The Hindu Business Line : Transport infrastructure

Logistics - Interview
Industry & Economy - Infrastructure
Money & Banking - Credit Market
Transport infrastructure — The emerging financing options

Mamuni Das

Now that we enjoy investment grade rating, we could look at accessing the 30-year, fixed rate bond market offshore in the dollar, the euro or the yen, depending on the timing. — MR S. BALACHANDRAN, FORMER MD, INDIAN RAILWAY FINANCE CORPORATION

At a time, when the Government is contemplating billions of dollars of investment in transport infrastructure, Business Line caught up with Mr S. Balachandran, who recently retired after mobilising funds for the Indian Railways for over five years in his capacity as Managing Director, Indian Railway Finance Corporation, apart from being the Additional Member (Budget) in Railway Board.

Excerpts from the interview:

What are your broad thoughts on infrastructure financing?

Initially, short-term construction funding could be provided by commercial banks along with equity brought in by project sponsors. In the later phases, it could be refinanced through issue of long-dated securities. This will be cost effective and draw a better response from the investor community as the project risk is greatly reduced.

We can structure the instruments to suit revenue streams (it is not securitisation in the true sense).

What kind of instruments?

We can look at pension fund accounts, insurance sector, mutual funds and bond markets, which have institutional mechanisms and are being regulated in India. The role of development financial institutions (DFIs) in promoting local currency funding mechanisms is equally crucial as these agencies can provide long-term currency hedging tools in the domestic capital market.

The DFIs are also contemplating whether they should shift over time from traditional lending to facilitating mobilisation of large pools of private savings in the domestic and international markets.

It is important to employ instruments to mitigate risk, such as partial guarantees, insurance cover and currency swaps. It is too much to expect banks, with short-term deposits, to create long-term assets — especially with their moving towards new capital adequacy norms under Basel II.

Infrastructure projects need long-term financing in the currency of revenue of the projects, preferably with fixed coupon rates.

In its Global Infrastructure Report 2006, the Asian Development Bank (ADB) proposes to swap its hard currency with local currency with a tenor of up to 20 years to be lent to those infrastructure project developers and sponsors, through reputed financial institutions without sovereign guarantee.

This currency swap will only change the currency composition, unlike the usual currency swaps in case of external borrowings, where the swaps are done on synthetic conversions instead of actual initial exchange of currencies. While capital markets have developed over the years in depth and liquidity, there is enough scope for debt and swap markets to boost the investor appetite for long-term instruments.

Now that we enjoy investment-grade rating from three international rating agencies, we could also look at accessing the 30-year, fixed rate bond market offshore in the dollar, the euro or the yen, depending on the timing.

We can have a 10-year call option if needed, and the funds mobilised could qualify for equity-like hybrid status.

It is advisable to create assets today with 30-year money as with a 5 per cent inflation, the purchasing power of Rs 100 crore will drop to less than Rs 30 crore after 25 years. To create assets of the same value, we will have to spend Rs 340 crore in 2032, instead of Rs 100 crore today.

To mitigate the currency risk, we can set apart 1-2 per cent of the debt at the time of coupon payment to a sinking fund, which will meet the exchange exposure management.

How about using the burgeoning forex reserves for infrastructure finance?

Much has been said on this subject. While it may be possible to safely employ a small percentage of forex reserves for exposure to infrastructure assets, preferably through public infrastructure finance companies, large exposure may not be prudent as we do not have trade surplus. And portfolio investments are about 27 per cent of our liabilities; about 51 per cent of liabilities are in the nature of loans, currencies and deposits.

Any suggestions on public private partnerships (PPP)?

With pressure on public finance, it is ideal to have PPPs wherever possible in building infrastructure and create value for money, which is lacking in traditional public investments. A few points to note are: Project structures should be flexible enough to deal with unforeseen change in circumstances to avoid winding up of operations. Then, the termination clauses should have a reasonable cure period with room to negotiate without triggering other complications.

The concession durations are usually long. The lack of appetite of private investors and banks for exposure in infrastructure is understandable since the legal framework in a public infrastructure can work against their interest under public policy objectives notwithstanding foolproof trusteeship agreements. Therefore, enforceability is an important issue.

There are not enough existing PPP experiences in the Indian market to study and learn from default patterns. What we depend on today are financial projections and coverage ratio analysis — these are useful to the extent that underlying assumptions are realistic and attainable.

In this context, a new model of pooling credit risk through infrastructure banks aided and supported by DFIs and the Government could be tried. The construction sponsor's role could be less for equity and more for their expertise in design construction and operation.

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