IL&FS: India's ten year itch of setting up infrastructure companies

In their zeal to push the pace of infrastructure development, govts. would start afresh with a new institution leaving the old problems to fester

Does India have a ten-year itch for setting up an infrastructure company? IL&FS was set up in 1987. A decade later in 1997, IDFC came into existence. IIFCL was established in 2006 and the latest NIIF was born in 2016. 

As IL&FS has been on self-destruct mode since August this year, it is worth pondering over the reasons for successive governments of India setting up a national level company to take on the role of financing infrastructure development; that too with such clockwork regularity. It is equally interesting that each finance minister took pride in setting up each of them but rarely spent time subsequently in evaluating the reasons why the older one would not suffice any more.

In the process each of the companies has moved away from their mandated role to something else. And each has described their core function as “commercialisation of infrastructure projects”. 

IL&FS, for instance, was set up to principally finance the acute shortage of housing stock in the economy. It hardly stayed in the role. In the budget speech of then finance minister Vishwanath Pratap Singh, for 1986-87, infrastructure deficit was synonymous with housing shortage. Indira Awaas Yojana was conceptualised and so was the move to repeal the Urban Land (Ceiling and Regulation) Act, 1976. There already was the Housing Development Finance Corporation Limited, set up by ICICI in 1977, again ten years before IL&FS was set up. But clearly it was not enough. IL&FS was incorporated in September 1987 by the troika of Central Bank of India, HDFC and Unit Trust of India or UTI as a public limited company. It was also the period when several other institutions were incubated by the government, like the National Housing Bank and the Securities and Exchange Board of India.

In its subsequent journey of 30 years, IL&FS has never mentioned this role. It instead described itself as a catalyst for the “development of infrastructure in the country. The organisation has focused on the commercialisation and development of infrastructure projects and creation of value added financial services”. (IL&FS Preference Share prospectus, 2015) It defined itself a project finance organisation. 

By 1994 the finance ministry had formed an expert group on “Commercialisation of Infrastructure Projects” with Rakesh Mohan as the chairman. The result of its deliberation was the setting up of IDFC by 1997. In his budget speech of 1996, P Chidambaram underlined the need to form a specialised financial intermediary for infrastructure projects. It went on to incubate the Infrastructure Equity Fund by 2002, and then became a bank by 2014. Before the transformation, IDFC defined itself broadly as a project appraisal and financing organisation. 

A decade later it was time for the government to revisit the infrastructure space again. In 2006, the government set up another institution but with the same unchanged mandate. IIFCL was asked to “provide long-term financial assistance to viable infrastructure projects through the Scheme for Financing Viable Infrastructure Projects”. It was the same finance minister, P Chidambaram, who established it. This entity was expected to soak in the large volume of surplus finance available globally to provide equity finance for infrastructure projects. 

And with a slightly tweaked role, the NIIF would be rolled out with the same role in 2016. The basic reason for bringing all of them has been the same. To bring in private capital to finance infrastructure projects or monetise those assets. As Partha Mukhopadhyay, senior fellow at CPR and one of India’s foremost analyst of the sector notes, “each of them solved a different perceived problem than addressing the entire financial architecture as a whole.”  

These interventions became necessary since Indian banks in the 1980s and even now are largely state led and do not have the appetite to finance long term asset building programmes that infrastructure projects entail. So the government has to step in to form companies that can borrow long term from the markets, domestic or abroad to invest in infrastructure projects. Vinayak Chatterjee, chairman of Feedback Infra says he is not surprised about the repeated attempts. “Each government wants a good harvest but forgets to reset the field. It does not want to examine the reasons why existing private public partnership projects have come to grief but wants to plough afresh”. 

He is correct, as the chart shows. 

The pace of infrastructure investments would begin to slow in blocks of ten years, It would signal the need for the government to show urgency to rectify the problems building up in the sector. A new institution would be called into being. But in its zeal to push the pace, it would start afresh with a new institution leaving the old problems to fester. IL&FS is the first among those that has come back to haunt.