Banks lending to the infrastructure sector are feeling the need for specialised project appraisal and advisory capabilities.SBI and IDFC have spun them off as separate entities that can backward integrate into their financing competency. IIFCL’s recently launched projects company goes beyond individual projects, and is starting with trying to capture the goodwill of states and state owned entities.SK Goel, CMD, IIFCL, explains to Shashidhar Nanjundaiah.
I understand the project advisory IIFCL Projects Limited (IPL) has been launched today [14 February]. Can you give a brief overview of what IPL hopes to do? What is the gap it wants to fill and how will it help IIFCL both monetarily and in terms of facilitation?
IPL is a company owned by Indian Infrastructure Finance Company Limited (IIFCL). IIFCL has been working with special focus under the special Scheme for Financing of Infrastructure (SIFTI), whose clear mandate to IIFCL is to confine itself to the role of financing infrastructure projects. It has also stipulated clearly that it will not take the role of syndication, lead bank role, it will not be in the advisory services and cannot exceed 20 percent of the project cost as exposure.
For quite sometime, our customers have been feeling that IIFCL has left a very important gap open by not taking on appraisal and advisory serviÂces.The idea of IPL was taken forward in order to fill that gap, and our Board has now approved it.We can do in the subsidiary what we are not allowed to do in IIFCL fundamentally, appraisal and advisory services.The state governments have also been seeking advisory services, and everybody feels safe in dealing with a government organisation’s instead of private sector’s advisory. IIFCL will come into picture if the project has been given advisory service by them asks for funding also.
We will shortly sign a Memorandum of Understanding (MoU) with the Government of Haryana. And with some other state governments this has already taken place.Once this subsidiary will come into existence we would like to seek MoUs for extending advisory services to other state governments.
Will this be for specific projects?
It will be in terms of what the benchmark should be for them in the sectors.
So it is an overall advisory based on the states’ requirements.
Overall advisory on various projects and how they should go forward.So these are certain issues.
Does IPL attract a separate mandate? IIFCL was mandated by SIFTI. Similarly is there a mandate for this?
No, we will have independent Board, which will decide the activities of that company. As the chairman of IIFCL, I remain ex-officio Chairman of IPL, but the other members of the Board will be different.The Board of the IIFCL as a Board of the parent company can always give them directions and monitor them and take reports from them as to their activities. Apart from that the day-to-day affairs they shall not look into.
What are IPL’s plans? Will your USP be that government agencies such as states may be more comfortable dealing with you? Does this extend to beyond the infrastructure sectors areas where IIFCL may not necessarily go? For example, IIFCL is less into power than Power Finance Corporation (PFC). Would you undertake advisory services in that sector?
Advisory services will be extended to all sectors of infrastructure.As you are aware, a high level committee under the chairmanship of the Cabinet Secretary is engaged in finding a common definition of infrastructure.Our advisory company will provide services for projects in all those sectors.The advice will be from concept till the project is awarded.
As an advisor, would you also help in preparing documentation, including standard ones such as the model concession agreements?
Because model agreements, including bid documents and Engineering, Procurement, Construction (EPC) documents are already finalised by the Planning Commission [for the roads sector], so we do not want to create duplication. But apart from those, if there are any other standard documents required, IPL can help.This will differ from sector to sector.
But IPL will not confine itself to Public-Private Partnership (PPP) projects.
No. But we are mandated that 80 percent of our business should be under PPP. Not more than 20 percent should be in private. Being a government organisation, our priority is PPP.
While IPL advises the states, would you also advise them that 80 percent of the projects should be PPP?
Because it is the mandate of the government, we will definitely like to advise them to go on PPP model: PPP is one of the successful models India has till now.There are certain legal issues that only the public sector can take care of, such as acquisition of land, while there are several issues that only the private sector can look at.
There are some infrastructure sectors like water, where PPP has not taken off in a big way, because as the Central Water Commission says not many private companies are interested.How would IIFCL address these issues?
You have rightly said that there are certain sectors which have viability problems such as rural roads. Similarly, water is also a subject which does not become commercially viable and that is private people do not enter it.These sectors must remain with the public sector there is no other way. Encouraging PPP depends on the quality of governance in a particular state, and this differs with regions.There are plenty of private activities in the southern and western regions, but in the north-east, north or central India, the governments do not make these kind of projects very viable for private sector. Nonetheless our target will be to promote PPP as much as we can.
In the end, it is a governance problem but is also an implementation problem that can be brought to the notice of governments. As an advisory, financier and perhaps an equity holder in some of these projects, what is the role of IIFCL and IPL in monitoring these projects for implementation?
That is a very good question because it is also a part of the advisory service.Suppose in a state there are going to be 30 power projects.We would advise them of all the implementation risks, particularly in fuel linkage, which should be available as near as possible or it will make power very costly if half the cost goes in transportation.
