If you have only been following the history of emerging markets specialist Actis since 2002, you might have been surprised to note that its first foray into Indian infrastructure is a joint venture targeting road concessions.
This is something Michael Till, co-head of infrastructure investments at Actis, readily acknowledges: “Our focus is primarily in power – and within power we tend to seek opportunities in power generation. If you look at our track record in the last 10 years the vast majority is in power generation, although we have also successfully invested in road, rail and airports,” he explains.
Power generation has been the “sweet spot” for Actis, Till explains, “where we compete in what we consider to be well-regulated markets and use our industry experience and skills to develop opportunities in the sector”. “In India, unlike in many other smaller markets, you have a handful of strong developers – some 10 or 15 – that have begun to build a track record [in power],” he continues.
‘’So whereas in some emerging markets we will develop projects through wholly owned corporate platforms, in India the opportunity is more about providing growth capital to existing local developers,’’ he adds.
When it comes to the Indian roads sector, even though “the government’s plans are ambitious, there still aren’t that many developers there,” Till argues. This gap, together with a stable concession model, strong political support and a “potentially attractive secondary market” convinced Actis this was a good opportunity to invest in the roads sector.
And so it did. In late April, the firm announced it had teamed up with India’s Tata Group for a $200 million roads joint venture known as TRIL Roads. Tata is the majority shareholder with 65 percent, or $122.5 million, of the equity in the vehicle; while Actis owns the remaining 35 percent, or $77.5 million.
By capitalising on an existing partnership between Italian toll road operator Atlantia and Tata to invest on a 50/50 basis at concession level, the amount of equity available to TRIL Roads increases to $400 million. This capital will be levered with government equity grants and project debt to allow investments in road concessions of some $2 billion, Till explains.
“The opportunity to invest in roads in India is actually quite recent,” Till says. “It has been developing for the last four or five years driven by political reform and a developing regulatory framework. As a result, you see two things developing : on the one hand, you now have clearer and more transparent rules for concession procurement for the assets you bid; on the other, you have a concession model with the right balance of risk and reward, with input from private sector participants,” he adds.
Till is particularly happy with how the regulation addresses land acquisition. “In India, the government takes responsibility for procuring 80 percent of the land by the time the concession is awarded, with the remaining 20 percent acquired afterwards. So even though land acquisition can still delay construction, it is nothing like it once was,” he argues.
The government is also flexible regarding road concessions it wants built but where the economics might not be attractive to the private sector. “Part of the equity for these projects can consist of a government tranche – or viability gap financing – where the government will basically put in a one-time grant to bridge the gap between the expected returns of the private sector and the economics of the project required to deliver an affordable toll price,” Till explains.
So far, the system has been working relatively well, but there are challenges on the horizon, Till contends: “One of the big challenges for the government in the next 12 months will be when it starts tendering the mega-roads projects and we will go from $100 million, $200 million, $400 million projects to $1 billion to $2 billion projects.”
Nor is project size the only variable to be wary of. “At the moment, bank debt is available in the local market but now you start to have competition between various sectors – such as power, rail and roads – for a finite pool of bank debt,” he explains, adding: “In three to four years’ time, I think it is very conceivable that local banks are going to start running short of debt capacity or run up against their corporate and sector limits”.
Till acknowledges the Indian government is not sitting around waiting for this to happen, and has launched initiatives such as an $11 billion debt fund. But attracting the 64 percent of funding it intends to get from the private sector to capitalise the new vehicle is unlikely to be straightforward:
“The government may have to seed [the debt fund] – maybe even use foreign reserves to do that. That can then bring in foreign capital in another form because it hasn’t really been arriving from foreign banks. Then I guess if that works, the key thing investors will want to know is how [the fund] will work, who will manage it and what the governance framework is,” he muses.
Despite the obstacles, investing in emerging markets can be very rewarding. Portuguese toll road operator Brisa recently announced it would sell its entire stake in Brazilian roads subsidiary CCR for €1.2 billion – approximately 6.5 times more than the €185 million it spent buying into CCR in 2001.
Like Actis in India, Brisa entered the Brazilian roads market by investing in an unlisted vehicle – CCR only went public in 2002 – reaping the benefits of targeting the market at an early stage. Since it was listed, CCR’s share price in euros has appreciated 658 percent, Brisa said in a statement.
So is Actis also considering an initial public offer for TRIL Roads somewhere down the line?
“I think that [an initial public offer] is a very possible end result,” answers Till. “I think the timescale will depend on our record and the number of deals we have concluded. So I would expect that to take some time – perhaps five years or more – as we bid for projects,” he explains.
That period of time will be used to build “a portfolio of six or seven roads, perhaps more depending on their size, and then, typically, you would be looking to get an equity value in the business of, say, $500 million,” before the idea of a listing becomes feasible.
Patience, Till argues, is a prerequisite for doing business in emerging markets:
“Investing in infrastructure in emerging markets requires capital to be very patient as it is usually supporting the development of new capacity, i.e. building new assets. If you manage the development process well, you can usually create value by de-risking an asset as it becomes operational. We will often then seek to create further value through refinancing and by aggregating assets into a portfolio that is attractive to other investors.