A committed DFI needed

India Infrastructure Finance Company Limited is poised to flower as a DFI for India's infrastructure

With public-private partnerships (PPP) in extended hibernation and private investment in infra at an all-time low, the challenge now is to get the private sector to invest upwards of Rs 7 lakh crore per annum in greenfield projects. Financing this will be challenging, given the dire straits of India’s banks, which is expected to get worse. Banks will have to hold more capital because of Basel III; struggle over the medium term with their bad debts; and suffer from asset-liability mismatches. Alternative capital market instruments like InvITs and REITS will take time to mature to make meaningful impact and, anyway, are only relevant for operating projects. A vibrant bond market is still to emerge and foreign direct investment is largely zeroing in on brownfield acquisitions.

Sixty years ago, India had a similar problem: How to fund steel and cement plants and other large industrial investments while not crowding out day-to-day finance for existing manufacturers and traders as well as sponsor a new entrepreneurial class? The solution was found in creating a clutch of development financial institutions (DFI) like IFCI, IDBI and ICICI. These were created to provide long-term finance backed with sectoral knowledge. And in their time, they did indeed deliver.

Twenty years ago, IDFC was set up with the same objective. Today, ICICI, IDBI and IDFC are no longer DFIs, preferring to be regular banks. And IFCI is grappling with its own existential dilemma. In 2006, the government tried again by setting up its wholly-owned India Infrastructure Finance Company Limited (IIFCL). IIFCL has many schemes and it lends to PPP projects in infrastructure across different maturities through direct lending, refinance, and take-out finance. Its subsidiaries are there to help develop projects, raise funds on the debt market and from international markets. Recently, it has also been mandated to sponsor a credit guarantee institution. Unfortunately, IIFCL has not really been able to become a big provider of infrastructure finance of the size that India needs. During FY 2015-16, IIFCL disbursed $1.45 billion to infrastructure. During the same time, BNDES, Brazil’s DFI, disbursed $18 billion. China Development Bank, disbursed $130 billion.

The government recently set up the National Infrastructure Investment Fund (NIIF) to draw in sovereign funds and provide equity capital. NIIF is still to get off the ground. Apart from IIFCL, there are other entities that finance specific infrastructure sectors — Power Finance Corporation, Rural Electrification Corporation, Solar Energy Corporation of India, HUDCO and Indian Railway Finance Corporation Limited.

The Reserve Bank of India (RBI) has allowed a class of non-banking finance companies to be treated as dedicated infrastructure finance companies (IFC); a handful now exist with this tag. A recent white paper from the RBI proposes to create wholesale banks for infrastructure finance, with a minimum capital of Rs 1,000 crore.

So, we have many institutions, existing and proposed, but none that matches the scale of those in Brazil and China. How do we get there? Infra experts concur that it makes sense to have IIFCL develop into a world-scale DFI for financing Indian infrastructure. To do that, IIFCL needs to be regulated differently, run better and be set stretch goals.

IIFCL suffers from dual regulation. The RBI regulates it as an NBFC-IFC. But it is also directly regulated by the Ministry of Finance, through its 2005 Scheme for Financing Viable Infrastructure Projects. This scheme restricts IIFCL’s exposure to a particular project to 20 per cent of the project cost. Thus, even for a small project, the developer has to approach several lenders before achieving financial closure. Further, it requires an overriding priority to PPP projects and imposes certain restrictions on exposure to non-PPP projects. Unfortunately, there have been few PPP projects recently. This has adversely affected IIFCL’s participation in the infrastructure sector.

Therefore, to allow the IIFCL butterfly to emerge from its chrysalis, the following suggestions merit consideration:

* Removal of dual regulations: IIFCL should continue to be governed only by RBI regulations. Finance ministry control should be replaced by a government charter outlining the broad policy directions for the company.

* Operational autonomy to the board of directors: IIFCL’s board should be empowered to take decisions on operational matters as per its revised charter, and remain under the regulatory purview of the RBI.

* Increasing IIFCL’s capital by getting equity from multilateral institutions or sovereign funds: IIFCL’s 2015-16 annual report shows that it has share capital and reserves totalling Rs 7,265 crore. This is clearly insufficient. The government of India can retain majority control of IIFCL but invite equity participation by institutions such as ADB, IFC, sovereign wealth funds, and new Asian funders like New Development Bank and Asian Infrastructure Investment Bank (AIIB).

* Better corporate governance: To attract equity capital from multilateral agencies and other global players, IIFCL’s corporate governance should also be best-in-class. For instance, the post of chairman and managing director could be separated. Eminent people could be co-opted as independent directors.

These are not difficult changes. The government is already doing this for NIIF. It has got a CEO from the market. It has invited sovereign wealth funds to be co-investors.
 

Gossip in Delhi’s policy circles speculate about a possible merger between IFCI and IIFCL to create scale. A more aggressive set of discussions hover around merging IIFCL, IFCI, PFC, REC and HUDCO to create an Infra DFI behemoth.

Whatever be the ultimate outcome, a good first step would be to galvanise IIFCL into a DFI role. 

The private sector would welcome that too.

The author is chairman, Feedback Infra. vinayak.chatterjee@feedbackinfra.com; Twitter: @Infra_VinayakCh