Hari Sankaran, Vice Chairman & Managing Director, IL&FS Ltd, has a few strong points to convey through this freewheeling interview. He says that bankability is often established by designing projects in an out-of-the-box way. And India needs to establish more efficient capital re-investment and re-cycling structures. The main question that Sankaran asks is if the next five years will see the infrastructure sector taking off.
The government´s focus agenda is on revival of the infrastructure sector in the next five years. And certainly, it has already started moving in this direction with PMG clearing Rs 4.5 lakh crore projects and MoEF clearing some high value projects. But the prime question is, do we have enough capacity to fund these projects?
Generally, projects that are bankable do not face problems in obtaining financing. Of course, there are issues relating to the sector exposure, promoter commitments, etc. But these are exogenous to issues of bankability and will need to be dealt with separately at a macro level. Projects that are unable to or find difficulty in raising funds are typically those whose bankability is not established. For instance, if the financial model assumes a traffic growth of 7 per cent/annum when actual growth in traffic over the past decade has been an average of 3 per cent/annum, then banks will need to examine the reasonableness of such an assumption. Similarly, if the project proponent has secured the concession by agreeing to pay a hefty premium to the government, the viability of the project will need to be carefully assessed. In such cases, we cannot blame banks for not sanctioning funding for such projects. Where we are severely challenged is in the availability of patient equity capital and/or pools of quasi equity and debt funds. This lacuna will seriously constrain our ability to rapidly roll out and implement infrastructure projects on a commercial basis going forward.
PMG has cleared a substantial number of projects that would get financed or can opt for financial closure. But these projects have still to begin
Again, projects that are bankable will be able to raise the debt funding required. Where projects are not bankable, either because of the assumptions made in the financial model or where excessive premiums have been committed to acquire the project, achieving financial closure will be a challenge. Having said that, there are a number of systemic level issues that are being dealt with to enable projects to raise financing more easily. The bottom line is that we need to see growth rates of the economy pick up and revenue buoyancy re-established. That would make these issues much easier to handle.
There is a perception that business in India is very time consuming and costly. Will such an image not hurt the infrastructure sector?
Infrastructure is a long-term game and projects getting stuck are not unusual. Take the case of the expansion of the San Francisco Airport. If I am not mistaken, it took ten years to get the project completed and interestingly some 115 design changes. Another example is of the Birmingham Metro rail line which took over a decade to get cleared and that too when the then Prime Minister of the day (I think Tony Blair) personally intervened. So India is not unique in the fact that projects take time to receive clearances, etc. However, having said that, there is much room for greater efficiency and predictability in the process and as a country it is only to our advantage to get our act together and emerge as the business destination of choice. The ease of doing business in India has assumed priority and is an area that needs urgent attention.
But apart from acquiring funds from banks, equity too is an issue...
Correct, because we don´t have significant pools of long-term equity capital in this country. This is a serious constraint and needs to be tackled on an urgent basis. All infrastructure companies need to be able to raise equity capital efficiently and adequately to ensure that projects are implemented to time and costs. As a corollary, we need to encourage the right kind of promoters into the infrastructure sector. Promoters who are willing to invest for the long term and who have the balance sheet capacity to withstand and manage the risks of the sector. Equally, we need to establish more efficient capital re-investment and re-cycling structures. In this context the recently announced schemes by the government are most welcome. They should give a fillip to the raising of investible capital in the sector once the fiscal framework is appropriately fine-tuned.
You have raised a point of bankability of projects, but in that case private banks have stayed away from funding infrastructure and adding any NPAs as compared to PSU banks. Your comments..
But you must also acknowledge that the PSU banks have shouldered financing infrastructure projects much more than the private banks. This is also true, right?
Agreed, but that does not mean that PSUs banks, without any groundwork, should fund projects which are not viable just because private banks are not willing to...
