Railways to lose Investment Guarantee from World Bank due to IRFC IPO

The MIGA gives political risk insurance and credit enhancement for cross-border lenders. MIGA helps multilateral lenders to make cross-border lending by identifying risk-free avenues in developing countries; sovereign guarantee (usually accorded to 100% state-owned entities) is one of its chief criteria.

NEW DELHI: The decision by the department of investment and public asset management (DIPAM) to go for an initial public offering of Indian Railway Finance Corporation (IRFC) has put paid to the Indian Railways’ (IR’s) chances of getting an investment guarantee from the World Bank. With the IPO decision, the Railways has lost the World Bank’s Multi-Lateral Investment Guarantee (MIGA) for raising at least $500 million from international private sector investors and lenders.

A decision to come out with the initial public offer (IPO) of IRFC, the borrowing arm of Indian Railways, has hit the entity’s ability to access low-cost institutional finance and could threaten the transporter’s capital expenditure. While a cap put by insurance regulator Irdai on insurers’ single-enitity exposure had come in the way of IRFC raising Rs 26,000 crore from Life Insurance Corporation (LIC) in the current fiscal, the IPO is now learnt to have resulted in the World Bank’s Multilateral Investment Guarantee Agency (MIGA) backtracking from a proposal to arrange a virtual soft loan of $500 million (Rs 3,500 crore) to IRFC.

MIGA helps multilateral lenders to make cross-border lending by identifying risk-free avenues in developing countries; sovereign guarantee (usually accorded to 100% state-owned entities) is one of its chief criteria. The result: IRFC will have to raise some Rs 55,000 crore this year via market borrowings, including the more expensive short-term bridge loans, against Rs 28,550 crore planned earlier, to help the transporter stick to its capex plan. While IRFC bonds used to carry a coupon rate of 8%, the lack of tax-free status has made its market borrowings costlier this year. As the market exposure increases, its creditworthiness will likely get dented, potentially inflating the cost even further.

As against this, LIC funds would have cost IRFC 7.5% annually (30 basis points above the benchmark 10-year g-sec). The MIGA loan would have been even cheaper at 5%. Higher cost of loans tied up by IRFC would finally reflect on the railways’ finances too, as the transporter, apart from repaying the principal, is required to give lease rentals (akin to interest) to IRFC for the assets created out of the latter’s borrowings. In a year, the railways shells about Rs 10,000 crore from its revenue to service the debt raised by IRFC while repayment of principal is made out of budget allocation.

It was said earlier that Indian Railways’ debt servicing costs were poised to rise at a much faster clip starting FY21 and might more than double in five years from now as repayment obligations concerning Dedicated Freight Corridor Corporation of India and the proposed high-speed train network would kick in. The transporter’s debt-servicing cost, which stood at Rs 14,000 crore in 2015-16, was estimated to be over Rs 19,000 crore this year; with the latest developments, this could go up even further. According to sources, while MIGA was earlier assured by IRFC that it would remain a 100% government-owned entity, the department of investment and public asset management has now decided to list IRFC. If the IPO is of 10% stake in the borrower, then it could fetch the government some Rs 500 crore, according to an official estimate.

While the railways’ capex this year is pegged at Rs 1.46 lakh crore – Rs 53,000 crore from Union budget (GBS), Rs 27,000 crore via public private partnership, Rs 28,500 crore via IRFC market borrowings and Rs 26,400 crore from LIC. While the plan was to raise a massive Rs 1.5 lakh crore from LIC over five years (FY16-FY20), just Rs 16,200 crore have so far been raised from the insurer. Only Rs 1,630 crore is expected this year as LIC is bound by the Irdai norm, as per which its exposure in a government firm is capped at 25% of the firm’s net worth. IRFC’s current net worth is around Rs 13,000 crore, but the LIC also reckons Rs 90,000 crore worth bonds issued by it.

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