Home » Fee-sharing mechanisms should be encouraged to push takeout finance

Fee-sharing mechanisms should be encouraged to push takeout finance

Fee-sharing mechanisms should be encouraged to push takeout finance

Takeout financing should be one of the key channels for financing infrastructure projects, wherein, certain sectors like power do have sector exposure issues with the banking sector, says Asit Ranjan Sikdar, Vice President—Project Advisory & Structured Finance, SBI Caps, in an interaction with Sumantra Das.

What are the key issues in infrastructure development? What needs to be done for infrastructure financing?
IndiaÂ’s infrastructural requirement is fast increasing with GDP growth. It is estimated in the 12th Plan that for a GDP growth of 7-9 per cent, the total investment requirement will be around Rs 51 lakh crore, with an increasing share of private investment of around 47 per cent. Some of the key issues are land acquisition, delayed clearances, changes in laws and regulatory environment (both domestic and international), and limitations in financing. While these concerns may stay valid across the board, some of them impact certain sectors more profoundly than others.

Any large industrial project requires land. Access to contiguous pieces of land in desired locations has been an issue. Connectivity projects such as roads and/or railways are most profoundly impacted by delays in land acquisition, mainly due to the involvement of multiple agencies in acquiring clearances. The matter is further complicated if the projects spread across various states. Delays in receiving clearances even if for valid reasons make redundant the underlying assumptions made in financing the project and consequently increase the level of uncertainty and risk in project viability.

Changes in the law or regulatory environment adve­rsely impact infrastructure development as these are long gestation projects. In my opinion, power capacity addi­tion projects, due to their increasing import depen­dence on account of insufficient domestic supply, have been adversely impacted by changes in international law, especially in countries like Australia and Indonesia.

The dependence on private investment is increasing at a rapid pace and commercial banks have been a major source of financing for infrastructure project. However, commercial banks have concerns with regards to asset liability mismatches, exposure limits and prudent norms.

In order to support the financing aspects, the government has undertaken a few initiatives such as encouraging Infrastructure Debt Funds (IDFs), impro­ving the takeout financing schemes and credit enhance­ment mechanism from IIFCL. The process of IDF schemes must be hastened as they are expected to bring in longer tenor funds such as pension, insurance, etc. However, in my opinion as a precursor, the regulatory and government agencies must further amend the concessions or agreements to address unforeseen situa­tions which are beyond the control of the contractor, in a time-bound and equitable manner, so that the project funding remains bankable for most of the time.

What are the key challenges while financing a project in India? As a project financer, what are your suggestions to overcome them?
SBI Caps has been successful in syndicating projects. We have been able to structure project cash flows, at times with a built-in takeout option according to the financing requirement. If the project has been found bankable, we have been able to successfully place it in the market. Of late, certain sectors like power generation are taking longer than usual on account of limitations in funds due to sector exposure from commercial banks which have been the largest source of funds for the infrastructure sector. While some projects do become available for takeout financing, as these projects are in the bankable category the incumbent lenders are hesitant to reduce their stake as there is perception of inadequate returns on the key risks already being assumed by the incumbent lender(s). With more modifications in the schemes and capitalisation of banks, we can expect some immediate relief. However, in the longer run, we need to have access to longer tenor and low cost funds to make the project financials attractive. Therefore, the need for IDFs has to be operationalised quickly. There have already been some initiatives undertaken towards IDF by certain lenders such as SBI, ICICI among others.

The bond market also needs to be strengthened through credit enhancement. While the IIFCL scheme is available, there are limitations. The mechanism is yet to mature to the level that is primarily supported by the underlying contracts backed by bankable counterparties. Some of the factors that make bonds a non-preferred financing instrument are the market to market norms, limited investor appetite, and limited number of issuers. The government has allowed an additional deduction of Rs 20,000 from personal income tax, over and above the existing Rs 1 lakh for investments in central government notified infrastructure bonds with the objective of channelling domestic savings towards infrastructure development. An increase in this deduction to about Rs 50,000 will further enhance the attractiveness of the offer.

The Indian insurance and pension funds are constrained as they have to invest a substantial portion of their funds in government securities. Insurance and pension funds that have the necessary Asset Liability Management (ALM) appetite should be allowed to take bigger exposures.

The government has also introduced the Viability Gap Funding (VGF) scheme. Projects have been approved in different sectors. In the transportation sector, roads in particular, have been beneficiaries. However, for certain projects, issues of allocations higher than the requirement have surfaced.

Other key project risks like land availability, approval, implementation, market, etc are mitigated by deeper due diligence by way of understanding the correct on-ground situation, market study, debt recasting, elongation of tenor through inbuilt takeout options etc.

How do you oversee the project finance market in India? Tell us about the expected 2020 scenario with regards to project finance market.
There are various estimates available about the project finance loan market ranging from Rs 1.25 lakh crore and above. During the calendar year 2012, as per Dealogic, project finance both globally and in India has contracted. Based on the 12th Plan estimates, the private investment and the expected debt equity profile offer potential to the Indian project financing market to grow to about Rs 5 lakh crore by the financial year 2020. However, there may be large variations in the project finance loan market year on year, as the investments are lumpy and the availability of finance especially from the banking channel needs to be ensured.

Takeout financing is expected to be a key channel of financing infrastructure develo­pment. How do you plan to work that out?
Takeout financing should be one of the key channels for financing infrastructure projects, especially in our context, wherein, certain sectors like power do have sector exposure issues with the banking sector. While some projects do become available for takeout financing, usually such projects being in the bankable category, the incumbent lenders are hesitant to reduce their stake as there is perception of inadequate return for the key risk already being assumed by the incumbent lender(s). Therefore, fee sharing mechanisms need to be improved.

How project finance tackle issues such as cost over-runs and risks related to operations, market, interest rate, foreign exchange, payments, regulatory and political risks?
Cost overruns: In order to mitigate this risk, lenders typically assess the timeline and cost elements of a project vis-à-vis other similar projects. Lenders would like to have certainty in both cost and time elements in contracts from a credible contractor.

Operational risks: This risk is usually taken care of at the bidding stage itself wherein, the relevant expe­rience of developers forms a part of the qualification criteria.

Market risks: Financing is carried out on detailed market studies from reputed market consultants in order to assess the revenue potential. The risk is further reduced if the project has sold upfront its product/output/services or has an agreement to that effect.

Foreign exchange risks: Forex risks arise where there is a mismatch in currency denomination in capex or revenue or opex. Payment risks: The lenders typically have debt service reserves to take care of immediate issues of payment. Apart from the same, the escrow mechanism is built in the transaction wherein the ultimate user of the project facilities is made to deposit their payments in the escrow account.

Political & regulatory risks: Typically, the concession agreements provide for changes in law as a political event. Political events that render the project unviable become political force majeure events which sometimes require the government/government agencies to make payments equal to a minimum of 90 per cent of the debt due to the lenders.

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