This is not true and, to my mind, an incorrect way to phrase the question. I think, the fact is that whilst the responsibility shouldered by the PSU banks has been unprecedented, it was in keeping with their mandate of encouraging the sector to grow and to inducing a large number of private corporates to enter the infrastructure space. The discipline of the private sector, especially in balance sheet and project management, was expected to serve the government well in reducing its obligations to fund the sector. Barely a decade ago, we were still not very sure that people would pay for such services. It was the PSU banks that took the risk of funding toll projects. Today, the public has clearly accepted the notion of user charges and is willing to pay for such services. It gives us as a country a great deal of flexibility in designing new ways of delivering superior infrastructure services across a range of sectors. A part of this credit must go to PSU banks who took the initiative to provide debt funding for these projects. Obviously, we need to improve our capacity to appraise projects and ensure that the level of NPAs reduces in the sector. I am sure that with the experience of the last decade, these lessons will be put into practice and a more rigorous financing framework will emerge going forward. Ultimately, by linking the sector to the capital market, we would be able to ensure that adequate resources are made available to the sector provided projects are structured to provide returns on a competitive basis.
Has there been any key policy move by the government and particularly by the RBI that makes you hopeful?
The Reserve Bank of India (RBI) has established a clear framework for banks to address stressed assets. It has also brought out a framework for banks to handle the infrastructure exposure on their books. These steps will go a long way in ensuring that the financial system progressively handles its infrastructure exposure in a responsive manner.
Your views on the RBI decision on the 5/25 scheme and bond market structuring These are solutions that the RBI has come up with to complement the framework it has promulgated to manage stressed assets. If these assets are to be managed back to health, banks will need the flexibility to do so within the constraints of their balance sheet. The 5/25 scheme seeks to do precisely that. It´s an enabling framework. But how and to what extent it is used is entirely up to the banks.
Given the fact that infrastructure is a long-term game and our financial system comes with short term products, how are these solutions making headway? In more developed markets, insurance and pension funds are the major players in the mature infrastructure financing market. In India, apart from LIC, no other insurance player is active in infrastructure financing. The pension sector, too, is absent from the infrastructure sector. The other aspect is that in most developed markets, there is a clear distinction in the financing of projects through construction and through the operations period, post commissioning. In India, we tend to lock into the long term financing model even before the start of construction. As a result, cost of financing is higher and the ability of the promoters to recycle capital and invest in new projects is reduced. We need to develop structures that distinguish between construction period financing and operations period financing. Products such as take out and the recent concept of IDF and Trusts are yet to make an impact but are all in the right direction. Over time, they will definitely broad base the infrastructure financing system in the country and complement the efforts of the PSU banks.
It´s quite fascinating to know that we are expecting so much of investment but are unable to bring in bankable projects on a platter
The government has to develop the capacity to create a shelf of bankable projects. Often, bankability is established by designing projects in an out-of-the-box way. In government, such out-of-the-box thinking is difficult, given that Ministries and/or Departments administer sectors in a straitjacketed manner. If the implementation of projects is to be taken to the next level, a more imaginative and integrated mechanism will need to be devised to support project design based on outcomes without multiple organisations/departments and overlapping decision making being involved at the same time. We also need to avoid procurement strategies that either encourage excessive risk taking or are inimical to project outcomes. An example is not tendering on a life cycle cost basis but on the basis of a capex model. The other aspect is that our system is simply not geared to handle failures. In outcome-based approaches, these are inevitable. Hence, we need to devise mechanisms by which individuals who have taken decisions in government are protected. If the decision was legal and the officer felt that at the time that it was the right thing to do, then they should be immune from action. The quicker we empower the government to take decisions boldly, the quicker will we see the benefit on the ground. Finally, don´t forget that in less than 20 years, India has become the single largest Public-Private Partnership (PPP) market in the world. In the 10th Five-Year Plan, private participation in PPP was 20 per cent, which increased to 37 per cent in the 11th Five-Year Plan and now it is likely to be 50 per cent in the 12th Five Year Plan. I am very confident that if given the right kind of push, the private sector can deliver on the infrastructure sector agenda for the country.
