Today's Top Gainer
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Infrastructure Development Finance Company Ltd (IDFC)completed its first full year of operations in March 1999. It was set up with a mission ? to lead private capital to core infrastructure. The institution has grown rapidly in its early years of existence. Apart from direct lending, IDFC has introduced some new and innovative products in infrastructure finance. The company has also taken a leading role in developing framework conditions necessary for the flow of private capital in infrastructure projects. Indiainfoline met up with Mr. D. J. Balaji Rao, Managing Director, to discuss his views on the status of infrastructure projects in the country and IDFCs emerging role. Mr. D. J. Balaji Rao began his career in 1962 as a trainee with Kamani Engineering Corporation Ltd. After a stint of five years, he joined ACC in 1967 and in 1970 he joined ICICI Ltd. as a Project Officer. He joined ICICI?s board in 1992 as Executive Director and was later appointed as the Deputy Managing Director. In 1996, he joined SCICI as the Vice-Chairman and Managing director. Consequent to the merger of SCICI with ICICI, he joined IDFC as the Managing Director in June 1997.
A growing economy needs to make huge investments in infrastructure development, for which both private and foreign participation is necessary. The progress in this regard has been quite disappointing. What has hindered the growth of infrastructure during the last few years?
The development of the infrastructure sector has been disappointing. In fact, if you look at the FIs figure for sanctions and disbursements, you will see that while sanctions have been going up, disbursements have not kept pace. During FY99, all FIs put together have actually disbursed about Rs6bn less than the previous year. While projects have been sanctioned, very few financial closures are taking place.
The basic mistake has been that proper policies have not evolved. As a result we are managing by crisis and no long-term solutions are being found. In our anxiety to invite foreigners and private sector players to participate, we did not frame the rules of the game properly and failed to take a holistic view. For example in the power sector, we should have started with the transmission and distribution (T&D) segment. Instead we started with the generation segment. Similarly instead of planning hundreds of new power projects, we should have started with renovation and modernization (R&M) of existing plants and reduced T&D losses. This alone would have resulted in additional power generation of about 10,000 MW. And this would have been a much cheaper option ? R&M would not have taken more than Rs15m/ MW of additional generation.
What about the telecom sector?
The story is the same in the telecom sector. The government should not have tried to make money by way of license fees. FIs/ FIIs, advising the government, brought in the wrong examples of penetration and usage. The bidders also went overboard with their bids, as the base assumptions were incorrect or too optimistic. The New Telecom Policy (NTP) has addressed many of these issues and things should now progress at a rapid pace.
What in your opinion are the policy initiatives necessary to expedite investment in infrastructure?
Let me first take up the power sector. We should be spending more effort on improving T&D. Generation activities should be separated from the T&D activities. Corporatisation and reforms in the SEBs is the other issue of paramount importance. Regulations would be required in terms of tariffs for at least the next five years by which time competing market forces will determine the tariff and choice of service provider.
The most important initiative necessary is to try and avoid pitfalls. For example, we may assume that sometime in the future our SEBs are going to become efficient and competition will grow, giving buyers the opportunity to chose the cheapest source of electricity. In this scenario, most naphtha-based power plants will be unviable. What many of these projects are looking at is to rake in the profits in the first five years. And due to this inherent unviability of many of these projects, IDFC has limited its exposure to naphtha based projects. Our order of preference for fuels is coal, residual fuel from refineries, gas and then naphtha or any other liquid fuel. The naphtha-based plants will in a competitive scenario become peak load plants. Same is the case with captive power plants. Most of them are viable because of the inefficiencies of the SEBs and the grid.
The second important thing is to take the process of reform to its logical conclusion. For example in the telecom sector, TRAI?s role is not being clearly defined. Also since we do not look at the whole picture, the necessary changes in regulatory framework are not taking place. This leads to confusion half way through the implementation of any policy and results in a change of risk perception and hence in the pricing of services. As a consequence, the sponsors of projects are apprehensive of entering into contractual arrangements.
What would your advice be to the government on the power sector?
IDFC has advised the government to first privatise power transmission and distribution in the large cities. Only then will we know exactly how much power is being supplied to the rural areas, to what extent pilferage and T&D losses are taking place and the extent to which power supplied to rural areas is being subsidised.
A lot is heard about private sector participation in infrastructure projects. But in reality, very little progress is taking place. What are the reasons for the same? Do you see the scenario changing? If so, could you elaborate?
To answer your second part first, yes I believe that the pace of investment should pick up. The new government is very keen to get things moving and it is evident from the speed with which they have been pushing forward with crucial legislations. Also this may be our last opportunity to get things going.
The reason for the poor participation by the private sector varies from sector to sector. Let?s take a look at roads and ports. Fortunately we are still drawing up the rules of the game and we are starting with a clean slate. Internationally not even 5% of the roads are privatized. And even where they are privatized often shadow tolling exists ? collecting cess through diesel, petrol etc. And then monitor the vehicles using the road and pay the operator as per pre determined charges from the cess levied. Alternatively give an annual payment to the operator, which covers his operations & maintenance costs and a return on invested capital. While tolling is the best option, it is not feasible to do so in many cases. Only in very prosperous areas or where there is a distinct saving (of fuel, time or distance) is tolling feasible. Similarly if one goes by lowest tariff bids, then not enough private equity will flow in, as returns will not be attractive. The Government will have to step in stretches of roads where traffic is low and tolls cannot be levied.
