IDFC Not Only Talking Point, Infrastructure Too Is

Updated: Mar 29 2004, 05:30am hrs
The country has never got its infrastructure issues right. The absolute necessity of a range of infrastructure facilities to maintain the high growth of the economy and the lackadaisical manner the authorities have dealt with them only shows the nations indifference to its own growth.

Except telecom, no other infrastructure sector has made any headway despite big promises on these fronts. Experts agree that the infrastructure sector growth is largely determined by policy guidelines, regulatory framework, long-term sectoral viability and reforms agenda.

The telecommunications industry has been witnessing rapid growth over the last couple of years, driven primarily by the mobile telephony segment. Going forward, experts expect a lot of actions on airports, ports and urban infrastructure sectors to provide significant business opportunities.

Almost all studies of infrastructure development suggests that involving the private sector in the delivery of services improves economic growth and helps restrain fiscal deficits of the government. Almost, all infrastructure development activities in India have over the past decades, been taken over by governments, central, state or local bodies, as the case may be.

This was perpetuated by the implicit assumption that the responsibility of providing basic and other services to the common citizen is entirely of the states.

The result has been less than desirable. It is no longer possible to tweak the ongoing system in order to improve the service delivery. A paradigm shift is called for to completely overthrow the existing ways of doings things and put in place a more dynamic process of ensuring solutions rather than attempting them, says the Infrastucture Development and Finance Companys managing director Nasser Munjee.

In Britain where the private-public partnership (PPP) has matured over a decade of experimentation, the government committed itself to the partnership process with respect to infrastructure and then created the institutional mechanics to carry it forward.

Fundamental reforms needs fundamental commitment to reform. PPPs are a key element in the UK Governments strategy for delivering modern, high quality public services and promoting the UKs competitiveness. They cover a range of business structures and partnership arrangements from the Private Finance Initiative (PFI) to joint ventures and concessions, to outsourcing and to equity stakes in the state owned business. PPPs are also being used to help state owned business to compete and provide improved services to their customers, while retaining responsibility for public interest issues in public sector.

With early success, the UK government is now extending the partnership approach to ever widening range of public sector activities, drawing on business skills to develop and implement policy and using the expertise of private sector partners to make better use of public sector assets. In essence, the approach recognizes that partnerships with the private sector helps to deliver the quality of public services the country deserves.

Partnerships enable the public sector to benefit from the commercial dynamism, innovations and management skills from private investors, who contribute their capital, skills and experience.

They provide a better value for money which means the government can, in more cases, deliver more essential services at a higher standard, within the resources available than would otherwise have been the case. In India, the things have happened in a reverse way. The institutional framework by way of IDFC was created but the philosophy of action is yet to be adopted, says IDFCs chairman Deepak Parekh in the IDFC annual report.

Thus, so far IDFC areas of preparations include energy, telecommunications, transportation, urban infrastructure, food and agri-business infrastructure, and it has recently expanded into tourism, health and education sectors.

On a cumulative basis as on December 31 2003, IDFCs gross approvals were Rs 16,039 crore for 137 projects and gross disbursements were Rs 5,674 crore for 69 projects. The approvals net of cancellations were Rs 10,445 crore and outstanding disbursements were Rs 4,291 crore. In the fist nine months of 2003-04, IDFC raised resources to the tune of Rs 2450 crore from the market and on a cumulative basis, as on December 31, 2003, outstanding resources (excluding subordinated debt) were Rs 2,675 crore.

The balance sheet size of the company as on December 31, 2003, was in excess of Rs 5,000 crore and the operating income constitutes close to 85 per cent of total income. In its close to six years of operations, some of the key achievements, IDFC claims to have made include innovative project finance techniques, helping telecommunications migrate to a revenue sharing regime, serving as secretariate to the prime ministers task force on infrastructure that catalysed the road investment programme, inducing the concept of private finance initiative (PFI) to India, pioneering annuity financing for roads, changing the focus of power sector reform from generation to distribution, preparing the process report for port corporatisation and creating model documentation for commercialisation of berths using revenue sharing model at major ports.

