We need global capital for India’s infrastructure projects

In an interview to Infrastructure Today, <span style="font-weight: bold;">Sanjeev Kaushik, Deputy Managing Director, India Infrastructure Finance Company Ltd (IIFCL)</span> asserts that Indian infrastructure sector will need to become highly competitive and efficient in order to attract global inflows. This government-owned lender for infrastructure projects also has plans to majorly expand in bond markets.
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<p><span style="font-weight: bold;">What are the primary constraints in the financing of infrastructure projects in India?</span><br />
Until recently, we used to talk about the cost of funds being too high and, as you are aware, some infrastructure projects have a long gestation period. There is a period of construction and then there are cost overruns and delays. Therefore, it is important for a project to be able to service the loan over a long period of time. Now the situation is gradually changing. Of late, the cost of funding has come down substantially. But despite that there are still cost overruns because of the various delays that we have seen in the past. The government is trying to resolve this situation. Steps are being taken on environment, land acquisition and in terms of speeding up arbitration proceedings. Next, there is a shortage of funding agencies presently, because traditional lenders such as the public sector banks face capital constraints. They have sector saturation in terms of exposure, and since they have their own capital problems, they are not able to spare much funds for the infrastructure sector which has huge requirements. Therefore, there is a need for more institutions like IIFCL and IFCI, which are development financial institutions. Also, more sectoral and more institutions are needed to fill in the vacuum that is being created by the retreat of some of the public sector banks from infrastructure.</p>
<p> <span style="font-weight: bold;">What is the nature of recalibration needed on parameters of competence, efficiency and financial management in order to maintain global standards of development?</span><br />
This is a crucial point. Now, you cannot take for granted that Indian projects will offer the kind of double-digit returns that they were historically offering to foreign investors. The funding shortfall in India is such that we need global capital to come in. </p>
<p>If the West is going to increase interest rates while Indian rates fall gradually, then that arbitrage opportunity reduces global funds that come in and takes on political and foreign exchange risks. The only option left for our projects in competing for that capital is to be globally competitive and efficient. How do we do that? All the three things that you mentioned – technology, superior management or proper financials and execution – are very important. In my experience, all of that will follow if managements give adequate thought to the design of projects. At the very inception itself, you need to think about proper projections, such as: how much can be the traffic growth without exaggeration, what would be the kind of toll coming in, what could be the potential risks and weaknesses of the project and so on. Going forward, I am much more optimistic about the design and quality of our projects which will attract that funding. </p>
<p> <span style="font-weight: bold;">Projections indicate that there will be a significant shift in infrastructure investment from the developed western economies to the eastern hemisphere. Is India ready to handle the sheer volumes of infra development foreseen for the next decade?</span><br />
It is a challenge and that, frankly speaking, worries me. You said that development of infrastructure will move from the developed to the developing world, especially to Asia and the East. Now, I think that is true only partially. China, to a large extent, has made a lot of strides. Similarly, the economies of the East Asian Tiger have made rapid progress. I think the requirements in a country such as India are huge, for which we do not have adequate capital and capacity and we need to attract global capital. However, you cannot say that the developed world does not have a similar need. I have been travelling to North America and Europe for various conferences, and I can tell you that they too have a crying need to replace and rebuild the existing infrastructure as well as invest in new infrastructure projects. In fact, PPP has caught fire in North America, especially Canada and the US. The whole fiscal and economic stimulus programme that US presidents have been talking about entails rebuilding the infrastructure. My worry is that the global capital will be attracted to some of the opportunities in those developed countries. At the same time, countries like India also need to attract some of these funds. So, we need to be globally competitive, which brings us back to the point where we started. </p>
<p> <span style="font-weight: bold;">With an estimated 500 million people expected to shift from India’s rural to urban areas over the next 40 years, how can the infrastructure sector maintain a healthy pace of growth?</span><br />
There is no option for infrastructure but to grow if such a large migration is going to happen from rural areas to cities. Delhi and Mumbai are live examples of this situation. Delhi is actually bursting at the seams in terms of several living quality indicators. The government has rightly been prioritising development of other clusters and cities. For example, it has been developing smart cities, tier 2 and tier 3 cities and creating clusters of jobs so that people find opportunities in those areas, instead of migrating to big cities. Also, by ensuring connectivity, production and manufacturing can be established in those places, instead of being centred on big cities. They can be in logistics hubs spread around the country. The goods can be transported by any mode of transport – surface, water or air. And these are already happening.</p>
