IIFCL is the right way ahead

The IIFCL has come out with its second tranche of tax free bonds worth Rs 2370 Cr (with a greenshoe-option) at a cuopon of 6.85% and tenor of 5 years. In order to expand the participation of individuals in the private placement, the minimum size of investment was reduced from Rs 1 Cr to Rs 10 lakh.

The IIFCL would then on-lend it to commercial banks at 7.85% to finance prioritized infrastructure projects. These banks wil be re-financed upto 60% of their loans for PPP projects. In the two stimulus packages announced so far, the GOvernment have permitted the IIFCL to mobilize Rs 40,000 Cr, Rs 10,000 Cr in 2008-09 and Rs 30,000 Cr next financial year. Besides, it is also expected to mobilize nearly Rs 9000 Cr from multi-lateral lending agencies like ADB and World Bank on soft terms. In the first round, the IIFCL had mobilised Rs. 7,369.30 Cr with a minimum lot size of Rs 1 Cr under similar terms, as against the original issue size of Rs 2500 Cr.

The IIFCL can be easily counted as one of the successful interventions of the UPA government, though it could have been activated much earlier, and taken advantage of the much more benign market conditions of the last three years. It relatively low cost of capital, when compared to the 12-13% ruling market rates for infrastructure projects, is a booster shot for the sector.

The one standout anomaly in the program is the short five year tenor. Given the large gestation periods of infrastructure projects, normally atleast 15-20 years, the five year period looks surprising and may pose considerable difficulties for projects during the financial closure. One way of looking at the problem is to use this loan to finance the construction and then mobilize fresh loans for the operational period. In one way this would help optimize the cost of debt servicing, as the construction risks, which are substantial in infrastructure projects and which command a high premium, could be off-loaded and longer term loans taken at lower cost.

In fact, this blog has been a long-standing advocate of such financing method for infrastructure projects, where the construction is financed with shorter term loans, which are then swapped for longer term loans after off-loading the construction risks. More on similar variants of infrastructure financing are available in earlier posts here and here.