So your advisory will look at it as a 360-degree model where, for example, if there are mines in a state then you will probably advise them to spruce up their port infrastructure, and then take those projects on, so on.
Definitely.A power plant will be more viable if it is somewhere near coal mines.If it is very far from the mines then the transportation cost will make the project unviable.For example, ash is released everyday from plants: how do you plan to dispose of it? If you install certain cement factories nearby so that this becomes raw material for them and continuously gets absorbed.These are certain areas we would like to draw the states’ attention.Finally we will come to a conclusion whether a particular project at a particular place is viable or not.
NHAI for example, started decentralising itself recently. It has got the state level nodal officers of general manager cadre. The concept was that local experts are needed to manage grassroot issues such as land acquisition that may not be that visible to a team in Delhi. What is your plan for IPL? How is your team built?
Because in consulting authority like NHAI has to decentralised itself.They are the implementing authority countrywide, and they cannot do this job from one location.We are trying to hire experts in different sectors so that they can do their job domain specifically.So now we are trying to get experts on to the sector and whenever advisory services are given on a particular sector that team will start taking the job.
Will this team be centralised in Delhi?
For the time being, yes.
For Haryana, with whom you are on the verge of signing an MoU, how have you envisaged this advisory’s functioning?
Our teams are allocated here but state governments are located in different sectors.So there was a good coordination between state teams and our team.Our team cannot complete the job without their cooperation that is where we are talking of the MoU.Unless the state government empowers properly, we will not be able to advise on the concerns they have.
We will also be acquiring some international expoÂsure.So we can advise states on international tie-ups for certain projects that can be done better than done domeÂstically.We are now suggesting foreign collaborations so that their technical expertise is available.
Do you believe it is a good idea for labour to be from India when the technology is from abroad?
It is quite a good idea because getting labour from there is impractical and it will make the project unviable.In Dubai, 80 percent of the roads are made by Indian labourers.The only difference is in the technical qualification. So technical teams can definitely be imported.Then there are social issues.Once you start ignoring local labour and start importing labour, there will be hue and cry.
Perhaps the implementing supervision can be imported?
Yes, perhaps.
Have you set any business targets for IPL?
In its first year, we are keeping a very modest target of Rs 5 crore income through advisory services.IPL has an initial capital of only Rs 10 lakh.
In infrastructure, which of the sectors are performing better than the others?
Two sectors, roads and power.We have done almost 78 percent of our business in these two sectors. Because airports and ports are not done daily.They are done once in a while projects.
What about performance?
Performance is quite good.Of course in thermal poÂwer, we are little more careful now. Unless the governÂment clears the coal policy and makes projects look viable, we are taking a slow approach to lending to power.
Going forward any new plans for the 12th Five Year Plan?
Last year we launched our take-out finance scheme where we have done credit enhancements.So we want to do something that other institutes are not doing for infrastructure sector.So take-out finance was initiated by IIFCL and so far it is doing well. We have taken out almost Rs 2,000 crore from most banks.
The experience has been good because you are taking out finance which is being financed by…
We do our due diligence. We make it and send that project to be rated by 2 ratings and is the minimum norms accepted to IIFCL. We have also structured our rate of interest on take-out finance to make it purely non-discretionary and in such a way that person can go to website and see the rating.
One of the issues banks have had with take out finance is you are taking out finance during post-construction phase when it is low-risk.
Now in the new scheme we have offered an incentive to banks whereby 30 percent of interest paid goes to the lending bank. That means out of Rs 3 crore, Rs 90 lakh will go to them.Second issue is asset liability.For the banks after 5-6 years asset liability mismatch (ALM). So we come at a time when they are facing that problem.
We take out the project so the asset liability mismatch does not trouble them. So bankers need to understand from that perspective. We have long term resources. I got money from ADB which has been running from 25-30 years. I can afford to take a project for 15-20 years, banks cannot do that.We tell the banks to stay there for 4-5 years and after maturity you hand over so you are not grilled by RBI for ALM, and also the exposure.Because once they take out to the same group now they can take up the same project.
Because infrastructure project rely so much on ratings, can your advisory not take on a rating role especially considering the fact that you have an advantage of rating states and you can actually rate states on governance and other basis.Surely you would have thought of that?
What you are saying is correct but there is no immediate plan.But we can partner the existing agencies. In the beginning partnership model is better becÂause they have already been in the field for quite some time.We are talking to them and I think within a month’s time we will have some tie ups.We do not want to take away their cake just like that.
Aren’t you taking the cake away from other advisories because you have the advantage of being a government entity?
That is true.Ultimately our idea is it should be combining all services in infrastructure and should be available under one institution though through different subsidiaries.Our London subsidiary is specialised in extending foreign currency loans only. We are giving domestic funding. And this project will give advisory service.We are shortly coming up with Infrastructure Debt Funds and have formed an asset management company to manage that company. So this way whatever the requirement of infra financing can be done through IIFCL.
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