India clears model tripartite pact for infra debt funds in ports
Last week, India’s finance ministry approved a model tripartite agreement to be followed by the project authority (the trusts that run the ports owned by the Indian government), concessionaire (private developer) and infrastructure debt fund for take-out financing of public-private-partnership (PPP) projects in the ports sector.
Take-out financing allows project developers to refinance a current loan with another loan, of a longer duration at a lower rate of interest.
Infrastructure debt funds are investment vehicles that can be sponsored by commercial banks and non-banking financial companies (NBFCs) in India in which domestic/offshore institutional investors, specially insurance and pension funds, can invest through units and bonds issued by infrastructure debt funds.
Infrastructure debt funds would essentially act as vehicles for refinancing existing debt of infrastructure companies, thereby creating headroom for banks to lend to fresh infrastructure projects.
Infrastructure debt funds-NBFCs would take over loans extended to infrastructure projects created through the PPP route and have successfully completed one year of commercial operations.
Such take-over of loans from banks would be covered by the tripartite agreement between the infrastructure debt fund, the concessionaire and the project authority, for ensuring a compulsory buyout with termination payment in the event of a default in repayment by the concessionaire.
The tripartite agreement binds all the parties collectively and provides for the take over of a portion of the debt of the concessionaire availed from lenders.
The concessionaire will issue bonds to raise funds from the infrastructure debt fund.
A default by the concessionaire shall trigger the process for termination of the agreement between the project authority and the concessionaire.
The project authority shall redeem the bonds issued by the concessionaire which have been purchased by the infrastructure debt fund-NBFC, from out of the termination payment as per the tripartite agreement.
The infrastructure debt fund mechanism was put in place by the government to enable refinancing of bank loans to infrastructure projects at longer tenor and lower cost.
Such refinancing helps in reducing the cost of funds for infrastructure projects and also free up lower-tenor bank funds for newer projects.
Currently, companies building infrastructure projects on a PPP basis depend primarily on bank loans, which are not available for longer tenors.
The infrastructure debt fund opens up new avenues for financing port projects.
India plans to triple the cargo-handling capacity at its 12 major and 187 non-major ports (those outside the control of the Indian government) to 3.13 billion tonnes by 2020 from 1.26 billion tonnes currently to meet demand, according to a 10-year plan unveiled by the shipping ministry in 2011.
The capacity expansion plan requires an investment of Rs.1 trillion and much of this is expected to come from the private sector, including debt funds.
The model tripartite pact sets out the rights and responsibilities of each stakeholder involved in the project and lends comfort to the infrastructure debt fund in the event of the termination of the port contract due to a default either by the developer or the project authority.
While the government has addressed the need for a model tripartite agreement for take-out financing of projects at ports owned by the Indian government, such a pact is yet to be worked out for ports owned by the state governments.
The ports owned by India’s states and given to private firms for development and operations have seen much faster capacity growth, compared with those owned by the Indian government.
Less stringent regulations, including an ability to set its own rates, have contributed to the growth of new ports at the state level.
Lenders appear to be much more comfortable lending to these ports, and a model tripartite agreement for take-out financing here would make the projects even more attractive for debt funds.
The absence of a model tripartite pact could prevent infrastructure debt funds from participating in the growth of ports owned by the state governments.
A slowing local economy and global trade have dampened investor interest in new projects at ports owned by the Indian government.
The government has taken a few key decisions in the past one year to improve the flow of investments into the ports sector. This includes a partial de-regulation of rates for new projects.
P. Manoj looks at trends in the shipping industry.