Transcript Takeout financing

FINANCING OF
INFRASTRUCTURECHALLENGES &
OPPORTUNITIES
S K Goel
Chairman & Managing Director
India Infrastructure Finance Company Ltd
New Delhi
Infrastructure: The Crucial Growth Factor
• Indian economy is on the path to strong recovery
• It is expected that during 2011-12, India would revert back to 9%
GDP growth
• Fast economic growth and growing population have led to
huge demand-supply infrastructure deficit
• Lack of adequate and quality infrastructure is proving to be
binding constraint in sustaining, deepening and expanding
India’s economic growth and global competitiveness
• Infrastructure deficit estimated to cost 1 to 2% growth in GDP
every year.
Infrastructure Deficit
• Roads & Highways- National highway network is 66,590 Kms which constitutes only 2% of
total road network but carries about 40% of total traffic.
• Power generation capacity- During the 11th Plan period, against revised target of
62,000MW capacity, capacity of 32,507 MW (52%) has been added. Peak power deficit range
around 12-13%.
• Ports- India has 12 major ports and 200 non-major ports which handle 95% of India’s trade in
terms of volume and 70% in terms of value. However, the average turnaround time in India’s
port was 4.54 days in 2009 compared to 10 hours in Hong kong.
• Civil aviation- Only two airports viz., Delhi and Mumbai account for 43% of passenger traffic
and 55% of cargo traffic in the country.
• Urban Infrastructure- India has the second largest urban system in the world and 285 million
people or 29% of the population live in urban areas. This is expected to reach 40% by 2021.
• Telecom - In the area of telecom, India has done well. Teledensity (telephones per 100
persons) has grown from 1.9% in 1998 to 60% in August 2010.
Infrastructure Investment Requirements
• In the 11th Plan period (2007-12), total infrastructure investment requirement has been
estimated at USD 514 billion.
• As per the Mid term appraisal of the 11th Plan, during the first 3 years of the plan
period
• Of the projected investment of USD 245 billion, the actual investment was USD
266 billion.
• This has been mainly due to over achievement in sectors like telecom, electricity and
airports.
• However, sectors like roads, ports and railways have shown underachievement.
• During the 12th five year plan (2012-17), the total investment requirements in
infrastructure sector would be USD 1 trillion.
• The large investment requirements cannot be met entirely by the public sector.
• The role of PPP in the coming years will therefore gain more importance
• It is expected that at least 50% of the investment would have to come from the private
sector and by 2015-16, share of private investment will surpass public investment
Infrastructure Financing
• Currently, over 80% of infrastructure projects in the
country are financed by public sector banks.
Bank’s lending to the infrastructure sector has grown significantly over the years
recording a compound annual growth rate of 49% during the last 10 years.
Issues in Infra Financing
Bank lending going forward is likely to be
constrained:
RBI Prudential Exposure Norms
1.
•
As per RBI prescribed prudential norms, in case of infrastructure projects, banks
can take exposure up to
• For single party- 20% of their capital funds + 5% after approval of their Board
• For group 50% of their capital funds + 5% after approval of their Board
• Most of the banks are operating at ceiling levels having little headroom to lend further
• The low resource base will not allow smaller banks to take large exposures as
required in the case of infrastructure projects.
2.
Asset-Liability Mismatch
• 79% of the bank deposits have tenure of less than 3 years, while in the case of
infrastructure projects, the loans are generally for 10-15 years.
• Thus, to mobilize the required resources, especially by way of private
investment, it is imperative that we find alternative mechanisms for
financing.
7
Financing by IIFCL
 India Infrastructure Finance Co Ltd (IIFCL) established in
January 2006, became operational in April 2006 to provide long
term financial assistance to commercially viable infrastructure
projects with overriding priority to PPP projects.
 IIFCL provides
 Long term debt by way of direct financing
 20% of the project cost is financed
 Loans to have average maturity of more than 10 years
 Subordinate debt finance
 Refinance to banks and other eligible institutions for their loans
to infrastructure projects in roads, ports, competitively bid
power and railway projects
 UK subsidiary provides foreign currency loans to Indian
infrastructure projects.
