Indian Railways: Resource Mobilisation for financing infrastructure

Transcription

1 Indian Railways: Resource Mobilisation for financing infrastructure Role of Extra Budgetary Resources 05 May 2018

2 Setting the context Role of IRFC Financing Rolling Stock: EBR-IRFC Financing projects: EBR-IF EDF/RM, Railway Board (Namita Mehrotra) 2

3 Setting the context

4 Financing capital assets Assets Rs crore Equity Rs. 200 crore (expected return 12%) Debt Rs. 800 crore (cost of debt 8%) Capital structure Decision to invest: Project IRR > Weighted Average Cost of Capital (WACC) WACC is a function of expected return on equity & cost of debt in their respective financing proportions (8.8% in the current case) Debt equity ratio indicates the relative proportion of shareholders' equity & debt used to finance a company's assets. Closely related to leveraging, the ratio is also known as risk, gearing or leverage (4:1 in the current case) EDF/RM, Railway Board (Namita Mehrotra) 4

5 Sources for financing CAPEX Capital Expenditure Budgetary Resources Extra Budgetary Resources Gross Budgetary Support Internal resources EBR-IRFC EBR-IF Market borrowings EBR-PPP EDF/RM, Railway Board (Namita Mehrotra) 5

6 Ramping up capital investment (Rs. in crore) Prov. BE EDF/RM, Railway Board (Namita Mehrotra) 6

7 : Annual Plan Source of funds (Rs. in crore) Gross Budgetary Support Railway Safety Fund Internal Resources Extra Budgetary Resources (EBR) Market borrowings through IRFC EBR(Institutional Finance) Public Private Partnerships Total Plan outlay IRFC Target: Rs. 54,940 crore (38%) EDF/RM, Railway Board (Namita Mehrotra) 7

8 Share of EBR 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 33% Prov. EBR-IRFC & EBR-IF (Market borrowings) 33% Balance Capex Financing Sources 38% BE EDF/RM, Railway Board (Namita Mehrotra) 8

9 Debt Liability of IR EDF/RM, Railway Board (Namita Mehrotra) 9

10 IRFC Dedicated borrowing arm of IR

11 Role of IRFC (1/2) Allocation of Business Rules of GOI allows only MOF to borrow on behalf of GOI; MOR cannot borrow directly to finance its expenditure Hence, IRFC was set up in 1986 as a non-banking finance company (NBFC) to raise market borrowings for augmenting Railway Plan finances. About a quarter of IR s Plan Outlay financed by IRFC; funded more than 75% of the total Rolling Stock Asset fleet of IR Institutional financing for Railway Projects through IRFC Cumulative funding to Rail Sector crossed Rs. 2,19,401 crore mark to end of March 2018 and likely to reach Rs. 2,74,341 crore by March 2019 Outstanding borrowings Rs. 1,34,968 crore as of 31st March 2018 EDF/RM, Railway Board (Namita Mehrotra) 11

12 Role of IRFC (2/2) Annual borrowing targets are determined by the MoR according to the annual budget approved by Parliament. Loans to MoR are extended in the form of financial leases. Borrowings used to finance revenue generating assets which are leased to MOR as per standard lease agreement. Lease charges paid by MOR cover principal repayment and interest cost; based on IRFC s average cost of borrowing in that year plus a small margin to cover overheads & profit. Rolling stock - Assets leased for 30 years co-terminus with economic life of assets; capital recovery completed during the primary lease period of 15 years. Project assets lease period coincides with terms of institutional financing Abides by a Debt: Equity ratio of 10:1; equity infusion by MOR to sustain borrowings EDF/RM, Railway Board (Namita Mehrotra) 12

13 Financing Rolling Stock EBR(IRFC)

14 IRFC s Share in Indian Railways Rolling Stock Position as on Particulars Units Rs. crore Locos-Electric Locos-Diesel 4,613 5,399 4,385 6,023 (85%) (73%) Locomotives ,739 Passenger Coaches ,225 Freight Wagons ,994 Coaches 47,825 53,453 (89%) Cranes and Track Machines Total 1,51,318 Wagons 2,14,456 2,77,987 (77%) IRFC's Share IR Rolling Stock EDF/RM, Railway Board (Namita Mehrotra) 14

