The discussions are over. Action has been taken.
The Government of India has cleared the establishment of a “government-owned development finance institution (DFI) and create an enabling ecosystem to draw patient capital and fund long-term infrastructure projects”, according to a news report in The Financial Express, datelined February 17, 2021 (https://www.financialexpress.com/economy/plan-in-motion-cabinet-clears-development-finance-institution-to-raise-rs-3-lakh-crore-for-infrastructure-spend/2214181/). It has been christened The National Bank for Financing Infrastructure and Development (NaBFID) set up with a corpus of Rs 20,000 cr and an initial grant of Rs 5,000 cr. Finance Minister Nirmala Sitaraman was quoted as saying that the GoI’s stake will eventually come down to 26% from the current 100% but not any lower. In addition, the government is open to the setting up of such institutions in the private sector, echoing the setting up in 1955 of the Industrial Credit and Investment Corporation of India (which became ICICI) with the help of the International Finance Corporation.
Naturally, NaBFID will need to raise more – up to Rs 3 lakh cr, according to current estimates. Since raising low cost and long term funds remains a priority, the new DFI will need to find many different sources (and instruments). The government will grant it certain tax benefits for 10 years while adding that The Indian Stamp Act will also be amended to extend certain other incentives. Anyone who has been following the infrastructure debate in India since the mid-1990s will recall that these have been long-standing demands. NaBFID will likely have sovereign guarantee to garner resources possibly from multilateral agencies, who typically engage in such ventures.
The core to this, or at least a significant part, will be the bond market, since bonds have been the preferred instrument to raise long term funds. That will not be sufficient by itself but much will depend on what kind of institutions evince interest and what their expectations are, indicating that a variety of instruments is going to be needed. What is equally important is whether there will be expectations on secondary market or trading in these instruments. Else, it is a ‘buy and hold’ play. Again, keen readers will recall that this was one of the stumbling blocks in the path to infrastructure development. Structured finance is another source that will have to be explored. And a deep understanding of the specific dimensions of each of the sectors that make up infrastructure. For example, understanding concession agreements, tenure of contracts in certain markets such as LNG and therefore the kind of funding. Risk identification and allocation will be critical aspects.
Finance, risk management, law, contractual management, execution expertise – these will be the factors that make or mar this venture. Fortunately, this is an extensively studied area and the government should first constitute a body of experts to collate a body of available knowledge and thinking. This is clearly a case where we don’t have to reinvent the wheel.
However, it is important to emphasize that this is a much discussed and traversed path, because there have been such institutions set by earlier governments which didn’t really get going at all – we would not have needed another institution if they had. It is vital that we clearly understand why they didn’t and why it is going to be different this time. Interestingly, financial services secretary Debasish Panda said that the board of directors (of NaBFID) will decide whether to subsume state-run IIFCL (India Infrastructure Finance Company), given the latter’s long experience in project financing (URL as above). You may recall that IDFC (Infrastructure Development Finance Company) was also set up for the same purpose. IIFCL became an NBFC and IDFC became a bank and IL&FS is in trouble.
Here is wishing NaBFID success. We are only in the second year of this government. Miles to go and promises to keep!
Photo by Andrew James on Unsplash