8
IIFCL’s Portfolio
SECTOR
(As on 31st October 2010)
CUMULATIVE GROSS
SANCTIONS
Rs crore
CUMULATIVE
DISBURSEMENTS
No. of
Projects
Amt
Sanctioned
No. of
Projects
Amt
Disbursed
Road
92
12662
63
4014
Power
26
11951
23
4691
Airport
2
2150
2
706
Port
7
860
5
293
Urban Infra
3
704
1
11
PMDO
30
113
19
43
-
-
-
1500
160
28440
113
11258
Refinance
TOTAL
•Projects sanctioned by IIFCL are spread over in 24 states of the country.
• Of the 160 proposals sanctioned, 137 (88%) cases have achieved financial closure which
indicates that participation of IIFCL has helped in speeding up financial closure.
•Commercial Operation Date (CoD) has been achieved in 18 road projects and 2 port projects.
9
Need for alternative financing options
• TAKEOUT FINANCING
• IIFCL, a policy-based institution can partly address the
constraints faced by banks
• Takeout finance can free up capital for banks and facilitate
incremental lending to infrastructure
• Takeout financing is a viable option before banks to
address asset liability mismatch issue and group exposure
constraint
• Takeout financing scheme introduced by IIFCL in April 2010
• First set of takeout finance deals signed recently
• More proposals in the pipeline
Need for alternative financing options
• NEED TO DEVELOP CORPORATE BOND MARKET
• The corporate debt market is at a nascent stage and is predominated
by government securities.
• Reasons for slow development of the bond market
• high compliance costs
• limited appetite for corporate bonds
• preference for bank loans compared to bonds
• high stamp duty.
• Bond markets need to be well developed to encourage greater
participation by insurance and pension funds, and thereby
reduce dependence on banks
Need for Long term Investors
• Insurance companies and pension funds are potentially a
high source of long-term debt.
• Internationally, insurance companies invest on an average
25% of their funds in less than AA rated paper.
• However, in case of India, participation of insurance
companies in infrastructure has been limited due to
regulatory requirements.
• Insurance companies are currently allowed to invest in
debt securities rated AA and above.
12
Need for Credit Enhancement
• Demand for debt instruments in India is largely limited only to
highest safety papers (AAA and AA rated papers)
• Around 72% of infrastructure SPVs in India are rated in the BBB
and A categories, while an estimated 18% - 20% of infrastructure
SPVs are rated in the sub – investment grade.
•
A credit enhancement instrument that leads to an improvement
in ratings of infrastructure SPV bonds raised by developers
(SPV) would lead to major players with long term funds like
insurance and PF getting enthused to subscribe to such bonds.
• IIFCL has taken up the task of evolving a credit enhancement
product
13
Private Equity investments
• Domestic resources may not be sufficient to bridge the
investment gap, thus, there is need to attract foreign capital.
• PE investors have shown keen interest in India’s infra
sector:
• As per available data, during 2009-10, total PE investments in power
sector alone was USD 820 million in 14 deals
• Recently, a PE deal for about Rs 400 cr was done in Road sector
• In 2010, till June, deal sizes in the range of USD 100-400 million
have been done in infrastructure.
• The flow of PE investments in infrastructure sector should
be increased through enabling policy environment.
14
Need for infrastructure equity funds
• Indian developers do not have enough long term equity
resources
• Dedicated infrastructure funds provide long term high risk
equity capital
• The longer term horizon of such funds help supplement
strategic long term foreign capital
• Early
stage incubation of infrastructure assets by
infrastructure funds can, after they attain maturity, become
suitable for annuity seekers like pension funds and
insurance companies
15
Conclusion
• India continues to remain infra-deficit economy which is acting as a
binding constraint on achieving higher economic growth.
• Development of corporate bond market, introduction of innovations
like credit enhancement, securitisation etc is important
• Long term investors like pension funds and insurance companies
should be encouraged to invest in infrastructure sector through
appropriate changes in policy and regulatory requirements.
• Attracting foreign investments through PE investments and
launching of dedicated infrastructure funds need to be taken up.
THANK YOU