Four months ago I wrote a column on infrastructure in which I opined that “The people who seem to have lost interest in Indian infra are the global super-rich, endowment and pension funds in the Western world.” Even as I wrote the column, I could not help feeling disappointed because whilst the analyst in me understood that “execution risks are not being priced into the Indian infrastructure story”, the Indian in me was dejected that something as close to the heart of the “India story” as infrastructure had become a no-no for many foreign investors.
So when the chance arose last month to dig deeper into exactly what bedevils Indian infra, my colleague, Nitin Bhasin (our Infrastructure sector lead) and I grabbed it. The rest of this piece summarises what Nitin and I found. The good news is capital is NOT a big issue for Indian infrastructure. The bad news is that the reason capital is NOT a big issue is because our Government is not creating enough projects.
We interviewed two dozen senior executives in the infrastructure sector. These executives spanned the full gamut – from equity financers to developers and from foreign investors to domestic consultants. We also met with representatives from relevant government departments such as roads, ports, infrastructure finance and planning. What this cross section of industry insiders told us surprised us:
Capital is not a problem: Not one of the experts that we spoke to highlighted lack of capital as a challenge at present. Most of the experts told us that for properly conceived projects finding debt and equity capital is not a problem.
The supply of projects is the biggest problem: Most industry insiders said that “Money is not a constraint for India’s infrastructure ambitions… it’s the government’s incapability to design and present bankable projects [that’s the problem].” One of the principals in a leading infrastructure fund articulated this further “India must have central machinery in place that conceives, structures, and creates a continuous shelf of marketable PPP projects.”
Returns are being crunched: the combination of the two preceding bullets means that at present we have too much capital chasing too few projects. As a result the targeted return from Indian infrastructure projects has fallen from 20% plus to 13-18%.
So think about the paradox. India desperately needs more infrastructure. The capital suppliers are waiting to get involved. But because the Government can’t create enough projects, the returns on the few projects that it can create are being competed down (with dozens of developers and Private Equity houses jostling for those few projects). The final result obviously is that not enough projects are getting off the ground and it is becoming harder to raise fresh capital for new Indian Infrastructure funds.
Most people in the industry understand why the Government can’t sign off on the requisite number of projects and are sympathetic about the “bandwidth and manpower challenges” that the Government faces in structuring and signing-off projects. However, there is a limit to this sympathy and one industry participant has come up with a novel idea.
He says that if the Government can’t create enough projects, it should let the private sector create the project and then apply for the Government’s sign-off. This is called the “Swiss Challenge” approach under which a private sector participant submits an unsolicited proposal and draft contract principles for undertaking a project not already initiated by the government agency or the local authority. The Government then puts the proposal out to tender. If the government finds one of the competing counter proposals more attractive, then the original project proponent will be given the opportunity to match the competing counter proposal. In case the original project proponent is not able to match the more attractive competing counter proposal, the project is awarded to the participant submitting the counter proposal.
We need our Government to listen to ideas like these. Every year India is spending US$60-70bn on infrastructure as opposed to the US$100bn p.a. targeted under the latest five year plan. If the extra US$30bn is spent, it would generate incremental GDP of approximately US$45bn (using the well accepted fiscal spend multiplier of 1.5X). Since US$45bn is around 4% of GDP, that’s the price India pays each year for not meeting the targets of the 11th five year plan. This suggests that if we can get our infrastructure build sorted out that alone will flip our GDP growth into double digits.
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