India’s anxieties

Infrastructure Investor recently hosted a roundtable in New Delhi comprising a selection of Indian infrastructure professionals. Here is what they had to say about the market’s challenges and pitfalls.

Observers of the US market, who have often been told of a $2.2 trillion opportunity in infrastructure and have seen deal after deal fall apart, know all too well that every glossy, opportunity-laden figure that makes its way into a pitch-book should be scrutinised to see whether the hype about a given market lives up to the reality on the ground.

India, which has pledged to spend $1.5 trillion over the next ten years to upgrade its infrastructure, is giving rise to similar eye-popping figures as well as a requisite need to look behind them and see whether they present real opportunity or not.

With this in mind, Infrastructure Investor travelled to India to talk with a mix of public and private infrastructure professionals and solicit their views about what the situation on the ground looks like for investors. Here is a sneak peak of what they had to say.

Democracy – a welcome hindrance: There was talk of the government needing to act as an “honest broker” between the investors who want to build India’s infrastructure and the people affected by their plans. Envious comments were made about China and its ability to develop a long-term infrastructure vision and then have a sharp focus on executing that vision. There was unease, however, at the thought that such developments as China’s huge Three Gorges Dam hydropower project should carry a high social price (in the case of the Three Gorges Dam, that price was an estimated one million people forcibly moved from their homes).  Striking a balance between competing interests was seen as a feature of democracy and not something to be sacrificed – even if this meant slower infrastructure development.

Independent regulators – does India need them? While India has made moves towards independent regulation in some sectors, there are criticisms of the way it has been done. There were views around the table that efforts in this direction should be redoubled, with regulators able to act as arbitrators, thereby speeding up processes and reducing the cost of capital – as well as perhaps having a broader mandate to make rulings on the grounds of fairness. This, one participant believed, could remove the perception of government favouring one concessionaire over another. From the government side, the view was that some infrastructure sectors are not yet mature enough to set processes and systems in stone. Only government can provide the flexibility needed to address a constantly changing reality.

Capital markets – how to fill the gaps: One participant pointed to a lack of “long-term annuity plays” delivering returns in the 8 to 12 percent bracket and called for the development of REITs (Real Estate Investment Trusts) –  investment vehicles that enable “stable cash-flow generating assets to list on exchanges” as well as a mortgage-backed securities market where you have “active trading and hence liquidity”. This would help the circulation of capital, with risk capital invested at the time of construction and development refinanced and replaced by long-term fixed-income investors. Calls were also made for a National Infrastructure Bank to refinance the commercial banks. Sound familiar?

Taxation – carve-outs, please: There was criticism of India’s Minimum Alternate Tax, a system designed to prevent high-earning corporations and individuals from reducing their taxes to a level the government considers too low. The criticism centred not so much on the level of the tax as poor drafting and confusion over applicability and intent, especially as applied to the country’s Special Economic Zones. The complaint was also made that projects can be initiated and then, after financial close, the tax laws change. As a solution, a call was made for the tax basis of certain infrastructure contracts to be respected independent of subsequent amendments – the kind of ring-fenced carve-out regime already applied to the country’s oil and gas sector.

Land acquisition – greater sophistication required: India’s Land Acquisition Act allows the government to purchase land from its owner for a “public purpose” in exchange for the payment of compensation. This has frequently been criticised as allowing the government to trample over the wishes of landowners. However, it was argued that land acquisition per se is not the problem. What is arousing hostility is the specific scenario of land purportedly being acquired for industrial use and then leased to developers – sometimes for 99 year periods – who will exploit it for commercial activities. There was a suggestion that lease periods could be limited with a reversion back to the original owner, or that an element of profit sharing could be introduced on top of compensation. A more sophisticated process, in other words.       

For more, see India: A Country Briefing, part of Infrastructure Investor’s May 2011 issue.