The ever-widening gap in banks' asset liability profile has also compelled policy-makers to find alternate solutions like IDFs, that are meant to supplement bank finance in the country's infrastructure. Meanwhile, despite IDF as a solution, obtaining financial closure for projects has proved to be a major roadblock in the growth of the infrastructure sector. INFRASTRUCTURE TODAY is featuring a few case studies which will elaborate areas of concern in financial closure and how these concerns have been addressed by financial institutions.
Relying on bank grants is now a thing of the past. The world over, the longest-term investors are insurers and pension funds. Pension funds as a way to finance infrastructure is new to (but highly recommended for) India, where insurers find it difficult to invest in long-term project debt.
What makes IDF a lucrative proposition for foreign investors is the fact that the government has reduced the tax for foreign investors on interest income from bond investments in IDF-NBFCs. It has been reduced to 5 per cent compared with 20 per cent for other bond investments. This will significantly improve the post-tax return of foreign investors. In fact, regulations allow a lower risk weight for the purpose of capital adequacy (50 per cent instead of 100 percent for other NBFCs).
In a significant move, Canadian Pension Plan Investment Board (CPPIB) has strung together three high-profile deals with Shapoorji Pallonji, Piramal and L&T in the past one year, stepping up interest in India's real estate and infrastructure. Australia's Hastings Funds Management Ltd, a Melbourne-based infra¡structure manager, also recently struck a partnership with the Aditya Birla Group, which will initially offer debt financing through a dedicated India fund for already-built infra¡structure, such as airports and toll roads. It was reported that the two companies will not be looking to finance fresh infrastructure projects through the venture.
Ergo, in the years to come, India can expect more aid from the Canadian and Australian Pension Funds. According to a source, who is closely monitoring moves of some private financial institutions, some companies are already in touch with the Canadian and Australian Pension Funds. Some private financial institutions like IL&FS and IDFC, which recently received banking licences, are in advanced talks with these two Pension Funds to rope in their funds in IDF.
Meanwhile, these two institutions are also in advanced talks with multilateral financial institutions like the World Bank, Asian Development Bank and International Finance Corporation for financing Indian infrastructure.
Many bankers are of the opinion that the overall concept of IDF will certainly ease pressure from public sector banks, which are overexposed to the infrastructure sector, and with the foreign investors coming in, it will be an ideal example for domestic investors too. Experts believe that rules must change and special vehicles meant to develop infrastructure, such as IDFC and IIFCL, must develop the expertise to vet projects and guarantee their debt servicing.
Of the various infrastructure projects, the projects that need urgent financing are in the power, roads, ports and airport sectors. Among these, power (other than solar) is perhaps the only project that could be termed bankable, i.e., it can repay principal and interest over a reasonable period of 7-10 years. All others have a long life of over 25 years, and therefore, yield lower returns. The other three sectors could barely pay interest on debt over the years and repayment of principal would pose an unreasonable burden on their cash flow even after 25 years or so.
According to Reserve Bank of India data, banks have maximum exposure to two industries-Roads (Rs 153,700 crore) and Power (Rs 475,800 crore). Industry estimates indicate that there are nearly 150 national highway projects operational where these funds can be invested and are long term in nature. Giving some impetus to the sector, the first tripartite agreement by India Infradebt Fund (IDF), an infrastructure debt fund promo¡ted by ICICI Bank, Bank of Baroda, Citibank and LIC with National Highways Authority of India (NHAI) was inked in February.
In addition, IDFC has inked a tripartite agreement last year in June, and will be raising Rs 500 crore in the years to come.
Meanwhile, IL&FS Infra Asset Management has already raised Rs 750 crore as the first part of its $5 billion infrastructure debt fund. It is expected that, in the next month, IL&FS will raise another tranche of Rs 750 crore from domestic insurance companies and banks, taking its total to Rs 1,500 crore for the year. To facilitate the IDF, IL&FS has inked pacts with five public sector general insurance companies ù General Insurance Corporation of India, National Insurance Company, Oriental Insurance, New India Assurance and United India Insurance.
Ergo, the government is focusing on passing supportive legislation and providing the right environment through which long term players such as pension funds and other investors can come into long term investment vehicles like infrastructure debt financing (IDF).
Experts added that the Employee Provident Fund (EPF) or the Pension Fund Regulatory and Development Authority (PFRDA) funds or other pension funds, there are several hundred billion rupees available for long term investments. The deep pockets of LIC carry tremendous scope as well. Favourable policies from the government in this regard will aid in attracting larger investments in the IDF. This is where entities like IDF will join hands with banks to identify their mature loan assets in the infrastructure sector, which could be considered as eligible for funding from IDF. This initiative will contribute to lessening the banks' infrastructure exposure, which in turn would enable them to undertake fresh infrastructure projects.
Indian contractors, who used to obtain financial closure prior to any clearances, are learning from their experiences. For them, the earlier mistakes of aggregative bidding have taken a toll on their balance sheets, resulting in asset sales. Now, in India, the growing trend is that private players prefer to have all project related clearances in place before going ahead for financial closure. It is expected that in the next couple of years projects worth Rs 4.5 lakh crore will be lined up for financial closure in India. So probably, the second half of FY16 will witness a funding boom.