<p> <span style="font-weight: bold;">Prime Minister Narendra Modi has emphasised the importance of capital and bonds markets to focus on infrastructure spending in the year ahead to spur development in this area. How is the industry likely to respond to this expectation?</span><br />
The government has done quite a lot. For example, let us look at the initiatives. We have been trying to develop the corporate bond market for a number of years now. It was a problem of rates. With recent fall in yields and with other developments like credit enhancements that institutions like IIFCL are now able to provide, it will become feasible for infrastructure companies to attract investors to their bond issues. The government is also in the process of setting up a new credit enhancement company, which will be promoted by institutions like IIFCL. Some of these will encourage issuance of more quality bonds in the market, which are targeted not just at the domestic investors but also at quality long-term sovereign wealth funds and pension funds, which require a minimum rating standard. In terms of deepening the market, the government has devised infrastructure investment trusts (InvITs) on the model of real estate investment trusts (REITs), while infrastructure debt funds (IDFs) are already active. These alternative investment vehicles will ultimately lead to the capital being increasingly channelised from the private markets into the infrastructure sector.</p>
<p> <span style="font-weight: bold;">Which financial models would be the mainstay of infrastructure investments in 2017? Will the PPP model find traction over the next two years?</span><br />
There is no alternative for us, but the PPP model. If the requirement is something like $1.5 trillion over the next few years for infrastructure in the country, we will have to look at private investment. If we have to look at private investment then PPP is the only answer, because the private developer comes in and takes over not just the implementation and execution responsibility, but also debt and equity. In the past, we have seen some slowdown in PPP and that was because of a number of problems plaguing the sector. However, in the last two to three years, a number of initiatives have been taken by the government to make sure that PPP gets revived. The Vijay Kelkar Committee has made a number of recommendations that are now in the process of implementation. Initiatives such as risk allocation or risk management, issue of 5×25 restructuring, recycling of capital and allowing brownfield projects to provide exits to investors, and new vehicles like IDFs and InvITs will facilitate PPP projects. Also, some of the bottlenecks that resulted in stalled projects in the past have been removed.</p>
<p> <span style="font-weight: bold;">What could be some of the innovative financing tools for the sector in the near future?</span><br />
I spoke about credit enhancement. I see that this is the need of the hour. Why? Because it is a kind of non-fund based activity where you do not lend only in terms of funds, you can also lend in terms of partial credit guarantees. And what it does is allow a project or company to achieve rating status by which a larger pool of investors can be approached, domestically and globally. </p>
<p>I think the other thing that has been happening in the sector with the National Investment and Infrastructure Fund (NIIF) and other initiatives is learning to leverage the capital more. If you bring in some equity, you can leverage many more times the debt against the equity. The NIIF is intended to provide that kind of annual servicing capability to leverage money many more times and raise debts and funds, which can then be targeted to different institutions. So, leverage is the second way to go, but of course, in a responsible manner. </p>
<p>And the third, a recent experiment that has been very successful is the masala bond. The masala bond will be a key instrument for targeting international investment.</p>
<p> <span style="font-weight: bold;">How are you planning to further expand your presence in the bond market?</span><br />
IIFCL is already a significant player in the bond market. Our bonds are listed and we have been raising funds domestically from private and government institutions. At the moment, our capital adequacy is more than 20 per cent and, therefore, we do not have any fresh funding requirement. Having said that, we are looking to raise dollar funds from our UK subsidiary, IIFC (UK), keeping in mind the cost of funding, because the cost of borrowing overseas is lesser. Earlier, we were also thinking in terms of a masala bond issue but that depends on how competitive its rates are vis-a-vis what we can get in the domestic market or through the US dollar instruments overseas. We are definitely looking at some of these issues. We were also very ambitious and we had requested the government to allocate us some tax-free bond element. However, that did not happen. Going forward, we will be coming out with our own taxable bond issue domestically as well as US dollar bond issue overseas. The other thing, credit enhancement is our important product as it allows us to give partial guarantees to bonds floated by issuers. Plus, we are playing the lead role in establishing a new credit enhancement company.</p> <span style="font-weight: bold;">- Manish Pant</span>
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