The Government (GoI) has announced plans for infrastructure investment of US$1 tn over FY12-17 (2X the amount for FY07-12). Apparently, private sector schemes will account for 50% of this $1 tn. We believe GoI needs to fill critical gaps in planning, policies and procedures before such magical numbers can be hit. Capital providers tell us that with a multitude of participants chasing the few projects that are actually being sanctioned, returns are being competed down. We advise investors to focus on construction firms and ancillaries rather than on developers.
The easy answer is not the right answer
The GoI’s US$500 billion targeted spend on India’s infrastructure build over FY07-12 is well known. That the country may be missing this target by 25-30% is also a well accepted (although not by the GoI). So why is the country falling behind in its infrastructure building program. We met two dozen participants in the Indian infrastructure sector to answer this question. The answer we got was loud and clear—it’s not the availability of funds, but the availability of “viable and properly planned” projects that is the biggest hurdle. Capital is ready, willing and available for Indian infra but the projects are not there.
Yes there is an opportunity but…
Our discussions with more than two dozen infrastructure focused financiers, developers and consultants highlighted that the Indian infrastructure opportunity is heavily tempered by:
•Political and bureaucratic challenges. Investors repeatedly stated that the biggest issue facing them is the political/bureaucratic challenges especially at the state government level. The majority of participants (and some government interlocutors) also acknowledged the “capacity” and “knowledge” related challenges facing the administrators of infrastructure projects. Furthermore, poor coordination amongst “the Centre” and the states was identified as another big political issue.
• Lack of a meaningful supply of bankable projects. A major impediment to heavier participation by private equity/developers has been the absence of rigorous project development guidelines and a robust pipeline of bankable PPP projects. The limited supply of projects leads to a larger number of developers bidding for a handful of projects. As a result aggressive bidding lowers the returns for the equally large number of private equity/infrastructure funds looking to participate in these projects with the developers.
• Opacity in bids/awards and procedural/regulatory delays. “Selection by nomination” and the lack of a level playing field for domestic and foreign players were highlighted as key deterrents in the Indian PPP program. Further, participants pointed towards the oft-repeated tales of procedural delays across sectors which increase projects costs and lower returns.
• Absence of the right kind of long-term debt. Investors and developers highlighted that India not only lacks a deep and robust long-term corporate bond market but also lacks pure project finance (of a “non-recourse” nature). Loans with regular resets and for durations much lesser than the concession period not only increase commercial risks but also increase project costs.
• Regressive taxation policies. Imposition of the dividend distribution tax on infrastructure SPVs and MAT (which has increased twice in last 3 years) during tax holiday period has eroded the tax benefits of these projects.
Infrastructure (equity) financier’s comments
“India is a high risk-high return market”
“If [a] project is good, then money will find a way. Although it appears to outsiders that private equity participation will be a challenge, we don’t think so”
“Money is not a constraint for India’s infrastructure ambitions... it’s the government’s incapability to design and present bankable projects.”
Infrastructure (debt) financier’s comments
“There [are] enough savings available in the domestic market which should be channelled as long-term debt funding into infrastructure projects”
“There is a lack of projects with clear visibility on equity returns... Hence participation in PPP projects is poor.”
Infrastructure developer’s comments
“Creating bankable projects is of the utmost importance”
“Inability to honour the sanctity of the Design, Build, Finance, Operate and
Transfer (DBFOT) contract”
“Large size PPP projects should be put out for bidding after obtaining mandatory
clearances and approvals”