IIFCL recently undertook takeout financing of a road and a port project, in the midst of much debate on this new form of finance involving underwriting an existing loan from another financial institution. SK Goel, Chairman and Managing Director, IIFCL, responds to questions by Shashidhar Nanjundaiah and Rai Umraopati Ray on how the Karaikal port will benefit from takeout financing in an environment where ports are poised to spring up within one another’s vicinity and financing has been difficult to find.
What is the status of the takeout finance for Karaikal Port, which you have now undertaken? What are the main terms of the finance?
IIFCL has sanctioned takeout finance in respect of Karaikal Port Pvt Ltd to the extent of Rs 86.21 crore for the Phase I and for Rs 440.23 crore for Phase II of the project. IIFCL has so far completed takeout of Phase I.
Phase II of the project commenced its commercial operations in October 2011. The takeout in respect of this phase will be effected in October 2012, since IIFCL’s Takeout Finance Scheme stipulates that the actual takeout can be effected only after completion of one year after achievement of commercial operations.
What factors favoured doing a full takeout from Oriental Bank of Commerce (OBC)?
The Karaikal Port project comprises nine lenders other than IIFCL, including OBC. IIFCL’s Takeout Finance Scheme authorises the company to take out infrastructure loans from any commercial bank or institutional lender in respect of infrastructure projects. The main objective of the Scheme is to enable the banks to better manage their assets and liabilities. Taking out the loans will enable the banks to overcome their exposure constraints and lend more to the infrastructure projects. For the Karaikal Port Project (Phase I), the loans were proportionately taken over to the extent of Rs 86.21 crore from all the consortium banks by IIFCL.
What are the benefits you see for the port from this takeout finance?
The takeout finance is expected to benefit the port project company by way of reduced borrowing cost resulting from IIFCL’s lower interest rate. Further, the banks/lenders to the project will benefit by way of freeing up their exposure in the project so that they can lend more to other infrastructure projects. As such, the overall infrastructure sector will benefit.
How is port (takeout) finance different from, say, road finance, which was your first takeout?
Takeout finance is a generic financial product with common features in respect of all the infrastructure projects. The only differentiating feature is based on the timing of takeout. While in respect of all the infrastructure projects, the takeout will be effected after completion of one year after achievement of commercial operations; however, in respect of road projects (with backing of annuities) the takeout finance can be effected immediately after the project achieves commercial operations.
Given that ports are poised for a massive capacity addition (and not enough on the infrastructure / connectivity side), what issues are brewing on the finance side of the equation? What are the factors governing those issues?
Cargo growth at Indian ports continued to be moderate in FY2012 with a 5 per cent year-on-year incÂrease being registered in throughput to 930 million tonne. This subdued growth was mainly attributable to the significant slump in volumes of iron-ore cargo folloÂwing mining restrictions and other policy-related adverse developments. However, the long term cargo growth outÂlook for the Indian port sector continues to be stroÂngly driven by the domestic requirements of coal for power and other sectors, crude oil for meeting domestic petroÂleum requirements and containers given the cost and logistical advantages associated with containerisation.
With respect to new capacity additions, the progress on the award of public-private partnership (PPP) projects at major ports continued to lag expectations and projections because of prevailing structural issues. Only three projects could be finalised and awarded in FY 2011-12 as against the planned target of 23. Further the progress with respect to capacity creation by way of greenfield non-major ports also continued to be uninÂspiring with very few of them moving from proposal to implementation phase owing to a host of issues including problems in land acquisition, environmental and other statutory clearances, issues in financial closure etc. Further, there are also tariff related uncertainties hanging heavy on the port sector entities.
How does Karaikal serve as an example of how to overcome some of those issues (on the basis on which you must have taken up the finance)?
The Karaikal region is nestled in between the Nagapattinam and Tiruvarur districts of Tamil Nadu. It is one of the four regions belonging to the Union Territory of Puducherry in India. This pristine location is blessed with immaculate topography and has a flat terrain with no hills or forest cover. Strategically located in the South East coast of India, Karaikal Port offers a sea of benefits to the region as a whole.
The port is strategically located between two major ports along the Tamil Nadu Coastline Chennai (~320 km north of Karaikal) and Tuticorin (~360 km south of Karaikal). The port serves as a modern port for efficient transportation of goods through advanced cargo handling equipment, sufficient and damage-free warehousing facilities, faster turnaround of vessels (due to mechaÂnisation of major activities) and smooth evaÂcuation of cargo with the help of advanced, competitive logistics support. It has been handling diverse cargo like coal, fertilisers, project cargo, raw and refined sugar, cement, scrap, gypsum, containers, crude oil, edible oil, limestone, agro, etc, among other products. The port is striving to achieve e-port model which will encourage transparent paper-free transactions through a single-window system.
On viability of private and smaller ports, how will IIFCL participate in advising the financed ports? For example, would it be a good idea for Special Economic Zones (SEZs) and their investors to also invest equity in ports?
IIFCL has been in the forefront of lending towards infrastructure projects, ports inclusive, and therefore can look to the financed ports for better regional development through developments around the port hinterland and also facilitating relationships to ensure a win-win situation for both the projects. This will enable IIFCL’s foothold on creating national assets which help in building the economy and outlook towards India from the international community.
SEZs are a very good option to be developed near ports since this would eventually result in better demand and supply of raw materials and finished products moving between the industries set-up in the SEZs and the port. The setting up of SEZs is subject to getting clearances, sanctions and approvals from the respective authorities and creating supplementary infrastructure to help prospective industries to come up in the area.
Karaikal Port serves as a good example of the growth availability and potential for equity investors in the non major ports segment. It has tied up three private equity players to meet the port capacity expansion needs with a combined investment of more than Rs 500 crore.
There has been a fair amount of interest among international ports to participate in Indian ports. How would they react to financial returns in the current scenario? In your opinion, would international players be able to raise funds to run Indian ports? Is IIFCL seeking funds from abroad for its current port commitments?
The market outlook for international players seems by far very favourable with FDI up to 100 per cent available under the automatic route. And with slowed growth and relatively smaller number of projects in the developed economies, the India outlook is by far positive and can help in better financial returns and also adding to a tangible asset to ensure further options.
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