Opinion

The new DFI must look beyond financing

SA Raghu | Updated on April 01, 2021

Roads Funding challenges   -  V Raju

The proposed development finance institution must find ways to bring private sector back into infrastructure

A brand new DFI, the National Bank for Financing Infrastructure and Development (NABFID) is taking shape. The focus now, rightly so, is on equipping it financially to raise long-term money, the perennial bugbear of infrastructure financing.

In a system awash with liquidity, this should not be too difficult, though it looks likely that NABFID will also lean on tax-break related funds as NHAI, IIFCL or PFC. But NABFID will also have to look at crucial issues on the “demand side” — the choice of projects, the nature of engagement — and governance.

If the National Infrastructure Pipeline’s (NIP) list is anything to go by, we can expect NABFID to be chockfull with road and transport projects (nearly half the NIP’s 7,700 projects are in transport, over 50 per cent of which are road projects).

Roads and power have been the go-to sectors for a long time now, reflecting not just the need but perhaps the ease of getting them off the ground. IIFCL has 44 per cent of its loans in roads and 42 per cent in energy, while NHAI has a roads portfolio of about ₹4 lakh crore. Banks’ infrastructure portfolio, which is a third of total advances, is largely split between roads (20 per cent) and power projects (50 per cent).

There is nothing wrong with this, except that NABFID should be wary of the risks here.

The issues are well known. Infrastructure services are hard to commoditise and nowhere is this more evident than in roads and power — the challenges in estimating traffic and demand, the political sensitivity of tolls and tariffs, the hurdles in implementation (regulatory, environmental clearances) are only a few. Similar issues plague power projects.

Stressed power

An earlier Parliamentary Standing Committee report on power showed that of the list of 34 stressed power plants, only 60 per cent of capacity was completed and even here, a third had no power purchase agreements (PPAs) or coal linkages, with another 16 per cent having disputed coal block allocations — effectively, about 44 per cent of all capacity (including fully commissioned plants) had neither fuel supply nor selling arrangements in place though banks had released their loans.

The pitch got further queered when policy changes began to favour state-owned utilities such as NTPC by protecting them from the bidding process which led to a pre-emption of PPAs in their favour, leaving private power producers stranded. The gross infrastructure NPAs of banks at about 12 per cent (as per the latest RBI FSR) and about 19 per cent for IIFCL tell the story. Even for NHAI, though not a financial institution, the stress in its roads portfolio is evident from its numbers.

The infrastructure sector has experimented with many models of engagement from EPC to PPP (including BOT with tolls and BOT with annuities) and also a hybrid model (HAM) with government co-financing and covering toll collection risk.

But the risks have overwhelmed both private players and lenders, who now shy away from these sectors, so much so that NHAI now has gone back to the EPC mode. Even the NIP projects are largely projected to be under EPC. If PPP is not going to be a significant part of the future, it would mean that the government will continue to sponsor projects, though in an off-balance sheet fashion. While NABFID and banks may be willing to lend to Governmental agencies on the strength of government guarantees, the sector risks still remain.

Therefore the government has a larger role than merely enabling finance. If the private sector has to come back, the government must help in enabling smoother implementation and commercialisation of projects.

There could also be need for some regulatory forbearance — the older DFIs (IDBI, ICICI) operated in an era with no regulatory norms for quite a while, save their own internal guidelines. But since infrastructure projects go through long years of implementation and operations before cash flows are visible, these projects may not always be able to pass a 90-day default test. Lenders therefore will need deep pockets and must reckon with long drawn repayments and low cash flows. There is plenty of experience and learning for NABFID to draw from.

NABFID must also help take infrastructure beyond roads and power, because there are other crucial sectors, especially health, social and urban infrastructure (water supply, sanitation) that have more pressing needs. More importantly, these sectors need the benefit of private expertise and skills more than finance.

Therefore NABFID, with the support of the government, must go beyond being a provider of capital, to helping enable the return of private sector to infrastructure; else it could end up as just one more DFI in the financing spectrum.

The writer is an independent financial consultant

Published on April 01, 2021

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