IRFC an outlier in project finance for core sector

Railways’ mega investment plan of Rs 8.56 lakh crore over five years starting from 2015, may now be the starting point for a long-term vision for 2030. Since these will be heavily dependent on borrowings, the plans may mean a change of course for not just the carrier but also for its borrowing arm, Indian Railway Finance Corporation (IRFC): it has to now shift from financing of rolling stock (locomotives, coaches and wagons) to projects.

According to the five-year plan, IRFC will provide almost the same amount of funds to the Railways as the government through the budget. Thus, IRFC will arrange debt amounting to Rs 2.50 lakh crore, out of which Rs 1 lakh crore will finance new rolling stock and another Rs 1.5 lakh crore, raised from entities like Life Insurance Corporation and Employees Provident Fund Organisation, will finance projects. 

This means that IRFC will have to increase its annual fund raising by half — from Rs 40,985 crore in 2016-17 to Rs 61,383 crore on an average in each of the next three years. It also explains why despite the railway budget being merged with the general budget, IRFC will continue to work separately. The organisation currently gets a comfort letter from the ministry of railways for all the fund-raising it does. The money raised by it does not count for government borrowing and, hence, does not reflect in the fiscal deficit. 

Since its inception in 1986, IRFC has borrowed Rs 1.85 lakh crore for the Railways and has Rs 85,542 crore outstanding as of September 30, 2016. Though it will liquidate about Rs 27,365 crore of borrowings by 2019, the new plan will mean that the outstanding loan for IRFC will increase manifold in the coming years. 

This creates a need to get more equity infusion from the Railways; thus, it will receive Rs 2,596 crore in equity from the Railways during 2016-17 to maintain a 7.5 debt-equity ratio. 

Foraying into project financing in a big way (51 per cent of its borrowings in the current year are targeted to fund railway projects) will require greater caution on the part of IRFC. “We cherry pick projects that are viable. The projects should have an internal rate of return of more than 14 per cent,” says IRFC Managing Director P V Vaidialingam.

According to Vaidialingam, whenever a project is funded by IRFC it brings more credibility to the process. “It ensures financial closure of the project since we provide uninterrupted supply of funds,” he says. These projects are primarily doubling and electrification where the current line capacity is utilised 130-140 per cent. IRFC has already funded 118 doubling and electrification projects.

The target Besides, sensitivity analysis for projects is undertaken so that there is no case where land and environment clearances are an issue or there are court cases. With a target of Rs 40,985 crore, IRFC is funding 33 per cent of the Railway Plan this year, from about 25 per cent share in the total planned spending traditionally. Overall, the total Plan outlay of the Railways has been Rs 7.15 lakh crore from 1996-97 to 2016-17, of which IRFC provided almost 26 per cent of funds at Rs 1.85 lakh crore. 

Similarly, while the share of rolling stock financed by IRFC in the Railways’ total asset was just 37 per cent in 1999-2000, it has risen to 72 per cent now. Two-thirds of the rolling stock on the railway network are owned by IRFC and leased to the Railways. Despite the Railways’ dependence on borrowings increasing over the years, IRFC has just 18 personnel, points out Vaidialingam. 

Moreover, the cost of its borrowing is low. “The interest rate at which we borrow is almost equal to sovereign borrowings.  In October, IRFC borrowed Rs 1,500 crore at 6.92 per cent,” says Vaidialingam. 

IRFC charges a 0.5 per cent margin to the Railways over its cost of borrowing. For instance, the average cost of capital for IRFC was 7.62 per cent in 2015-16 which after the margin works out to 8.12 per cent for the Railways.

Though the rolling stock life span is 30 years, the loan is liquidated in 15 years after which the ownership is passed on to the Railways. The second period lease starts from the 16th year when it gets Rs 1 lakh every year on every lease agreement. At the end of 30 years, the rolling stock will be transferred to the Railways for a token amount. So far, however, none of the IRFC leased rolling stock has been freed of loan and the first transfer will take place next year.

For projects, Vaidialingam explains the lease arrangement will be structured in such a way that there will be little cause for worry and it will be smoothsailing as in the case of rolling stock. The loan from Life Insurance Corporation, which IRFC will use for project financing, will be for a 30-year period at 30 basis points above the G-Sec rate and will be revisited after 10 years. For the first five years, there will be a moratorium on repayment. From the sixth year onwards, only the interest will be payable, while the principal repayment will begin after the tenth year.

Between the tenth and thirtieth years, there will be 40 biannual equal monthly installments that will be paid by the Railways to IRFC and from IRFC to LIC.

This arrangement will be put in place through back-to-back agreements. In addition to the financing arrangement, the Railways will lease out land for project at Rupee 1. IRFC, in turn, will appoint the Railways as contractor for developing the project. The ownership of the asset, once constructed, will lie with IRFC for the lease period. The lease rental will be equivalent to the payment arrangement with LIC.

Despite the mirror arrangement, rolling stock financing has been a much simpler process for IRFC and devoid of risks since its user is the Railways. Now, a National Rail Plan 2030 is also being envisaged to make “rail development strategically oriented and holistic”, Railways Minister Suresh Prabhu on Thursday tweeted. This may also have to heavily depend on loans. But, by branching out to project financing in times when lending to the infrastructure sectors has been a trouble spot for financial institutions and banks, IRFC will be an outlier in the business.