Govt funding on its own won't suffice for infra: P R Jaishankar, MD, IIFCL

In a Q&A, he asserts that 23-27% of the Rs 111 trillion required by the National Infrastructure Pipeline must come from banks and financial institutions

With the government deciding to have development financial institutions (DFIs) and subsuming India Infrastructure Finance Company (IIFCL) into a new entity, Jyoti Mukul spoke to IIFCL managing director P R Jaishankar on the challenges in infrastructure financing. Edited Excerpts:  

With the government focusing on the National Infrastructure Pipeline in the Budget, how crucial is it to address the financing challenges?

Infrastructure as an engine of growth is primary to our economy. NIP requires an investment of Rs 111 trillion over 2020-25. A huge amount of 23-27 per cent has to come from banks and financial institutions. Even with all envisaged sources of funds, there remains a gap of 8-10 per cent in funding the NIP, which has to be filled, for which we have new age instruments, like infrastructure investment trusts and infrastructure debt funds, and also refinancing. We are looking at a new architecture for financing and this budget has laid the foundation for that. There will be complexities since project sizes will be bigger. Going forward, the way projects are designed and implemented will make a lot of difference.

What role has IIFCL played and were there any limitations because of which a new DFI has been envisaged?

IIFCL has been in the infrastructure financing sector since 2006 when it was established. Over the years, we have built expertise in project advisory and structuring for sustainable infrastructure financing. We are geared up for catering to all facets of sectoral requirements and take on additional responsibilities as the government will like us to do.  

When infrastructure projects began to take shape, the highway sector saw evolution from traditional public procurement models to public private partnership structure. The then new-found process induced a positive outlook amongst all stakeholders as it opened up a plethora of opportunities. However, in their attempt to “quickly” reap the fruits of this development, the cardinal principles of PPP for adequate project preparation, balanced risk allocation-based contracts, and the right approach of ‘partnership’ were compromised. Debt that constitutes the major part of the project financial structure, turned subservient to the needs of ‘high growth’. The inadequate preparation of contracted projects led the developers, with limited finances and risk taking capabilities, to bear the onus of getting land acquisitions and all clearances, an area where the Government supposedly has a better hand than the private sector. This laid the seeds for delays and cost-overrun in projects. The issues that came up were mainly because of structural reasons but long-term finance is a key requirement for infrastructure projects. That is needed to be put in place. We have gone a long way since then and the transition has been full of learning. New models such as Toll-Operate-Transfer (TOT) and the Hybrid-Annuity-Model (HAM) have now come in place and there has also been reinstatement of the traditional EPC mode to an extent.

What challenges has IIFCL faced in its current form?

Initially, banks led the way in financing of infrastructure development in India despite their asset-liability mismatch issues. IIFCL was set up in 2006 as a specialised infrastructure financing institution to finance such long gestation projects. Over a period of time, the banking sector and IIFCL have together contributed to the success of a number of infrastructure projects such as Bandra-Worli Sea Link, Delhi-Meerut Expressway, Strategic projects in the North-East, Port developments, Station Redevelopment etc. There have been learnings from issues and shortcomings. Long-term instruments, like bonds, were absent in India. World over infrastructure sector is majorly financed by the bond market.

Over a period of time, we are trying to build capacity especially for long-term financing. We are trying to do a number of things; not just to improve institutional capacities but also to advocate regulatory conduciveness by the Reserve Bank of India and other regulators. The infrastructure sector has come out of its “teenage” phase over the last two decades and it is time for the regulators to support innovative structured solutions and help to de-stress the lending space.

Is it that IIFCL is fully owned by the Government India which makes it conservative in approach and the new DFI structure will empower it?

The Budget has made an outstanding statement which lays blue print for reinvigorating of the system. IIFCL has been 100 per cent owned by the government. We are geared up to take up any additional responsibility as the Government may perceive. World over, infrastructure has been initially funded by the government because it is a public good. It is a necessary factor but how you have to deliver the financial requirement and design, is a question which has developed over a period of time. The capacities and skill-sets have to be further enhanced, whether it is in case of a bank or IIFCL. In the emerging scenario, banks also have a role to play particularly in greenfield financing till such time a robust system is developed. The bond market will not take the construction risk. In such a context, Indian banks and financial institutions are quite geared up to take up the construction risk. IIFCL is gearing up to meet the challenges of financing mega projects from a technological and skill sets point of view. It is a question of moving to the next scale.

Long-term financing is part of the process. The role of IIFCL and banks has to be complementary. You need an environment where long-term financing happens with a set of banks taking up financing and passing it to another set of banks over a period of time. There is the Channel Tunnel financing example where one set of banks passed on the asset to another set of banks so the amortization period of the project increases and enhances the project viability and helps reduce user charges and create a multiplier effect in the economy. We need to build the infrastructure sector through futuristic methodologies. In addition to that PPP is important. Government funding entirely will not be the most efficient structure. It has to be a combined effort of the public and private sectors.

What kind of contractual changes do you think can help at the time of award of contract itself?

Concession agreement is on bilateral basis currently. Lenders, who take 70 per cent stake in the project, need to have a say. If the lenders can be made a party to concession agreements in a way, lenders can have a say, it will go a long way in making infrastructure projects viable.

Also, delayed termination payments have been a serious concern for lenders and investors in an infrastructure project. Ensuring timely termination payments by Concessioning Authorities would encourage lenders/investors to lend/invest in infrastructure projects. In order to do this, an insurance like mechanism covering the amount of termination payments may be set up by insurers and offered for subscription by concessioning authorities, who may pay premium for such products to the insurers. Upon termination, lenders can receive termination payment from the proceeds of the insurance claim without the Concessioning Authority processing the same. That will increase the confidence of lenders to finance infrastructure projects.  

What is your view on the Insolvency and Bankruptcy Code? Do you think it has been successful?

The intent has been very good, moving from a developer-driven perspective and to a lender-driven perspective. Lenders have a better say and that is a good thing. We have used this mechanism in certain projects. IBC is a new process and has to get seasoned. We expect it to become robust over a period of time. Resolution of disputes in a time bound manner is important.

What is the status of NPAs?

The peak of NPAs seems to be over. Our NPA have started dropping. The business is picking up and recovery has been strong. Prospects of growth seem to be coming in a big way. Net NPAs have declined to 7.67 per cent as on Dec 2020 from 10.81 per cent in the same period last year.

Are you looking at new products like green bonds?

We have done take-out and credit enhancement financing, complementing the bond market. IIFCL as an innovative lender will continue to play its role. Going forward, options like green bonds may also be explored depending on requirement.