Investors hit pause as Indian elections loom

Prime Minister Narendra Modi is perceived as a reformer that helped lure foreign capital into India's infrastructure sector, but experts believe the market will remain attractive even if the incumbent PM suffers an electoral defeat.

India’s general elections, scheduled to start in April and end on 19 May, are bound to slow down deals in the country’s infrastructure market.

Prime Minister Narendra Modi is running on a business-friendly platform and looks to be re-elected for a second term. But he faces strong competition from the Congress Party in the world’s largest democratic elections. Infrastructure players, especially foreign ones, are expected to adopt a ‘wait-and-see’ approach towards the results. However, the appetite for India’s infrastructure assets should remain strong in the long term. “The industrial community will keep pushing to open up good brownfield assets,” says Jagannarayan Padmanabhan, director of CRISIL Infrastructure Advisory. “Private capital can play an important role.”

The country needs to keep attracting private capital to its infrastructure market. According to the Global Infrastructure Hub, a G20-backed research centre, India will need $4.5 trillion of investment between now and 2040 if it is to fulfil its infrastructure needs. At least $526 billion of that will have to come from the private sector.

Modi made infrastructure one of the central issues during the 2014 election. His campaign talked of “a crisis of inadequate and crumbling infrastructure”, and criticised the previous government for doing little more than “setting up commissions” to tackle the issue.

So what has Modi done since? Quite a bit, as it turns out, including a raft of initiatives to increase private sector participation. According to a study by CRISIL, private spending on infrastructure between 2013 and 2017 rose to 11.1 trillion rupees ($159.3 billion; €141.5 billion), compared with 8.8 trillion rupees during the previous five years. International heavyweights such as Global Infrastructure Partners, Macquarie Infrastructure and Real Assets and the Canada Pension Plan Investment Board, have gained a strong foothold in India.

However, as public spending on infrastructure has kept growing, private sector participation, as a proportion of the total, has fallen. CRISIL estimates that in 2018 the private sector’s contribution to spending on infrastructure fell to around 25 percent, the lowest level for a decade. It blames “stalled projects and stressed assets” for dampening investor interest. “As credit comes back in the next six to 12 months, investors will come back,” Padmanabhan predicts.

When Modi came to power, telecoms were already heavily privately owned across India, so his government focused on attracting investment in renewables and transport.

In the former, India is targeting an ambitious 175GW of capacity by 2022, including 100GW of solar power. Some of the country’s projects have already achieved grid parity, as developers bid aggressively to secure a place in the market. Actis, Warburg Pincus and Japan’s Orix are among the international players that have invested in the Indian solar industry.

UK development finance institution CDC Group last year created Indian solar platform Ayana Renewable Power. Chris Chijiutomi, head of infrastructure equity, at CDC, told Infrastructure Investor: “One of the main drivers of the Indian solar market was the will of the government [together with] a renewable energy strategy, enabling framework and legislation that enabled investors and operators to participate in the sector.”

The sector did face some clouds last year, after New Delhi imposed tariffs on foreign solar equipment in order to stimulate the domestic solar manufacturing industry.

On the transport front, Modi’s government has championed an asset-recycling programme that aims to raise $20 billion through the monetisation of 105 road projects. MK Sinha, co-head of GIP India, told us last year that the country was “migrating to a model in which the government funds the construction and development of infrastructure projects […] and, once they are operational, they package them and transfer ownership to large investors”.

A first bundle of nine toll roads attracted strong interest from international players in March 2018. The 30-year concession was awarded to MIRA for $1.49 billion, a price substantially higher than the $1 billion initially set as the government’s base price.

However, a second bundle failed to fetch the government’s initial price and the National Highway Authority of India last month shelved the sale. The NHAI was criticised for being “too optimistic” after its first auction success, but there are no plans to halt the programme. In fact, sources from the agency told us in February that a new bundle could be tendered as early as June.

The government has also looked at new ways to attract private investment to the sector by taking further development risk when it comes to greenfield projects. In 2016, it introduced its Hybrid Annuity Model, combining the existing EPC and annuity models, in which it assumed 40 percent of the total cost of a project. In February, I Squared Capital-backed Cube Highways acquired three roads to be developed under the new model.

New Delhi has also moved ahead with the privatisation of six major airports, after previous failed attempts in recent years. The 30-year concessions were awarded to Indian infrastructure conglomerate Adani Group. Some investors criticised the tight deadline for the tender process, which started in December and closed in February. The auction nevertheless managed to attract strong competition from AMP Capital, Italy’s Autostrade and India’s National Investment and Infrastructure Fund.

The government has also sought to make the infrastructure sector more dynamic. In 2015, it set up the National Investment and Infrastructure Fund, which aims to raise $6 billion through three different strategies in order to invest in infrastructure across the country. The NIIF has received backing from the Asian Infrastructure Investment Bank, sovereign wealth fund the Abu Dhabi Investment Authority and Singaporean state-owned investment company Temasek.

Additional assets are coming on to the market as a result of the Insolvency and Bankruptcy Code implemented in 2016, which makes it easier to start legal proceedings against companies that default on their payments. The reform has accelerated the collapse of cash-strapped developers such as IL&FS, one of India’s major infrastructure conglomerates, which failed to repay several short-term loans at the end of last summer.

The IL&FS crisis had a negative impact on the country’s credit markets. However, it has also created opportunities for private players to pick up assets previously held by the firm. This portfolio includes more than 14,000km of roads, 860MW of wind assets and $2 billion of maritime and logistics assets.

Soumitra Majumdar, a partner at JSA, a law firm focused on India’s finance sector, told us last November: “A lot of players are vying to get good, distressed assets, and this has become a good market for these activities.” Asset-recycling programmes, such as those in the roads and airport sectors, and an institutional push to develop sustainable power have turned India into a ‘hot’ infra market. That is the legacy of Modi’s government when it comes to infrastructure.

As the country prepares to go to the polls, investors tell us they appreciate “the structural changes” he has brought about. They also point out that the Indian market has proven resilient through previous periods of political turbulence.

As one market source summarised it: “The trend in India has been that the market accepts the change and moves on.”