We could lose all private infra gain PDF Print E-mail
Thursday, 29 November 2012 01:37
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With all manner of private infrastructure initiatives in litigation—the Delhi Airport Metro being the latest example—Rajiv Lall, vice chairman and managing director, IDFC, argues India is at the crossroads in the PPP space. While there is no rethinking in the sense of the private sector wanting out—the $1 trillion opportunity in the current Plan is too juicy—there has been a big setback with banks, for instance, not wanting to fund various projects. Lall spoke about this to Sunil Jain and Shobhana Subramanian. Lall also explains why he thinks infrastructure development funds, the latest innovation in the financing space, will find it difficult to take off.


With so many infrastructure projects in trouble, do we have a problem?

Generally speaking we’re at a crossroads with respect to private sector participation, not just PPPs but also, for instance, independent players in power generation. And this puts at risk all the gains we have made by actually getting the private sector involved in building infrastructure; the momentum could take a setback. One of the patterns we see is that, across the board where private sector has participated, government has very often either not been able to meet its obligations or there has been some amount of backtracking.


What kind of backtracking?

The power sector is the classic example where Coal India was to provide the fuel but the fuel is not there in sufficient quantities, and this has created its own problems. Roads are another example where land aggregation is not happening quite at the pace at which it was advertised and a lot of people have made mistakes on the basis of those promises.


So how serious is the problem?

The entire financial system went along with government, or NHAI or the line ministry, in the expectation that if 80% of the required land was available, the rest would be taken care of. So banks believed it was alright to do a financial closure. This may have been naïve on our part, but we believed the government. The reality is, in the case of land, the remaining 20% has become a big problem and has led to considerable delays and complications.


You claim there has been regulatory backtracking...

The Delhi airport is a great example of this, where there has been so much back and forth after the contract was signed. I know you don’t agree—your argument is that the concessionaire was reinterpreting the rules to alter the definition of the topline—but this is not the only example. There are many more. TAMP has been looking at regulation of tariffs in different ways in different cases, there was an issue about how the Airport Development Charge was to be treated...

And there is the big issue of the government not being able to keep its end of the bargain in terms of clearances, environmental clearances in particular. Again, in strict project finance terms, none of these projects should have been funded and there should have been no disbursement of funds until such time as the last environmental approval was in the pocket. But we did it, and the system has got so gummed up that it’s causing a lot of stress.

But surely, it can’t all be the fault of the government? How did UMPPs take a big risk on global coal prices, what were the banks thinking when they financed power projects...

Of course, the private sector is also to blame. We all knew that when the private sector was asked to participate in the infrastructure build-up, it was totally unchartered territory. Since the risks were high, those willing to bet on this had built into their models unrealistically high returns—justifying them with the high risks. Ironically, the way things have panned out, with the government not keeping its end of the bargain, the risks have actually turned out to be as high as initially thought.

That, in turn, seems to have brought out the worst in the private sector since it had put money into the ground and some had put in serious money. This has, no doubt, added to the ‘nexus’, the ‘crony capitalism’ and ‘corruption’ that the media talks of. And now, civil society is up in arms, as is the judiciary. With the judiciary looking at things more closely, this has led to further government inaction, decisions are held up and arbitration is mounting. So what’s happening is that the government is not taking any decisions, the private sector is not willing to put in any more money and the banks and financial institutions are staying away.


Is IDFC holding back on financing?

Of course. 80% of our business today is refinancing, we are not doing any greenfield funding. Earlier, about one-and-a-half years back, this number was possibly around 50%, which was already high. We are doing this to mitigate the risk, we are re-financing other financiers in existing projects that are already operating. 75% of our exposure, or maybe more, is to operating assets and we have moved aggressively to change the character of the book.


What will this do to infrastructure investment plans?

We’re talking of $1trillion, of which 50% is supposed to come from the private sector. It’s really not an issue of financing not being available, it's one of instilling confidence in all stakeholders because most projects still do make financial sense. Take the Agra Expressway; you can’t fund that on the basis of tolls, that’s funded partly on the basis of real estate. Is that a crime?


But were the bids realistic? DIAL bid a 46% share of topline. Even if you leave aside the issue of what was topline (this is the real estate stuff), how can you make money on such projects?

The project was robust even from a debt-servicing point at 46% because there’s huge traffic. A high revenue-share model is adopted routinely in areas like exploration which are extremely capital-intensive. All over the world—Africa, Indonesia, Malaysia—the revenue sharing is very high at 40-50%.


