VISIBLE CONSTRAINTS

(Pic by Subhabrata Das) DEEPAK PAREKH COMMITTEE: Stepdown subsidiaries — created to execute a particular infrastructure project without any dependency on the parent whatsoever — do not involve cross holdings… banks’ lending to these subsidiaries is not vulnerable to the bankruptcy of the parent… there is thus a strong case for removal of exposure to such subsidiaries from group exposure limits. (Bloomberg) RAGHURAM RAJAN COMMITTEE: Sectoral caps and limits on single and group borrower exposure will place further constraints on financing (of infrastructure). While it might be tempting to relax prudential norms in the cause of infrastructure, this would simply be wrong — infrastructure finance can be risky, and it would be short-sighted to sacrifice the health of the banking system on the altar of infrastructure finance.

Feeble Alternatives
If group exposure is one major hurdle in raising funds for infrastructure projects through banks, insurance and pension funds, also a source of long-term funds, are equally unenthused about lending to the sector.

Lal during his 23 December meeting with the government said, “With the exception of LIC, insurance companies, pension and provident funds rarely invest in paper with a maturity longer than five to seven years”. In fact, projections show that barely 5-6 per cent of the total debt funds needed for infrastructure come from insurance companies. Lal also says insurance funds would not be available as the Insurance Regulatory and Development Authority’s (Irda) investment guidelines call for project rating of not less than AA.

Generally, infrastructure projects that depend on, say, toll collections or airport traffic get a BBB rating. Projects with minimum guaranteed revenue (like an assured offtake in power projects) get a higher rating, a source in the infrastructure sector explained. Therefore, important road or national highway projects would carry only a rating of BBB. Infrastructure projects are structured and financed very differently from other ventures. They have large upfront capital costs where lenders (who provide 60-70 per cent of the project cost) are repaid only from the project’s revenue stream — toll collections in the case of highway projects. Added to this, huge infrastructure projects are executed through SPVs or individual project companies and cannot bank on the parent company for guarantees (non-recourse). Therefore, the credit rating of the project company is solely dependent on the revenue stream forecast lasting for the concession period of 15-20 years.

The Interim Measure
In the stimulus package announced on 2 January, the government allowed IIFCL to raise Rs 10,000 crore through tax-free bonds for refinancing bank lending of longer maturity to “eligible infrastructure bid-based PPP (public-private partnership) projects”. The very fact that IIFCL’s refinance window is for port and road projects is a tacit agreement that bank funds are not available for such projects.

Speaking to BW, the Deputy Chairman of the Planning Commission, Montek Singh Ahluwalia, clarified that “shortage of long-term funds is a key constraint and (therefore) the refinance proposal will provide immediate help”.

According to officials, this (refinance window) is purely an “interim measure”, and the bonds would provide a relatively cheap source of debt finance. If the amount raised adds up to to Rs 40,000 crore, it will enable infrastructure investments of about Rs 1,00,000 crore (debt and equity together). But this is still a far cry from the Rs 9,84,500 crore of debt funds needed for the infrastructure sector, by 2011-12.

Will things change? As Lal says, “...the alternative is to leave the government to build the country’s infrastructure or just be reconciled to not building as much infrastructure as we need”.

kandula(dot)subramaniam(at)abp(dot)in

(Businessworld Issue 13-19 Jan 2009)