Indian Infrastructure Finance Company Ltd (IIFCL) is the premier government-owned institution for providing low-cost, long-term finance to the infrastructure sector. Sanjeev Kaushik, Deputy Managing Director, IIFCL, shares his thoughts on the current situation in infrastructure financing in India.
First of all, is there an institution design problem when it comes to financing infrastructure projects in India?
It-¦s a very relevant point since $1 trillion is required for infrastructure spending as estimated by the 12th Five Year Plan and you need long-term low-cost funds. Clearly, the major supplier of those, the public sector banks historically, are not going to be able to fill this requirement. We have to have the private sector coming forward but this is not going to happen unless there-¦s a supply of viable projects. In the past, you had the development finance institutions but they have all been converted into banks. Now, you have IFCI and IIFCL but we have not been given the status of development finance institutions. I think the government needs to look at giving this status because the benefit of this will be a number of concessions.
The sector also suffers due to high cost of funds. Can this change anytime soon? Certainly. There are various ways in which this could be done. The government has set up institutions like us. The primary purpose of IIFCL was to channelise low-cost funds into projects. We have lines of credit from multilateral institutions like Asian Development Bank (ADB) and European institutions, among others. There is another very important source which the Ministry of Finance is trying to tap and these are mainly the international sovereign wealth funds, pension and endowment funds. Not only are they very gracious long-term investors, but at an expectation of 8 to 10 per cent annual coupon, we can get some of them. Certainly, institutions like IIFCL or other specialised institutions will be targeting these. Recently, the government has also set up the National Investment and Infrastructure Fund (NIIF). One of the primary objectives of setting this up is to go after these low-cost funds overseas and ensure there is an amount to service the debt.
Are such types of overseas funds and institutions comfortable in a market like India?
There are two or three different routes they can take. For brownfield projects, it is easier. The project has achieved commercial operations date (COD) and cash flows are coming, so they can fund its expansion or take out the existing institutions. The second is to tie up with some local player. Recently, the Canadian Pension Plan Investment Board (CPPIB) invested with L&T Infrastructure and through their infra vehicle, they are going to be looking at opportunities. Similarly, Brookfield Asset Management and the Ontario Teachers Pension funds, along with some local players and also independently, are investing in infrastructure projects in the country. I think the need is to make sure they get into greenfield investment options. Some of this can be routed through organisations like IIFCL which are specialised vehicles. There is no explicit government guarantee but we are hundred percent government owned. There is a degree of comfort for overseas funds to channelise funds through us. This could be a route.
Do you think successive governments in India have been able to package their projects in a way that seems attractive to the different classes of investors?
If you look at the entire public private partnership (PPP) experience over the last few years, one reason why it has not done very well is the risk-reward trade-off has not been very feasible. You can take several examples across the country where projects failed in the bidding because the government did not mitigate the risks. For instance, the recent Vizhinjam project underwent several rounds of bidding and they all failed. Finally, it has been successfully awarded to Adani. The reason it was finally able to succeed was because they took out a number of the risks. They made sure that the land was already acquired and available as well as the environmental clearances. Road and rail connectivity were provided. There was also help and grants from the government for financing. To ensure that the risk-reward trade-off is viable is the first and foremost thing. Second, the government recently said promoters can exit wherever projects are completed, recycle equity and invest into other new projects. This was IIFCL-¦s recommendation which the government accepted.
What were your recommendations to the Vijay Kelkar panel whose report is expected soon?
IIFCL-¦s CMD is on that committee and we made a number of suggestions. We said the risks have to be mitigated and be commensurate with the reward. At the project design stage itself, we have suggested modifications, then the contractual arrangement, i.e., the contract between the concessioning authority and the concessionaire; also the concessionaire and the financing institutions. There have to be modifications to recognise risks and adopt international best practices. Currently, we don-¦t have that. The third major point of the Kelkar Committee that I expect is with respect to a proper legal framework in case of stalled PPP projects. What is the legal mechanism for redress and for recovering costs? In some cases, it might be the fault of the concessioning authority and the concession itself may be flawed, in which case why penalize the developer or financing institutions?
The Committee should also be looking at ways to improve the appraisal process. Have the financial institutions done their due diligence properly? Is the project appraisal solid so that there is not much deviation from the concessioning authority-¦s project cost and theirs?
Some of these points will take care of the stressed advances and loans in the future. I think the Vijay Kelkar committee is going to be dwelling on these three-four aspects.
What are the types of problems in drafting of contracts?
The first point is that there is a lack of flexibility in some concession contracts. These PPP contracts are non-negotiable. Therefore, if there is a cost overrun due to a delay which is for a reason beyond the control of the developer or promoter, then he has to bear the interest or construction cost overrun. If it is beyond his the control, then why should he bear it? If you look at international best practices, contracts can be re-negotiated to salvage some of these projects, and not abandoned. Of course, there are some moral hazards and conflicts of interest which have to be kept in mind. We have been suggesting without much success that there should be a tripartite agreement. It should not be a contract only between the developer and concessioning authority but the lenders should also be party to that. This way, we will have better control which we currently don-¦t have. However, I find there is not a very warm reception to this idea. If there is a contractual dispute, how will you resolve that? Which are the untold key situations because of which there are delays and cost overruns? Whose court do they lie in and who is going to arbitrate on them? I think the Kelkar Committee should also dwell on some of these aspects.
Given the expenditure and the kind of asset creation envisaged, isn-¦t this going to be very important?
Absolutely. If you look at just roads or even renewable and solar energy, the kind of capacity that has to be added and the kind of investment that has to come up; you clearly need private initiative and external finance, meaning non-government financing. Now, if the basic design and the PPP contract itself is not going to be properly structured, well, people have already burned their fingers once. We don-¦t have contracting capability to that extent in this country. Therefore, we are attracting companies from Malaysia, for instance. These guys are going to completely scrutinize everything before they come in and join, not only in terms of funding but also execution and contracting capability. All this has to be addressed.
Let me tell you about our own subsidiary, IIFCL Projects Ltd (IPL). It is a young company we created two years ago. It is an advisory subsidiary of ours which advises governments, state agencies and others when they are designing projects. Currently, we are advising the Ministry of Shipping on the rail-port connectivity company. We are advising a number of state governments on their infrastructure projects because what we find is the states necessarily don-¦t have the capacity to structure and design some of these projects. Moreover, this whole PPP thought process of why are we giving our assets to developers or to the private sector. Unless they are in that PPP mindset, it will not roll forward. We need more advisory capability like IPL and some other institutions.