Who is to blame when assumptions go wrong?

I would say that one out of two times, the savviest of business prognostications go wrong because there are things that are unforeseen and beyond your control and you don’t always have the information or the wherewithal to make a reasonable prognostication. Who would have thought that we would have 900 million telecom subscribers in 10 years? Nobody. And it is easily possible for things to go the other way too, so ascribing blame is not the way forward.


Is a permanent renegotiating committee a good idea given how projects need to get restructured? And how come no one shouts murder when banks restructure loans, but do this when an airport metro has to be rejigged?

It’s an interesting idea but it’s not going to be easy because everybody’s inclination is to blame everybody else. And, in the Delhi-Gurgaon Expressway, for instance, where the traffic was hugely under-estimated, there are technical solutions. Also, you should talk to the French company that is collecting the toll; there is this general impression that people have that money is being siphoned out and the toll is under-declared, but that is not true at all.

If we had a senior dynamic civil servant who’s given adequate protection and whose job it would be to solve the problem, then some brave people will take the responsibility and renegotiation could work. Under the circumstances, nobody wants to do anything, no one wants to pragmatically swallow one’s pride and admit to a mistake. We are routinely trying to solve a problem and we as financiers would be pragmatic.


Are there solutions that have worked in the past?

Look at the accelerated power restructuring programmes. We all know they are dysfunctional. Every ten years there is a bit of a crisis and we all sit down and “solve” the problem by redistributing the burden. It doesn’t solve the problem, it kicks the can further down the road. Each time there is some incremental improvement, though that’s not a very satisfactory way of doing things. But that’s our system, there’s a little bit of carrot, a little bit of stick and there’s distribution of pain and burden.

As long as the government is taking part of the hit, it’s fine. But, what if the Delhi-Gurgaon Expressway had been run without a hitch and the payback had come sooner because the traffic is huge. Would it have shared the gains with the government?

That’s built into the contract—if the traffic exceeds a threshold, the concession gets cut and if it falls below a level, the concession gets extended. Gajendra Haldea has thought about these things very carefully.


You’re defending Haldea!

I am. What he says always makes sense. His big contribution is in the model concession agreement in roads and the nice feature in this is that the regulatory aspects of the tariff are built into the contract. So we don’t need an independent regulator for roads. If the concession agreement had been appropriately drafted for Delhi-Gurgaon, my hypothesis is that the problems wouldn’t have been as serious. Now the Haryana High Court is also involved. Regulation through contract is an important idea.


What are the lessons IDFC learnt, or practised?

At IDFC, we funded mainly operating assets in the power sector or captive projects because we were not confident about fuel supply agreements and often when we asked for a proper agreement, we didn’t get any. So we approved some projects where there was access to captive mines. We checked with the environment ministry on whether there were issues before we funded them, and were told things looked okay. This led us to conclude, erroneously it would appear, that the approvals would come. That’s when you guys brought in “Coalgate” and ensured all the plants got into trouble.

You can take the view that coal mines should be taken back if they're not developed or that captive mine owners can’t be allowed to sell the power at merchant rates. Fair enough, we could change that prospectively. But you need to clear projects where coal mines were promised because it’s not easy for them to get imported coal.


How did people like the Tatas go so wrong in their estimation of coal prices?

Everyone got it wrong. At the time of euphoria, there’s a certain psychology. And the psychology—which makes perfect sense—is that this country has such an acute shortage of electricity that one just needs to invest and over time one will make good.


Are the Infrastructure Debt Funds taking off?

The idea of IDFs via the NBFC route is for financial institutions to be able to transfer the risk into an off-balance sheet vehicle. But for that you would need to leave the capital requirements for IDFC-NBFCs relatively low so that banks are motivated to transfer their assets to the SPVs. Otherwise, they might be unwilling to lose out on the current spreads of around 400 basis points since the assets are already operational. Also, it’s hard to see foreign players coming in since they are unlikely to be given control and an exit won’t be easy either. Moreover, the dividends, too, are unlikely to be compelling.


Would foreign debt market investors be willing to invest?

From the point of view of the debt market investor, the yields need to be attractive enough even after the hedging costs are taken into account. My sense has been that to really make the debt flows happen and allow financial institutions to move assets from their balance sheets, you need some element of credit enhancement. However, commercially there’s no way of making it work currently in the Indian context and, therefore, some amount of sovereign help would be required. This could easily be done by an institution like IIFCL which could play a role in providing targetted credit enhancement.


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