In times to come, IDFC is expected to work more closely with the Centre. Moreover, IDFC would formulate different approaches, which would generate better policy frameworks and greater investments by noon-traditional investors in infrastructure.

The companys exposure to the energy sector was the highest and constituted 35.47 per cent of IDFC total exposure, followed by transportation and telecommunications at 32.30 per cent and 28.83 per cent respectively.

IDFCs exposure to the state of Delhi was the highest (Rs 982,20 crore) followed by Maharastra (Rs 922,40 crore) and Gujarat (Rs 764,90 crore). In terms of outstanding disbursements, Maharastra (Rs 806,40 crore) and Gujurat (Rs 458.00) hold the top two positions. Outstanding disbursements to others (All India) was the third highest (Rs 361,60 crore).

In the telecom sector, slowly but steadily, thinking of the key policy makers seems to be converging on some of the best practices that IDFC has been advocating for long ie-transitioning of the current disparate licenses into unified licensing regime, auctioning of spectrum and minimum subsidy bidding for achieving the universal service objectives.

Without going into details, it can be said that IDFC is a much evolved institution. It has its task and focus cut out. As the industry points out the institution has its share of omissions and commissions.

As one expert poses: why has it taken five years on the part of the government to scrutinise IDFCs operation If the policy frame work for facilitating the fund flow into infrastructure is not ready, everybody is to blamed, not just IDFC.

Let us not deviate from the main issue of developing infrastructure projects and infrastructure financing. Everybody is concerned about the fact that right policy framework is yet to be ready. Let us try to find a way out. Let IDFC be taken care of by its shareholders says JM Morgan Stanleys vice-chairman P Krishnamurthy.

Talk of merging IDFC with State Bank of India (SBI) has led to much heat and dust. And here, it would be worth recalling the Reserve Bank of Indias (RBI) governor Yaga Venugopal Reddy, critical point on the issue of restructuring of banks and financial institutions.

Restructuring is important, but this should reflect shareholders interest and, interests of all other concerned parties should also be taken care of, Dr Reddy noted recently. Though, he categorically mentioned that his comments are of academic interest, his views have great importance in the light of recent developments related to the restructuring proposal of IDFC.

Meanwhile, it is also reported, though unconfirmed, that the Industrial Development of India (IDBI) is also in the race to acquire IDFC. This might make sense as both the players have synergy in their operations. IDBI has also the experiences in handling large infrastructure projects. IDBI, which holds just five per cent stake in IDFC, is keen to acquire stakes of both the RBI and the government of India which hold 15 per cent and 20 per cent respectively in IDFC.

Much of our creative initial work was intellectual in nature, notes Mr Parekh in the annual report. Thus, the measuring rod for success to be applied to IDFC would, therefore, be very different from the traditional one of approvals and disbursements. The difference between IDFC and other institutions is that the client bases for IDFC is determined by the pace at which governments (central, state, local) let go of infrastructural activities that they own manage and operate today. Infrastructure is not just waiting to be financed, Mr Parekh noted.

IDFC is all about defining the conditions under which designing the mechanics of actual implementation and creating structures for private investments, can happen. IDFCs core business comprises of lending to infrastructure projects. This has risks associated with it depending upon the specific infrastructure sector.

Here, it may be noteworthy to know what the rating agency Crisil feels. The mitigation of such risks in order to maintain asset quality is imperative for IDFC.

It believes that the institutions strong risk management and monitoring systems helps it to address these risks to a large extent. This is also supported by a strategic structuring of its transactions, which partly mitigates the inherent portfolio risks, says Crisil. Even as the government is getting ready for Rs 50,000 crore investment in the countrys infrastructure, it is time to remind the oft repeated statement of late chinese leader Deng Xioping: the colour of the cat does not matter as long as it catches mice.