India is looking for $1 trillion in the 12th Plan period to fund infrastructure projects. Last week, the cabinet cleared the model tripartite agreement for IDF?NBFC, the first of many steps needed to attract funds to the sector. Pawan Agarwal, director, Crisil, explains how the move will help.
Now that the model tripartite agreement for infra projects has been cleared by the cabinet, can IDF-NBFC get going?
The tripartite agreement between the IDF-NBFC, the concessionaire and the concession authority, say NHAI, for roads was needed to kickstart infra funding because the guidelines stipulate that Infrastructure Development Funds (IDFs) can lend only to PPP projects that have a tripartite lending agreement in place. The role of IDFs will be to refinance the debt that already exists and, in the process, they will offer low-cost, fixed rate, long-tenure debt. That is only possible if IDFs are able to achieve credit quality that is consistent with the objectives of their investors. IDFs will complement bank funding.
What is the value of the tripartite agreement?
IDFs need to raise resources and, to do that, they need to be designed such that that their credit quality is able to reach the levels that the fund?s long-term investors want. So, a credit enhancement mechanism is needed because IDFs will lend to projects, which even after completion, may not on their own, fall into the AA category. The tripartite agreement effectively acts like a credit enhancement mechanism; it safeguards the interests of the IDF-NBFC. In every PPP, there is a concession agreement and there is a clause called termination payment clause or what is called a buyback guarantee.
This ensures that the termination payment process is activated in a timely manner should there be a default. The IDF gets a priority if the termination payment happens and that is adequate to cover its exposure to the project.
How does the agreement protect the IDF?
Essentially, the tripartite agreement enhances the asset quality of an IDF and we believe that the agreement will take care of all these issues. The termination payment clause says that should there be a default, the concession authority, say NHAI, will provide up to 90% of the debt due to the lender. IDFs can only refinance up to 80% of the debt due of the project and that will be within the 90% that the concession authority pays. The agreement also prioritises the termination payment to the IDF.
Will the IDFs be investing in the early stages of projects?
No, IDFs will not be investing in the eary stages, the first three or four years, when the plant is under construction. IDFs can come in only one year after the operations begin, so they don?t take on any risk during construction. During this time, banks will fund the project. The reason why IDFs don?t fund projects in the early stages is that investors typically don?t like to put their money in infrastructure projects . And that?s because infra projects typically command lower credit ratings?BBB— whereas investors are looking for paper rated AA or above.
Banks can now, therefore, pull out after 4-5years…
Banks have been the main investors in infra projects so far and infra loans account for around 11-12% of banks? total loans. The challenge that banks face is that they have deposits with an average maturity of three years, but the loans have an average tenure of 8-10 years, which creates mismatches in their asset-liability profile. Now, IDFs can take oevr the debt after the project is operational.
