How a tortoise made due diligence process NPA-free

Only NIIF has stayed the course as a viable infrastructure financing institution.

Started in 2015, the National Investment and Infrastructure Fund Limited (NIIF) was India's first stab in creating a sovereign fund, so commonplace among the commodity-rich nations of Asia.

With the Budget for FY24 expected to push the envelope on building infrastructure to keep the economic growth momentum going, NIIF's track record so far becomes extremely relevant.

NIIF has assets under management of $4.3 billion, a modest sum by most yardsticks. Its new rival, the National Bank for Financing Infrastructure and Development (NBFID) launched by Parliament in March this year, will have an authorised share capital of $12.5 billion.

But NIIF has an important lesson to offer to NBFID. It has no bad loans (non-performing assets or NPAs) in its bag, remarkable given that power and road sectors have contributed in a major way to banks' bad loans, especially those in the public sector.

"We ensured that NIIF picked only those projects that it was able to read well," said a senior source in the organisation off the record.

The company, under CEO Sujoy Bose, was mandated to always keep the government as a 49 per cent minority shareholder in each of its investment funds. It has three of them as of now.

'In each entity (fund) set up, the government share will neither be increased beyond, nor allowed to fall below, 49 per cent. The whole of 49 per cent would be contributed by the government directly,' a notification of August 20, 2015, stated.

The model is different from say, India Infrastructure Finance Company Limited or the erstwhile IDFC where the government had offered a fixed sum towards the equity capital of these companies.

NIIF, therefore, has a challenge. The continued government presence in all its investment funds acts like a sovereign support visible to investors from abroad.

But given that the government is not cash-rich — the share capital of the company is just Rs 40,000 crore (Rs 400 billion) -- NIIF's management means having to raise the level of due diligence for all projects it finances so that no money spent is lost.

This level of prudence has helped to sail all its offerings easily. The sovereign-linked fund, as NIIF likes to describe itself, allied with a private sector like management structure has drawn in a large bunch of investors to pick up equity stakes in the offerings.

The list includes sovereign funds — Abu Dhabi Investment Authority, Ontario Teachers, Temasek, and banks and insurance companies such as SBI, Axis Bank, Kotak Life and HDFC Life.

While most asset monetisation programmes from the National Highways Authority of India (NHAI), power and others have relied on building up tax-efficient escrowing of cash flows from operating assets, NIIF has largely eschewed this route when selecting projects to finance.

In other words, many infrastructure investment trusts (InvITs) offer investors assured returns plus tax incentives, irrespective of the viability of the infrastructure assets. NIIF chooses the other route.

'Unless the underlying commercial logic is sound, investing in an InvIT is not what most passive investors from abroad get interested in," said a senior banking source. NIIF's rationale is to invest in "commercially viable projects', stated a note issued by the Department of Economic Affairs, finance ministry, when NIIF was set up.

This diligence has crimped NIIF's pace despite being around for seven years. Since neither NIIF, nor the investors in its funds, get into the boardroom of the project management companies, those projects have to run several hoops before NIIF uses the money from its investment funds to finance them.

For example, NIIF has recently signed a memorandum of understanding with the Tamil Nadu government to develop a shelf of investible public private partnership infrastructure projects in the state. Now, Tamil Nadu runs one of the best banks of infrastructure projects in India.

Yet here, too, NIIF has, as of now, seen commercially visible line of, at best, Rs 6,000 crore (Rs 60 billion) in 'renewable energy, roads, waste management, water, tourism and other related sectors'.

It is the same prudence that means despite the plethora of completed road projects that NHAI has to offer, NIIF through its three investment funds has picked up very few of them.

Such prudence may make commercial sense, but for the political executive in a democratic polity this approach means a long wait. The government wants infrastructure projects to be built yesterday.

To push those visions, with some or the other state support, India has built infrastructure agencies at the rate of one each decade since the eighties. The list includes IL&FS, IDFC, IIFCL, NIIF and now the latest, NBFID.

Only NIIF has so far stayed the course as a viable infrastructure financing institution, using sovereign support.

This picture could change. Two huge government entities with large reserves of long-term funds at their disposal, LIC and EPFO, are getting interested in financing infra investment through the markets. Their combined investment corpus could be over $700 billion.

If they become stakeholders in NIIF's investment funds instead of the finance ministry directly, that could make Bose's team look kindly at many more projects. It also makes sense, as neither of these pension-cum-insurance funds have the ability to examine projects to finance across 30 types of state governments or even engage with the investors abroad to sell their investment funds, with the combination of safety and diligence that NIIF can offer.

"One of the options could be for NIIF to become a vast sized equity-linked generator of funds, while NBFID does so for debt-linked," said a top banking source. Infrastructure projects in India have been essentially financed by debt, which in turn has been leveraged to raise some equity -- remember IL&FS.

The model is a high-risk one as banks have found. Instead, a combination of NIIF and NBFID could offer a sweet spot.

For developing countries, if this model succeeds, it can be a good one to explore instead of having to depend only on debt from multilateral institutions tied to often difficult conditions or the equally difficult alternative -- that of raising high-cost equity from the global markets.