15 Lease charges paid to IRFC (Rs. in crore) FY Capital Component Interest component * Total As % of Gross Traffic Receipts % % % % (BE) % * Interest on a cumulative basis for all borrowings Lease rentals have gone up as a percentage of OWE from 8.9% in to 12.8% in For every Rs. 100 crore raised from the market, the OWE is impacted annually by Rs crore because of interest liability and Rs crore has to be repaid as principal amount from Capital Fund/Capital every year over a period of 15 years. 15 EDF/RM, Railway Board (Namita Mehrotra)

16 Cost of leasing Rolling Stock through IRFC FY Rate of Lease Effective cost to MOR under lease pricing (IRR)* % 8.39% % 8.96% % 8.12% % 7.65% (prov.) % Includes principal repayment component * Perhaps the lowest cost debt raised by any entity with such long tenor EDF/RM, Railway Board (Namita Mehrotra) 16

17 3. Lease Rentals 2. Lease of Assets 1. Bond Subscription/ Loan Financial Leasing Model: Rolling Stock Financing Lease Period 30 years (primary period & secondary period of 15 years each) Full recovery of principal & interest during primary lease period After 30 years, assets handed over to MoR Lender/Bond Subscriber 4. Interest & Principal Payments Standard Lease Agreement Every year, IRFC enters into a Standard Lease Agreement with MoR IRR of the lease includes a mutually agreed mark-up over the marginal cost of borrowing (at present 50 bps) IRFC Advance Lease Rentals Arrangement to pay lease rentals in advance by MoR in case of difficulties experienced by IRFC in debt servicing IRFC has never resorted to MoR s extraordinary support for meeting its debt obligations IR STRUCTURE & PROCESS FLOW IRFC enjoys legal ownership of the rolling stock assets, which are leased to MoR EDF/RM, Railway Board (Namita MoR Mehrotra) effectively uses and maintains them throughout their life 17

18 Financing projects EBR(IF)

19 Funding projects through EBR-IF A new source of funding viz. Extra-Budgetary Resources (Institutional Finance) or EBR-IF introduced from EBR-IF funds invested in throughput enhancement projects of Railways, mostly doubling & electrification projects EBR-IF funds currently drawn from LIC through IRFC; other possible options are ADB non-sovereign funding and National Small Savings Fund Railway Budget provides for allocation of Rs. 26,440 crore from EBR-IF for executing the following projects:- 282 doubling projects (Rs crore) 131 electrification projects (Rs crore) 14 new lines projects (Rs crore) 10 gauge conversion projects (Rs crore) 22 other works (traffic facilities & workshops) (Rs. 58 crore) EDF/RM, Railway Board (Namita Mehrotra) 19

20 Projects being funded through EBR-IF Ongoing works Prioritised works on congested routes were taken up essentially doubling and electrification works; other Plan heads works to have RoR > 14% and to be approved by AMs committee New works sanctioned onwards Projects should have RoR of at least 14% (subsequently revised to 12% and now 10%) Year-wise cash flows & milestones for completion provided by each Railway/ RVNL/ CORE duly signed by GM, CAO and FA/Con Works required to be completed before ; no impediment to immediate drawal of funds Works should be clearly identified for leasing EDF/RM, Railway Board (Namita Mehrotra) 20

21 Why Institutional financing Convert vicious cycle of under-investment to a virtual cycle of revenue generation and higher investment Leverage conventional sources of fund to finance projects through institutional debt Low cost, long term financing Serviced through enhanced revenue generation Implications: Assured availability of funds for projects taken up for financing through institutional financing Funds do not lapse at the end of financial year EDF/RM, Railway Board (Namita Mehrotra) 21

22 Prerequisites for successful financing through EBR/IF Robust appraisal of projects Selection of projects which are clear for drawal of funds; unutilised funds would be a drain on Railway finances Realistic assessment of fund requirement Timely completion of projects leading to timely generation of revenues for repayment Intensive monitoring required to avoid slippages EDF/RM, Railway Board (Namita Mehrotra) 22

23 LIC Financing Facility March 11, 2015 MOR signed MOU with LIC of India for extending a financing assistance of Rs. 1.5 lakh crore for the next five years; Rs crore drawn till date Rate of interest : 30bps above the 10-year benchmark yield; yield to be reset at 10 years interval Funds would be drawn in tranches, as per requirement Tenor of the facility would be 30 years MOR owned entities can draw funds available under this facility LIC will invest in bonds issued by IR companies such as IRFC Moratorium: on interest and principal payment for first 5 years; interest to be capitalized year 6 to year 10 interest liability to be met; year 11 to year 30 repayment of principal and interest in equated half yearly instalments, i.e. 40 instalments EDF/RM, Railway Board (Namita Mehrotra) 23

