NaBFID - A "New Age" DFI

Governments world over including USA, UK and Canada have all recently started devoting significant energy and focus towards getting infrastructure programs off the ground in their countries including creating specialised financing institutions. Brazil is planning to auction out 126 private concessions across ports, airports, railways, sanitation etc amounting to $ 67 billion in 2022 itself. India has been a front-runner in this having rolled out NIP in 2019 followed by the National Monetisation Plan, Gati Shakti and creation of NaBFID.  The critical need to front load capital expenditure for  the  associated unarguable multiplier effects juxt aposed with the constraints in the existing financing ecosystem to fund massive capital-intensive programs makes an infrastructure focussed “development” financial institution for India very welcome. However, the new DFI will have to reflect upon the additionality it would bring about in the current financing environment aligned to its developmental objectives and not just become one more plain-vanilla refinancing lender with a big balance sheet.

Focus on Greenfield Projects: Prioritisation and Structuring

While many of the de-risked operating projects to be monetized under NMP will easily find poolsof capital, it may be challenging (at least in the near term) for India to attract significant funds for its green-field projects. Currently barring pockets in renewable energy, there is extremely narrow if at all any non-recourse bank financing available in India for green-field projects, which may jeopardise the commendable programs like NIP, and Gati Shakti rolled out in recent years. Hence, the most critical and near term objective for the new institution has to be aggressively prioritising and under writing a few large green-field projects. This would also serve as demonstration of early successes, which will then serve to attract increased private capital into new capacity creation progressively. Such prioritisation can be done on the basis of a few factors such as scale, strategic national importance with high economic returns, initial development works already completed, socially critical but not commercially viable on a standalone basis etc.  Such demonstration green-field projects if structured and de-risked well using a variety of policy interventions and financial tools could become one of the biggest game changing initiatives in the evolution of the Indian infrastructure development journey.  From a financing point of view, NaBFID can help achieve this in a number of ways including funding development activities in early stages pre financial close andproviding partial risk guarantees during the construction period which fall away post commissioning. Other products could include stand-by lines for cost overrun support in form of subordinated debt / equity or zero cost financing during the construction period that makes up its returns by way of equity warrants or step-up coupons once the project is up and running.

Crowding in& Innovation

One of the big expectations from NaBFID is that it would help crowd in non-traditional incremental sources of finance including the bond market. A vibrant domestic bond market with adequate depth will stack up as quite an interesting alternative to global markets especially when viewed under the lens of commercial factors like no currency risk, lower minimum ticket size, reduced overall transaction costs, compressed lead-time for issue and lesser restrictive indemnity & legal liability clauses. With well-structured issuances, the Indian domestic bonds markets have the capability of providing a very viable and cost effective “Atmanirbhar” solution to the financing needs of Indian infrastructure sector. NaBFID can also support / create facilities that can be specialised sector vehicles to bring in third party investors focussed on each of those specific sectors aligned to their risk return objectives including bringing in impact oriented “Blended Finance” from international sources in the early stages of project life cycles. Alternatively, the capital structure of the projects could be tiered across time periods in form of credit enhanced listed bonds and pooled asset securitisations.

There would be a number of aspects that will require careful deliberation as the new DFI is built up including the right organisational architecture, product mix, optimal capital structure and funding sources, suitable prudential norms, appropriate forms of Government support as well as governance.  Given that NaBFID is being created from scratch, it should also create frameworks and processes wherein technology and data analysis is leveraged in different ways to appraise and build better as well as monitor and intervene proactively on real time basis.The entire Indian infrastructure ecosystem is looking forward to the new DFI playing a huge catalytic role in the coming years under the leadership of Mr. Kamath who not only has an unparalleled record of creating world-class institutions but also a reputation of getting things done expeditiously.

Aditya Aggarwal is India Partner of an infrastructure focussed Global Private Equity Fund based in Singapore. The views expressed here are those of the author and not of the organisation.