Financing Railway Infrastructure - IRAS Times• Hence, IRFC was set up in 1986 as a non-banking...

Indian Railways: Resource Mobilisation for financing infrastructure

Role of Extra Budgetary Resources

05 May 2018

• Setting the context

• Role of IRFC

• Financing Rolling Stock: EBR-IRFC

• Financing projects: EBR-IF

EDF/RM, Railway Board (Namita Mehrotra) 2

Setting the context

Financing capital assets

Assets – Rs. 1000 crore

Equity – Rs. 200 crore

(expected return 12%)

Debt – Rs. 800 crore

(cost of debt 8%)

EDF/RM, Railway Board (Namita Mehrotra)

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)

4

Sources for financing CAPEX

Capital Expenditure

Budgetary Resources

Gross Budgetary

Support

Internal resources

Extra Budgetary Resources

EBR-IRFC

EBR-IF

EBR-PPP


Market

borrowings

5

Ramping up capital investment (Rs. in crore)


39672 40793 45061 50383 53989 58718

93520

108290 102020

146500

0

20000

40000

60000

80000

100000

120000

140000

160000

2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 Prov.

2018-19 BE

2018-19: Annual Plan


Source of funds (Rs. in crore)

Gross Budgetary Support 40880

Railway Safety Fund 12180

Internal Resources 11500

Extra Budgetary Resources (EBR) 81940

- Market borrowings through IRFC 28500

-EBR(Institutional Finance) 26440

-Public Private Partnerships 27000

Total Plan outlay 146500

IRFC Target:

Rs. 54,940 crore (38%)

7

Share of EBR


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 Prov.

2018-19 BE

EBR-IRFC & EBR-IF (Market borrowings) Balance Capex Financing Sources

38% 33%

33%

Debt Liability of IR


IRFC

Dedicated borrowing arm of IR

• 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

Role of IRFC (1/2)


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


Financing Rolling Stock – EBR(IRFC)

Position as on 31-03-2017

2,77,987

53,453

6,023

5,399

2,14,456

47,825

4,385

4,613

0 50000 100000 150000 200000 250000 300000

Wagons

Coaches

Locos-Diesel

Locos-Electric

IRFC's Share IR Rolling Stock

Particulars Units Rs. crore

Locomotives 8998 71,739

Passenger Coaches

47825 40,225

Freight Wagons 214456 38,994

Cranes and Track Machines

85 360

Total 1,51,318

(85%)

(73%)

(89%)

(77%)

IRFC’s Share in Indian Railways Rolling Stock


Lease charges paid to IRFC (Rs. in crore)


FY Capital Component

Interest component *

Total

As % of Gross Traffic Receipts

2014-15 5450 7023 12473 7.83%

2015-16 5984 7644 13628 8.29%

2016-17 6665 8531 15196 9.19%

2017-18 7591 8914 16505 9.24%

2018-19 (BE) 8784 9864 18648 9.28%

•Lease rentals have gone up as a percentage of OWE from 8.9% in 2008-09 to 12.8% in 2017-18.

•For every Rs. 100 crore raised from the market, the OWE is impacted annually by Rs. 7.02 crore because of interest liability and Rs. 3.89 crore has to be repaid as principal amount from Capital Fund/Capital every year over a period of 15 years.

15

* Interest on a cumulative basis for all borrowings

Cost of leasing Rolling Stock through IRFC


FY Rate of Lease Charges@ Effective cost to MOR under lease pricing (IRR)*

2013-14 11.365% 8.39%

2014-15 11.724% 8.96%

2015-16 11.196% 8.12%

2016-17 10.905% 7.65%

2017-18 (prov.) 11.230% 8.17%

@ Includes principal repayment component

* Perhaps the lowest cost debt raised by any entity with such long tenor 16

Financial Leasing Model: Rolling Stock Financing

IR

Lender/Bond Subscriber

IRFC

2. L

ease

of A

sset

s

3. L

ease

Ren

tals

4. Interest &

Principal

Payments

1. B

ond

Subs

crip

tion/

Loa

n

STRUCTURE & PROCESS FLOW

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

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)

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

IRFC enjoys legal ownership of the rolling stock assets, which are leased to MoR MoR effectively uses and maintains them throughout their life EDF/RM, Railway Board (Namita Mehrotra) 17

Financing projects – EBR(IF)

Funding projects through EBR-IF

• A new source of funding viz. Extra-Budgetary Resources (Institutional Finance) or EBR-IF introduced from

2015-16

• 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 2018-19 provides for allocation of Rs. 26,440 crore from EBR-IF for executing the following

projects:-

– 282 doubling projects (Rs.16607 crore)

– 131 electrification projects (Rs. 6300 crore)

– 14 new lines projects (Rs. 1805 crore)

– 10 gauge conversion projects (Rs. 1670 crore)

– 22 other works (traffic facilities & workshops) – (Rs. 58 crore)


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 2015-16 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 2019-20; no impediment to immediate drawal of funds

• Works should be clearly identified for leasing

20 EDF/RM, Railway Board (Namita Mehrotra)

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


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


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. 16200 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


Drawal of EBR-IF funds@ & related costs


FY Amount (Rs. in crore)

IRFC’s cost of borrowing *

2015-16 9430 7.95%

2016-17 13170 7.69%

2017-18 14760 7.40%

2018-19 (BE) 26440 7.50%

@ 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 2011-12, IRFC had provided Rs. 2,079 crore for project financing. However, that financing was done in the same manner as for rolling stock

24

Financial Leasing Model: Project Financing

IR

Lender/Bond Subscriber

IRFC

3. License

to

deve

lop

asse

t ove

r

IR L

and

4. U

nder

taki

ng

deve

lopm

ent W

orks

5.

Pay

men

ts fo

r

Dev

elop

men

t Wor

ks

6. L

ease

of A

sset

s

7. L

ease

Ren

tals

2. In

tere

st &

Pr

inci

pal

Paym

ents

1. B

ond

Subs

crip

tion/

Loa

n

STRUCTURE & PROCESS FLOW

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

IRFC is investing in development of railway infrastructure on project funding basis. Development & operational responsibility of projects however rest with IR.


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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.16200 crore against MoR’s requirement of Rs.35914 Crore.

MOF has agreed to guarantee IRFC bonds issued to LIC without guarantee fee


Challenges

Sourcing low cost, long tenor funds

Completion of projects as per schedule

Robust appraisal of projects

Accurate projection of fund requirement


Thank you

For more information, contact: [email protected]

mailto:[email protected]

Definitions

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.


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.


Financing Railway Infrastructure - IRAS Times• Hence, IRFC was set up in 1986 as a non-banking...

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