But even if the private sector is enthusiastic, are they are not stuck for financing?
We need to remember that the last few years have been very difficult for the economy as a whole and for the infrastructure sector in particular. Most of the companies in the sector are still suffering from the overhang of the last few years and will take some time to gear up. Nevertheless, it is worth keeping mind, that as economic growth picks up momentum, infrastructure players will regain strength and the necessary financial muscle. With most of the other major economies in the world facing dim prospects of growth, India has a unique opportunity to attract investment. If we make the right moves, global infrastructure players will want to participate in the India infrastructure story. As a country, we must capitalize on this.
But where do you generate funds till that point, as it will take some time for global investment to flow in?
Over the past year, Prime Minister Modi has made terrific strides in rekindling global interest in India´s economy. Wherever we now go, there is renewed interest in the country and a general willingness to consider opportunities for investment. This is a sea change from barely 12 months ago. To build on this interest, we will need to demonstrate real changes on the ground. This year´s Budget thus assumes critical importance in signalling the intent of the government to take forward to the next level the work they have done over the last nine months. Initiatives taken by infrastructure ministries have already begun to see global investors exploring opportunities in the country. A favourable Budget will only serve to accelerate the momentum.
The US has a $3.7 trillion municipal bonds market, which is an important source for infrastructure funding. Where does India stand on the municipal bonds market and what can be done to broaden and deepen this segment?
The capital market is a major source of financing for municipalities in the US. However, they have evolved rules and regulations to support investors in financing their municipalities that we may find difficult to emulate. For instance, in the US, municipalities can be declared bankrupt and investors can force actions on the municipalities that would be considered completely unacceptable in our country. Given our socio-economic-political context, such a dispensation will also not be warranted. Our institution has been working with a number of banks in putting together a Pooled Municipal Debt Obligation facility that is designed to provide financing to commercially structured and bankable projects in municipalities. Over the past few years, we have developed significant expertise in handling such projects and in assisting in their seamless implementation. Increasing the footprint of initiatives such as the PMDO, will provide the basis for deepening and strengthening the municipal financing system in the country and position the sector for the capital market eventually.
Meanwhile, IL&FS has been instrumental in managing GIFT City, a project touted to get the first tag of a smart city. Which other smart city projects are on your radar? Do you think IL&FS will be the major beneficiary as you have firsthand experience?
The GIFT project is an ambitious project in that it seeks to establish a financial services and IT sector in Gujarat. The logic of GIFT is based on the demographics of Gujarat as one of the largest producers of commerce, law and accountancy graduates in the country, the largest investor pool in the country, and a rich and vibrant history for trade and entrepreneurship. The city has been designed to generate 500,000 direct jobs and equal number of indirect jobs in these sectors. The city boasts of state-of-the-art infrastructure and promises to provide an exceptional quality of life, with walk to work concepts built into the master plan. In Phase 1, around 10,000 jobs are sought to be created in GIFT. Thereafter, it is expected that the momentum of the city would increase significantly. IL&FS is committed to realising this vision of GIFT and is not engaged in any other smart city initiative. These are very complex and long term projects and require to be carefully nurtured to maturity.
IL&FS Infrastructure Debt Fund (IL&FS IDF) is floating a third round to raise up to Rs 1,000 crore from insurers and pension funds. Infra Debt Fund, unit of Infrastructure Leasing & Financial Services (IL&FS) group, has already received commitment for Rs 550 crore in the second round, taking total commitment to Rs 1,380 crore since its inception in 2013. This includes its current assets under management of Rs 830 crore. The money raised in the third round would be primarily invested in higher rated infrastructure debt securities. IDF will launch schemes in line with both investor appetite and opportunities available in the infrastructure sector.