Save IRFC From Project Financing

AV Poulose

The financing arm of Indian Railways (IR), the Indian Railway Finance Corporation (IRFC), was created by the government in 1986, for raising funds from the open market to make up the shortfall in provision of funds for IR by the government. According to the Allocation of Business Rules, which govern the distribution of duties amongst the ministries, the power of borrowing is vested in the ministry of finance (MoF). Since MoF did not want to function as an agency for raising funds for the railways from the open market, this public sector enterprise under the ministry of railways (MoR) was set up to raise funds for use by the railways.

Starting on a small scale, by borrowing Rs 25.26 crore in 1987-88, by the year 2000, it has grown into sizeable organisation with reserves worth Rs 1,505.51 crore, loan funds of Rs 12,578 crore (including long-term loans of Rs 4 44.47 crore), net fixed assets of Rs 11,557.24 crore, and net worth of Rs 1,737.51 crore. It has also consistently got a credit triple-A rating. The confidence level of lenders in IRFC is very high because of it having established itself as a success story.

From inception, it has been doing leasing business, namely procuring rolling stock — coaches, wagons and locomotives — and leasing them to IR for 30-year periods. Since the leasing charges provide for the interest payable by IRFC to the lenders, a small amount to cover administrative charges, a proportion for making repayments and so on, there was no real risk involved for those who deposited their money in IRFC bonds. Since IRFC’s client is its own owner — a government department — there was a de facto sovereign guarantee for the payment of the lease charges. This factor boosted the level of confidence of the lenders, and IRFC has had no difficulty whatsoever in raising funds, except when it tried to raise funds on behalf of the Konkan Railway Corporation.

During the past few years, sporadic attempts had been made to dip into IRFC’s kitty for financing projects and to fund the PSU’s. Except for a few aberrations, like providing straight loans to IR itself, supporting RAILTEL, the latest corporation in IR’s stable, and giving a bridge loan to a joint SPV under President’s directive to get over a problem of timely Parliamentary approval, the corporation has stuck to the safe leasing business.

Renewed attempts are afoot to diversify IRFC into project financing. A member of the aborted Railway Advisory Committee (Sam Pitroda Committee) had suggested the creation of a Rail Infrastructure Development Fund, on the lines of the funding of the National Highway Development Project, to be managed and deployed by IRFC on the pattern of the National Highway Authority of India. It is not known whether this has been considered by the MoR, but indications becoming available reveal that IRFC is being tempted with a possible diversification into project financing.

Recently, there was an advertisement by IRFC in the newspapers inviting subscriptions to bonds of the value of Rs 200 crore. IRFC has not been asking for such small tranches of borrowed funds. It raises some suspicions about the object of these bonds.

Any attempts at such diversification should be nipped in the bud, since it involves very serious implications, as brought out herein.

It will be a betrayal of the trust reposed by the lenders in IRFC, since it has been into the safe business of leasing with unassailable security. Any diversification into project financing should be from funds raised on the basis of a transparent indication of the purpose for which they are raised, and on the basis of fresh credit rating for the new type of business. Such transparency is called for by the principles of corporate governance. And the existing lenders should be given an opportunity to withdraw in full their deposits with IRFC. Several senior citizens like me have deposited significant portions of their household savings in IRFC. These should not be endangered by misadventures of IRFC. Let not IRFC do a US-64 of UTI.

If the projects to be financed are from amongst those awaiting completion on IR, they should not be touched with a barge pole. As brought out in the White Paper on projects issued by the MoR in July 1998, an amount of Rs 35,000 crore was needed for completing the outstanding projects of which as much as Rs 23,000 crore were for non-viable projects.

Even the so-called viable projects, like electrification and gauge conversion projects, have turned out to be totally non-viable. Of course, IR does not furnish full details about non-viability in the Work Programme furnished to the Parliament with the budget documents, nor does it conduct any post-commissioning evaluation to see whether the anticipations have been realised. Can any financial institution risk its funds and reputation for financing such projects.

If the intention is to fund projects in the joint sector, through SPVs it will go against the very purpose of setting up IRFC on the one hand and setting up SPVs on the other. IRFC was set up to borrow funds from the market for railway purposes. SPVs are conceived of to bring in additionality of resources. If IRFC funds are used for financing joint sector projects, it defeats the objective for which IRFC was set up and nullifies the purpose for which SPVs have been conceived of. Additio-nality of resources disappear.

Risk is another factor to be weighed carefully. Selection of the project can be done on the basis of a due diligence by an independent agency or credit rating of the party by another independent agency, but even where all these have been done defaults have taken place. The NPAs accumulated by the banking sector should serve as an eye-opener. The bulk of these NPAs is due to wilful default, which no due diligence can prevent.

The MoF has tried to tighten the screws through an ordinance empowering banks to take over or change the managements and so on to enforce recovery. Captains of industry responded by trying to secure a differentiation between wilful default and default for other reasons, to get an opening to stall the operation of the stringent measures. It goes to the credit of the New Finance Minister, Jaswant Singh, that he has introduced the relevant bill in Parliament without any dilution. IRFC funds are mainly short-termed funds. Project lending requires very long-term funds.

And it also requires skills of a special type, which IRFC does not possess. Any misadventure into this field can only make IRFC take the route of downfall, as has been taken by IDBI, IFCI and ICICI.

If any institutional arrangement is necessary, let it be created as an independent one, not connected with IRFC. Let not the beginning of the end of the success story of IRFC be scripted by it undertaking any misadventure of project financing!

(The author is a former financial commissioner, Railways & ex-officio secretary to the Government of India)