After having progressed from urban housing quietly to a significant player lending and consulting to the infrastructure sectors, this corporation has shied away from lending to some of the infrastructure sectors, VP Baligar, Chairman and Managing Director, HUDCO, explains to Shashidhar Nanjundaiah how the corporation has bucked the trend of gloom and uncertainty in the infrastructure sector, and lays out big plans over the next two years.
HUDCO has been a quiet player in infrastructure player, and as an arm of the government, it has acted fairly independently in terms of its own assessment of infrastructure projects. Can you explain the decision process of lending?
HUDCO has got a unique place in infrastructure funding from small roads to airports and ports. But our core strength is in urban utility finance water supply, sewerage, solid waste management, and drainages.
In this space, there is no competitor for HUDCO. Earlier Life Insurance Corporation (LIC) of India would finance water supply and such activities, but now it is only HUDCO.
We work with urban local bodies (ULBs) to improve and upgrade their infrastructure. We have developed a strong relationship between state and city governments over the 20 years in the space of infrastructure, and over our 43 years in housing. So far we have funded more than 1,800 ULBs. We also help cities in structuring the projects, provide consultancy service in handholding ULBs and we do not insist so much on formalities and nitty gritties. We have our own institute called Human Settlement Management Institute (HSMI), where we train about 2,000 people every year.
So far we have trained about 30,000 people including mayors, urban administrators, secretaries to governments, commissioners, engineers, and most employees of ULBs. We help them in conceptualising a project and funding the project. We provide assistance in preparing the Detailed Project Report (DPR). There will be financial prudential norms to be followed but since the capacity of ULBs is low we take up the task of capacity building.
There is no other funding agency that takes up even capacity building from structuring to implementation. We are also the only agency in the country for funding land acquisition for government projects.
Utility is one of the biggest issues in urban India. Schemes such as JNNURM have come to the rescueùin theory. How has been your experience with cities especially in capacity building?
I am proud to say that HUDCO is involved in implementation with JNNURM. We are a monitoring and appraisal agency of the [Union] Ministry [of Urban Development], and sometimes we help state governments in monitoring, appraisal and implementation of the projects.
We also fund viability gap funding (VGF). Much of the grant for JNNURM projects comes from the central government, and another part from state government. The rest must be garnered either by the beneficiaries or the ULBs. Financial problems or cost escalation or tender premium (not funded additionally by the Centre) sometimes means states or cities may not be able to afford their portion of the funding. Our VGF is a loan for 10-15 years.
So what is the kind of corpus you have set aside for JNNURM?
So far we have sanctioned about Rs 6,000 crore towards VGF for JNNURM projects. However, we go with need-based funding without any fixed earmarking or limit. We have been exceeding our target over the years. Last year we sanctioned nearly Rs 24,000 crore against a target of only Rs 22,000 crore.
Of this, two-thirds goes towards for urban infrastructure and the remaining for housing. We do have enough leverage to see that no request of ULBs goes unmet.
As you observed, in the experience of many consulting and funding bodies been there, cities do not seem to have capacity or expertise. Yet, even with the presence of agencies to help, the implementation of JNNURM has not been up to the mark. Why?
There are many other issues in JNNURM and not funding alone. The concept involves reforms, but many states have been resistant to reforms, leading to a lag in implementation. There have been political issues, for example property tax: Many states did not want to implement property tax. Many states did not want to collect tariff on water. Empowering ULBs and implementation of 74th Amendment [on urban self-governance, recognising ULBs as the third tier of urban government by assigning them specific civic functions] have also been problematic. Reforms are essential, and most of them are being implemented as a part of JNNURM's Phase II [scheduled to start mid-2014].
So I wouldn't say JNNURM is a failure. If it hadn't been for JNNURM, many states would not have implemented the reforms. Capacity building alone has resulted in better urban governance. For example, earmarking 25 per cent of the funds for the urban poor was one of the conditions of the Ministry of Housing and Urban Poverty Alleviation(MHUPA). I don't believe many ULBs would have implemented it if JNNURM hadn't been a factor. So there is a larger picture here.
Do you think the consultancy part has helped?
The support of our own consultancy has helped, and then there are international, independent consultants helping ULBs. The assistance provided by the related ministries in terms of setting up of state level monitoring cells and units for JNNURM has helped in providing support to ULBs.
Therefore would you be willing to say that governance has actually improved in our cities?
Yes. JNNURM has definitely given lot of qualitative improvement in ULBs' governance and infrastructure.
When you get to fund urban bodies, do you sometimes find that although you are willing, there are not enough takers?
Yes; the capacity to absorb is another problem. One of the reasons of non-utilisation of 100 per cent funds of JNNURM is that [lack of] capacity to absorb. Therefore, capacity building is integral to JNNURM. HUDCO offers assistance to more than 1,800 citiesùwell beyond JNNURM. Our target is to cover at least 100 local bodies every year. Last year we did 73, a big improvement over previous years when that number was in the 20s. This year we are already at 70, so we should cross 100 cities.
How do you set your target? Is there a marketing activity, whereby you approach cities and say, "Hey, we're here to help you!"?
