Railways to lose investment guarantee from World Bank due to IRFC IPO

The decision by the department of investment and public asset management (Dipam) to go for an initial public offering of Indian Railway Finance Corporation (IRFC) has put paid to the Indian Railways’ (IR’s) chances of getting an investment guarantee from the World Bank.

With the IPO decision, the Railways has lost the World Bank’s Multi-Lateral Investment Guarantee (MIGA) for raising at least $500 million from international private sector investors and lenders.

The MIGA gives political risk insurance and credit enhancement for cross-border lenders.

The World Bank last week informed the national transporter it would not be able to guarantee the IR’s dedicated financing arm IRFC to raise funds from international markets because it would be listed during the January-March quarter of the current financial year.

The decision to list IRFC came with the government pushing hard to meet the disinvestment target of Rs 800 billion for 2018-19, of which the government has realised only Rs 340 billion.

The MIGA did not respond to the questions of Business Standard. Multiple sources close to the development said had the World Bank guarantee been there, IRFC would have raised money at a competitive interest rate of around 5 per cent, which would have been 2 percentage points lower.

A source said the World Bank agency backed out, citing there would be higher risks involved if an entity was not fully owned by government.

The decision is a double blow for the IR, which is struggling to ensure promised financing from Life Insurance Corporation (LIC) for its infrastructure projects. LIC had signed a memorandum of understanding (MoU) with the IR in March 2015 to invest Rs 1.5 trillion in railways infrastructure through bonds issued by IRFC (between 2015 and 2020).

Of this LIC money, the IR so far has secured only Rs 162 billion till 2017-18 and is likely to get another Rs 16 billion during the current financial year. This pace of investment became slow owing to guidelines by the Insurance Regulatory and Development Authority that it requires explicit sovereign guarantees as well as special status for such bonds.

During the past two years, the pace of infrastructure investment in the IR, including electrification and track renewal, has gathered momentum.

“Since IRFC has a letter of comfort from the government of India, it is as good as a sovereign guarantee. Hence, backing from the World Bank is not required. As far as LIC funding is concerned, the IR will have to ensure that its projects will give them an attractive rate of return,” said R Sivadasan, former financial commissioner of the IR. Even if IRFC goes for listing, the deferred tax liability issue, which is yet to be sorted out, will hurt its valuation.

For the current financial year, the IR has exhausted its limit of $750 million for external commercial borrowings. The MIGA says its guarantees protect investments against noncommercial risks and can help investors obtain access to funding sources with improved financial terms and conditions. The World Bank agency, which guarantees projects in developing countries, include most countries of the world as its shareholders.

During 2017-18, IRFC had posted a profit before tax of Rs 25.45 billion as against Rs 21.33 billion in 2016-17. Since its inception till the end of March 2018, IRFC has funded acquisitions of 8,998 locomotives, 51,857 passenger coaches and 2,20,746 freight wagons of Rs 1.69 trillion. In addition, IRFC provided funding support to railway entities such as Rail Vikas Nigam Ltd and RailTel Corporation of India.