NaBFID – A “New Age” DFI

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Governments around the world, including the United States, United Kingdom and Canada, have all recently begun to devote a great deal of energy and focus to launching infrastructure programs in their countries, including the creation of specialized financing institutions. Brazil plans to auction 126 private concessions in ports, airports, railways, sanitation, etc., for $67 billion in 2022 itself. India was a forerunner in this area, having rolled out the NIP in 2019, followed by the National Monetization Plan, Gati Shakti and the establishment of NaBFID. The critical need to anticipate capital expenditures for the associated indisputable multiplier effects, juxtaposed with the constraints of the existing financing ecosystem to finance massive capital-intensive programs, makes an infrastructure-focused “development” finance institution for India very welcome. However, the new DFI will need to think about the additionality it would bring in the current financing environment aligned with its development objectives and not just become another ordinary refinance lender with a big balance sheet.

Focus on greenfield projects: prioritization and structuring

While many risk-free mining projects to be monetized under NMP will easily find pools of capital, it may be difficult (at least in the short term) for India to attract significant funds for its on-the-ground projects. Virgin. At present, with the exception of pockets of renewable energy, there is extremely limited to non-existent non-recourse bank financing in India for greenfield projects, which could jeopardize commendable programs such as NIP and Gati Shakti deployed in recent years. Therefore, the most critical and short-term goal for the new institution must be to aggressively prioritize and underwrite a few large, greenfield projects. It would also serve as a demonstration of early successes, which will then serve to gradually attract increased private capital into the creation of new capabilities. Such prioritization can be done on the basis of a few factors such as scale, national strategic importance with high economic returns, initial development work already completed, socially critical but not commercially viable on a stand-alone basis, etc. and well de-risked using a variety of policy interventions and financial tools could become one of the biggest game-changing initiatives in the evolution of India’s infrastructure development journey. From a financial perspective, NaBFID can help achieve this goal in a number of ways, including funding early-stage development activities before financial close and providing partial risk guarantees during the construction period that disappear. after commissioning. Other products could include support lines for cost overrun support in the form of subordinated debt/equity or zero-cost financing during the construction period which builds its returns through equity warrants or progressive coupons once the project is operational.

Overcrowding and innovation

One of the big expectations of NaBFID is that it would help attract additional non-traditional funding sources, including the bond market. A vibrant domestic bond market with adequate depth will be quite an attractive alternative to global markets, especially when viewed from the perspective of business factors such as no currency risk, lower minimum note amount, reduced overall transaction costs, reduced turnaround time for issuance, and less onerous indemnification and legal liability clauses. With well-structured issuances, Indian bond markets have the ability to provide a highly viable and profitable “Atmanirbhar” solution to the financing needs of India’s infrastructure sector. NaBFID can also support/create facilities which can be specialized sector vehicles to bring in third party investors focused on each of these specific sectors aligned with their risk return objectives, including the provision of “blended finance” focused on the impact from international sources in the early stages of project life cycles. Alternatively, the capital structure of projects could be staggered over several periods in the form of credit-enhanced listed bonds and pooled asset securitisations.

A number of aspects will require careful consideration when setting up the new DFI, including the right organizational architecture, product mix, optimal capital structure and funding sources, appropriate prudential standards, appropriate forms of government support as well as governance. Since NaBFID is being created from the ground up, it should also create frameworks and processes where technology and data analytics are harnessed in different ways to assess and build better, as well as monitor and intervene in a meaningful way. proactive in real time. The entire Indian infrastructure ecosystem is looking forward to We look forward to the new DFI playing a huge catalytic role in the years to come under the leadership of Mr. Kamath who not only has an unparalleled track record of creating ‘world-class institutions, but also a reputation for getting things done quickly.

Aditya Aggarwal is the Indian partner of a Singapore-based global infrastructure-focused private equity fund. The opinions expressed here are those of the author and not of the organization.

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