One of the targets is fixed by the Department of Public Enterprises and the concerned ministry that the PSU is attached to. But we have also set our own [higher] internal target. While the Ministry of Urban Development's (MoUD) target is only about 4 lakh houses per year, our own internal target is 10 lakh.
We call these targets Mission Five Ones: one million homes, one lakh crore cumulative release, one thousand crore rupees profit after tax (we are at Rs 700-odd crore already), one hundred ULBs, and bringing down gross NPA by one per cent every year. This is our mission and internal targets.
How has HUDCO fared on NPAs?
I would like to narrate an experience from last year. Last year we were able to bring down our gross NPA from 6.07 per cent to 5.69 per cent, and net NPA from 2.83 per cent to 1.44 per cent.
It does appear on the higher side ...
Yes; gross NPA is on the higher side. We had some exposure to bad power and real estate projects, causing our NPA to escalate to double digits. To bring down from double digits to less than 6 per cent is an achievement for us.
So has there been prudency in terms of lending?
Yes. We have stopped funding bad projects.
Power projects in the private sector. It is not our core strength and there are PFC, REC and other [specialised] financial institutions.
When you say power projects you are talking of generation projects?
Mainly generation, but distribution and transmission in the public sector as well our NPA in power sector in public sector is zero. We do not have any NPA among the State Electricity Boards (SEBs) or state power sector or power and distribution companies. In real estate, we have had some problems in lending to the private sector, so I stopped that window. We are recovering and effectively monitoring and enforcing and bringing down NPA.
We are going ahead with lending to housing board, state corporations, ULBs where we have either government guarantee or the land as mortgage and we have very good track record except some states there is a problem. But we will not lend to the private sector until our private sector NPA comes down to a manageable level.
We take government guarantees where there is no or not enough repayable revenue generation. Underground drainage system, sewerage treatment plant, etc, are not standalone projects. Viability is an issue. So we take government guarantees and government budgetary support for recovery. A 100 per cent recovery from SEBs is quite unusual, given that other banks have restructured their loans.
Among SEBs, we have successfully lent to Tamil Nadu, Rajasthan, Madhya Pradesh, Andhra Pradesh and Uttar Pradesh. They are biggest projects which were restructured by other banks but we did not do that because we have been with them for a long time. We had given them very long term project loan and helped them when they needed. They consider us a friend in need.
Helped how? Timely disbursements?
Yes; disbursements and sanctions without much red tapism, when they needed it.
I am asking these electricity distribution questions because of the obvious fact that they were the ones that the government recognised as needing restructuring. Did you at that point need a sovereign guarantee and did you have to invoke it?
In some cases we asked for some and in some we did not but based on mortgage on buildings and all. We usually take escrowing of revenues plus some mortgage if there is no government guarantee.
Coming to a slightly larger question of infrastructure finance in general, have NBFCs in India taken to infrastructure lending in a big way and what is the kind of success they have found?
In our case, we have long term resources available thanks to tax free bonds, which we have had for the past three years. We also have a public deposit scheme ranging from one year to 10 years. Our tenure range is 7-20 years.
We are part of IIFCL's IDF and I hope it will become a gamechanger in infrastructure funding. I think there is a lot of scope and it has to be handled properly.
What is your funding focus?
Although we have financed even airports, that is not our core. Our main focus is drinking water. Many towns today do not have drinking water. Our focus for bigger cities will be ensuring 24x7 drinking water.
I have just come back from a conference in Seoul, where I learned that many Asian countries not only have 24x7 water supply but they are moving almost towards 90 per cent recycling of wasteùonly 10 per cent dumping ground is required. So solid waste management (SWM) is going to be one of the biggest challenges.
Is this something HUDCO will be doing?
SWM hasn't really taken off in India. Yes. We are willing to support SWM. Slowly it will come when it becomes inevitable I think we will move towards that. User fee has to be leviedùBangalore is already doing so. Second is handling of waste, segregation of waste and finding a dumping guardùa difficult task. Therefore we will be forced to look for alternate technology, how to recycle and maybe convert waste to energy and then how to reuse it. For example, one of the technologies that is showcased and internationally practised is rubble converted into bricks or other construction material. We need to do that. otherwise it is difficult to find a place to dump rubble.
Do you fund technology?
Yes. Mainly to state governments if they would like to adopt new technologies. We demonstrate technologies, we [recently concluded our event] BuildTech, which showcased new technologies of construction material and also machineries and new designs.
INTERNATIONALLY YOURS, JAPAN
As a PSU, Housing and Urban Development Corporation Ltd (HUDCO) has bucked the trend. Against the grain of both the infrastructure industry sentiment and the financeability issues, the corporation's highest ever sanction was in FY2013 Rs 23,974 crore, up 17 per cent from the previous year's lending. Its gross NPA came down from 6.07 per cent to 5.69 per cent; its profit highest ever in 2013, nearly Rs 701 crore (PAT).
HUDCO is a partner (Rs 50 crore) to IIFCL's IDF, and a Rs 19.90 crore investor in the Delhi-Mumbai Industrial Corridor. The corporation has also invested Rs 25 crore in a venture capital fund called India Inclusive Innovation Fund. In addition to financing projects in urban infrastructure, the corporation is also a consultant to city authorities on infrastructure and housing.