Infra credit cover: Firm to debut with Rs 4,000-crore equity base; key role for World Bank

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August 28, 2020 5:35 AM

The National Infrastructure Pipeline (NIP), with identified projects, including brownfield projects worth over Rs 100 lakh crore ($1,400 billion), offers a ready-made five-year pipeline for CEC to offer its services.

In the Budget for FY20, the CEC (for which regulations have been notified by the RBI), was to be set up in 2019-20. However, the entity is yet to be formed.

The massive infrastructure investment pipeline of Rs 100 lakh crore mooted by the Centre will get a shot in the arm with a solid credit guarantee facility for investors to tap and lenders to rely on. According to a World Bank note outlining the design of the proposed well-capitalised Credit Enhancement Company (CEC) and the bank’s own potential role in the venture, the firm will debut with an initial equity/quasi equity base of Rs 4,000 crore.

The Centre’s holding in the company would be capped at 49%. It would have a governance structure akin to a private sector entity and be regulated by the RBI as an NBFC.

According to the Wold Bank note reviewed by FE, the balance 51% stake in the CEC will be split between the World Bank, other multilateral development banks/FIs, sub-sovereign entities and the private sector.

In the initial phase, the likely paucity of private capital could be bridged by the Centre via contingent capital instruments; these will gradually be replaced with private funds and even debt, at a later stage.

As far the World Bank is concerned, three options could be considered for its supportive role to the CEC: Direct loan to the company or guarantee by the mulitateral lender in lieu of a loan or a combination of both.

In the Budget for FY20, the CEC (for which regulations have been notified by the RBI), was to be set up in 2019-20. However, the entity is yet to be formed.

Given the need to get the CEC operational to leverage private investors, the World Bank has recommend the use of guarantees. The International Bank for Reconstruction and Development (IBRD, the World Bank’s lending arm) guarantee is likely to be the most cost-effective option for the CEC, if the RBI confirms the regulatory treatment for contingent instruments, the World Bank has said.

Credit enhancement by CEC may be in the form of partial guarantees and other funded and unfunded products that would enhance the underlying credit rating of the project or the state-owned entity’s debt to source long-term financing, according to the World Bank. The CEC will also help in revitalising the financing of the infrastructure sector and ease the pressure on commercial banks through the recycling of credits with capital market instruments.

The World Bank suggested IBRD guarantee structured as contingent/callable capital backstopping the Centre’s capital contribution to the CEC, subject to regulatory approval as eligible Tier 2 instrument. This will have a high leverage impact of over 6 times due to participation as contingent capital. This will have high impact on the CEC credit rating and lower CEC product cost due to cheaper IBRD guarantee product cost. It has also suggested several other models of World Bank financing support.

The National Infrastructure Pipeline (NIP), with identified projects, including brownfield projects worth over Rs 100 lakh crore ($1,400 billion), offers a ready-made five-year pipeline for CEC to offer its services.

A nation-wide solar power project requiring investments to the tune of $62.4 billion, village road projects ($48.4 billion) and mega water treatment facilities ($85 billion) are among the largest projects in the NIP.

While the Centre (39%) and the states (40%) are expected to have almost equal share in implementing the infrastructure pipeline, the private sector will have the balance share of 21%. The government is taking a number of steps to catalyse private investments in key infrastructure sectors by removing the bottlenecks and making the concession contracts more attractive to investors.

Since the CEC will be set up as an independent company with its own legal identity, it is essential that its rating is maintained at ‘AAA’ domestic rating.

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