24 Drawal of EBR-IF & related costs FY Amount (Rs. in crore) IRFC s cost of borrowing * % % % (BE) LIC funds & other short term borrowings * Does not include margin payable to IRFC which is yet to be decided (similar to 50 bps currently being paid for rolling stock) In , IRFC had provided Rs. 2,079 crore for project financing. However, that financing was done in the same manner as for rolling stock EDF/RM, Railway Board (Namita Mehrotra) 24

25 7. Lease Rentals 6. Lease of Assets 3. License to develop asset over IR Land 4. Undertaking development Works 5. Payments for Development Works 1. Bond Subscription/ Loan 2. Interest & Principal Payments Financial Leasing Model: Project Financing License Agreement Rights for development of rail infrastructure on railway land are provided to IRFC Development Agency Agreement IRFC appoints IR for development of the infrastructure Construction is funded by the long term borrowings & equity of IRFC Leasing Agreement Developed infrastructure is leased back to IR on Financial Leasing Arrangement Lease Rentals covers IRFC s debt obligations and margin Borrowing Arrangement Long term, low cost borrowing along with construction moratorium to fund infrastructure assets of matching life Secured funding as lease rentals from IR covers the debt obligations Lender/Bond Subscriber IRFC IR STRUCTURE & PROCESS FLOW IRFC is investing in development of railway infrastructure on project funding basis. Development & operational responsibility of projects however rest with IR. EDF/RM, Railway Board (Namita Mehrotra) 25

26 Relaxation of Exposure Limit by LIC LIC is subject to exposure norms prescribed by IRDAI. LIC can have maximum exposure to the extent of 20% of the Capital Employed (Paid Up Capital Plus Free Reserves and Surplus plus bonds / debentures outstanding) of an entity. The limit of 20% can be enhanced to 25% with the approval of the Board of IRFC. Bonds issued by IRFC if eligible for categorization as Approved Security will not be subject to exposure norms prescribed by IRDAI. Securities issued by Central and State Government / guaranteed by Central and State Govt. / debt service obligations directly appropriated out of State / Union Budget/ guaranteed by Central / State Govt. qualifies as Approved Security. LIC has disbursed a cumulative sum of Rs crore against MoR s requirement of Rs Crore. MOF has agreed to guarantee IRFC bonds issued to LIC without guarantee fee EDF/RM, Railway Board (Namita Mehrotra) 26

27 Challenges Sourcing low cost, long tenor funds Completion of projects as per schedule Robust appraisal of projects Accurate projection of fund requirement EDF/RM, Railway Board (Namita Mehrotra) 27

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29 Definitions

30 Let s start at the very beginning (1/2) Shareholders Equity: Shareholders' equity or net worth represents the net value of a company, or the amount that would be returned to shareholders if all the company's assets were liquidated and all its debts repaid. Debt: Debt is money borrowed by one party from another & is used by many corporate entities & individuals as a method of making large purchases. The money borrowed carries a cost, called interest or coupon and is required to be paid back after a specific time. Bonds: A bond is a fixed income debt instrument in which an investor lends money to an entity (corporate/government) for a specified time period at an interest rate. Projects are financed through bonds by companies/municipalities/governments. EDF/RM, Railway Board (Namita Mehrotra) 30

31 Let s start at the very beginning (2/2) Debt-Equity ratio: Debt/Equity (D/E) Ratio, calculated by dividing a company s total liabilities by its shareholders' equity, is a debt ratio which indicates how much debt a company is using to finance its assets relative to the value of shareholders equity. G-sec/ Government security: All government authority issued debt obligations or bonds, or treasury bills. Considered low risk investments. Non Banking Finance Company (NBFC): NBFC is a company registered under the Companies Act engaged in financial activity as principal business A company whose financial assets constitute more than 50% of total assets and income from financial assets constitutes more than 50% of gross income will be registered with RBI as NBFC. Different from banks as it cannot accept demand deposits, cannot issue cheques drawn in itself and is not part of the payments and settlement system. EDF/RM, Railway Board (Namita Mehrotra) 31