What is happening in the ports sector?
The entire cargo mix is undergoing a change. We used to be a major importer of POL products. Now with the new refineries being set up (Reliance, Essar etc.), our imports of crude oil will go up and POL products will come down. And the new refineries have their captive moorings and pipeline for unloading crude. Thus, a lot of capacity will be freed in the existing major ports. This capacity will go to containerized traffic. Similarly with refinery products getting transported by pipelines, you will see some capacity getting freed from the railways and the roads.
We are not taking cognizance of the above and are not developing ports in an integrated manner. On an adhoc basis we want to set up ports. Instead, it is suggested that the existing ports should be modernized and mechanized. People worry about the militant labor unions. But all the major ports are very rich bodies and they can give attractive VRS to their surplus employees. Moreover, ports are again a dual subject ? major ports are under the center and minor ports are under the state. Independently everybody wants to set up ports without taking the others plans into consideration. In my opinion many minor ports will come to grief and connectivity to the hinterland will become very important for major ports. In fact, it might be a cheaper option to expand / mechanize facilities at existing major ports, provide appropriate road and rail connectivity and to develop the hinterland so that adequate demand for port facilities can be justified.
Which are the major projects financed by IDFC? How is your investment divided among roads & bridges, ports, power and other areas? What are your targeted sanctions and disbursements for the next two years?
We have financed over 30 projects so far. Of these, 13 projects are in the power sector, 6 in transportation, 5 in the telecom sector and the balance in port and other infrastructure. I would not like to talk about our targeted sanctions and disbursements, although we would be able to meet our sanction targets. Our disbursement targets would depend on the extent of financial closures taking place. Besides, unless projects get implemented, we will not be able to try out new products on the ground. But during FY99, we sanctioned assistance of Rs22.8bn (fund based Rs16.4bn) and total disbursements aggregated Rs7.24bn. IDFC also received prepayments of Rs3bn.
What role do you see IDFC playing in infrastructure development in the country? How will its role be different from the role of traditional institutions like ICICI, IDBI or IFCI? Also since your major promoters are FIs, do you see IDFC competing with them for a share of the same pie?
We do not see ourselves competing with ICICI and IDBI. Instead, we expect to supplement their efforts. We are looking at issues and pollicies in a big way. We have a major role as an advisor to the government in identifying various issues and then helping the government formulate new policies.
The other thing where we are different is that we are trying to develop innovative products, which meet the requirement of infrastructure projects like credit enhancement, guarantees and take-out financing. In take-out financing, we are giving a guarantee to the lending institutions that subject to certain conditions being fulfilled we will take over the loan after a certain period. This helps to stretch loan maturities and match the cash flows of the project concerned.
Do you think the entry of foreign insurance major would expedite the flow of funds into the infrastructure sector?
I do not expect things to happen overnight. The insurance companies will need to build their businesses and this process may take five to seven years. Only after that are we likely to see the impact of funds flow into the infrastructure sector.
What are the skills required to assess/ fund projects in the infrastructure area? How are you going about developing these skills in your employees?
Traditional lending to the manufacturing sector is security based, while for the infrastructure sector, it is project finance based lending to special purpose vehicles (SPVs) with or without recourse to the sponsors. The skill sets have to be developed to:
We have been standardizing documents for roads and ports, which are now being enclosed by the government alongwith every bid document. We have also prepared standardized concessional agreements and bid documents. We have prepared a vision paper for corporatisation and privatization of ports. As we are spending more and more time on such policy and advisory issues, our staff have to build up skills in these areas.
The other big difference from traditional lending is that in infrastructure lending, the legal professionals work with you from day one, and not only after assistance has been sanctioned. Also we source out studies from specific experts on a need basis.
Training in the legal and regulatory framework is of paramount importance. Some of our laws are antiquated and more than 100 years old. For example, under the P&T Act, couriers cannot carry mails, similarly under the DoT Act, only DoT has the power to grant licenses. Hence, though TRAI has been formed, DoT still has its original powers. These would need to undergo change.
Infrastructure finance requires innovative funding, with customised financial products. The pricing of a product could go haywire if the tax authorities raise objections at a later date. Therefore, all new products require the appreciation and approval of the tax authorities (CBDT) as well as the Reserve Bank of India, which is IDFC?s regulator. This area needs better coordination.
Sir, we believe that urban infrastructure is an area where there is some increase in investments especially in water supply system. What are your views?
While there is a lot of potential, urban infrastructure is one of the most difficult areas and is likely to take a long time to take off. The problem is nobody wants to give up control. And states do not have the money. Maharshtra, I understand, spends Rs1.25 for every Rs1 that it earns. So where is the money for investments? People will have to understand that they will need to pay for the services they enjoy. Leakage and thefts, which are as high as 40-50%, need to be stopped and metering of services has to start. We are negotiating a line of credit with ADB for developing urban infrastructure projects.
If you were to draw out the priorities for this government, what would be the top items on your wish list?
My wish list will be as follows: