Gathering in New Delhi for our inaugural India roundtable, we have a line-up that in many countries would have onlookers anticipating a lion’s den-style atmosphere. Ramesh Abhishek, Secretary of the Indian government’s Department of Industrial Policy and Promotion, is flanked by the country’s leading fund managers in MK Sinha of IDFC Alternatives, Edelweiss’s Subahoo Chordia and Sujoy Bose of the National Investment and Infrastructure Fund. Rounding out the table are Karunakaran Ramchand, managing director of developer IL&FS Transportation, and Deepak Bagla, head of Invest India.
Ordinarily, a government minister in this situation might find nowhere to hide and berated from all sides for lack of funding or deal pipeline. Yet, such is the success of the Indian infrastructure story – which has attracted some of the biggest institutional investors and sovereign wealth funds in recent years – this is no ordinary situation. If anything, Secretary Abhishek is the least vocal in trumpeting the government’s achievements.
For Chordia, be it through credit enhancement or via its asset recycling programme, the government has taken steps to provide investors with far more stable returns through de-risking. “Historically, investors used to target higher return by taking higher risks,” he says. “I believe now they should and have started looking at much more sustainable risk-adjusted returns and that makes it much more exciting.”
Sinha is also eager to praise the government for making private sector participation a much more comfortable experience.
“The government has corrected the implementation flaws which became evident between 2008 and 2012,” he explains. “The NIIF has been conceived effectively as governmental validation of the robustness of the Indian infrastructure opportunity and the regulatory and policy framework has been substantially distilled to make it clear and comfortable for all participants.”
Of course, Bose, as head of the NIIF, is likely to be positive about the government’s achievements but he lauds the commitment to the private sector in facilitating private investment in roads, a point expanded on by Bagla.
“What was happening with the PPP structure in India was one of the Ps was not playing its role properly,” Bagla outlines. “That was the public aspect, the private guy was already there. Today, the other P, the sovereign, has started playing the role it ought to have played earlier. That is what the government has brought to a large extent and that is where you’re seeing the high level of interest coming into India.”
However, as a developer of Indian roads since 1992, IL&FS still sees some significant flaws in the system. “In my view what’s happened is that we seem to be either doing public or private projects, and we’re still trying to find the right blend between public and private investment,” Ramchand maintains. “If credit was available, I believe we would have seen a larger number of private sector projects being brought up by the government, but the current government realised early on that that’s not going to happen.”
While Ramchand says the “government has done wonders as far as implementation is concerned”, he identifies an additional issue hindering projects in the system.
“We are really not seeing too much play at the state level; we really need to see states start moving on infrastructure, because a lot of the infrastructure creation falls within the remit of these state governments.”
This is where Abhishek nods in agreement and, while he praises the efforts led by Prime Minister Narendra Modi, this is tempered somewhat.
“No government before was actually even partly as ambitious as this government is,” believes Abhishek. “If you just see the sheer size, the scale that we are looking at, I think what we need to do is be much more ambitious than we have been. Some of the states have led by example. I would say the highways that they have constructed and the way
they have completely turned around the power sector are good examples, but I think others need to be reaching in a big way. The states’ role will be very critical.”
Abhishek includes naming and shaming as “one of the very effective mechanisms of late”, in addition to improving governance at all levels. “I think we also need to have much more public pressure on the political leadership to deliver on these promises, otherwise people can be slack and we cannot afford that.”
PUBLIC VS PRIVATE
As Bose tells us, India is not a unique infrastructure market and in this sense grapples with the same challenges faced by Western European markets and the US, namely that of when and how to privatise infrastructure assets, or to what level the private sector should be involved. This, according to Sinha, partly stems from experiences in the last decade.
“Between 2002 and 2009 there was a frenzy of activity from the private sector, some not so correct,” he recalls. “We had issues as a consequence of that kind of frenzy — basically undisciplined bidding by not so financially strong local developers and indiscriminate lending by public sector banks without proper evaluation of project risks — and, of course, there were also certain deficiencies in government policy administration and implementation. The good news is that between 2012 and now, I think we’ve gone through a course correction. The not-so-serious players from the private sector have been weeded out, banks have been more discreet and the government has been a lot clearer, transparent and consistent in its policy making.”
Bose agrees and states that India is now in the third decade of the infrastructure investment cycle and is striking a far better balance of the two.
“The positive aspect of recent infrastructure sector auctions in India is that there have been extensive efforts by the government to consult with potential investors to ensure that their input is taken into account in the design of concessions,” he says. “As a result, investors have been willing to bid aggressively. A good example is the recent ‘Toll-Operate-Transfer’ auction of nine government-owned toll roads where the winning bidder paid substantially higher than the reserve price following a well-designed procurement process. The evolution of instruments such as InvITs and REITS, which provide investors with tax-efficient, listed instruments to invest into infrastructure and real estate also signals the government’s efforts to ensure that investors have different ways to invest into those sectors in India.”
Indeed, last month Allianz Capital Partners made its first direct investment in Asia, acting as an anchor investor alongside CPPIB in the IndInfravit Trust. Yet, as Bagla points out, “the one missing piece is project finance. Essentially, virtually the entire funding is coming from commercial banks and obviously their view of the world is completely different. We do need to focus more on getting institutions at play which focus on project financing.”
However, the question remains in some areas as to whether all the flaws have truly been weeded out and if this is affecting financing.
“Perhaps one amendment that can be done in bidding selection is to check means of financing of the bidder,” suggests Chordia. “This will avoid people bidding for projects and winning them without having capital in place; projects that don’t have the required capital either get delayed or do not see the light of the day. The moment you have the required capital in place, then at least you know the capital is there to construct the project.
“One of the key reasons the infrastructure bond market in India has not been that vibrant so far is because of a lot of restrictions imposed on long-term institutions to participate. Infrastructure bonds in India have to be institution-led to start with and domestic institutions have a key role to play. Currently, the domestic institutions have lots of restriction in terms of low threshold caps on how much they can put in as single exposure to infrastructure products.”
Despite Chordia’s concerns, Bose remains convinced that in several respects, the sector has turned a corner.
“The capital that is now coming into the infrastructure sector is much more aware of the risks associated with the sector,” he believes. “That’s not to say there will not be bids that will seem excessive at different times, but there is much more of a mindset stabilisation of what infrastructure investing involves. The government should continue to push for smart procurement through well-structured auctions, with expertise and financial capacity being taken into account.”
Ramchand, as chair of a company that holds almost 15,000km of roads under concessions, is deep in agreement.
“That’s very critical for India,” he concurs. “It has to improve the procurement process and it has to actually come up with assets which are sustainable. There may be an outlier who comes in and bids, which is probably far beyond expectation and I’m not sure that you want to accept that bid. Most of the stressed assets are created because of a lack of understanding risk.”
As several participants point out, there is no shortage of interest in India’s operating infrastructure assets. The likes of Global Infrastructure Partners, Brookfield and I Squared Capital have all been attracted to the Indian market, but Bose believes NIIF can provide gateways to more than just one pool.
“NIIF invests through different strategies,” he explains. “The NIIF Master Fund is dedicated towards creating large-scale sectoral platforms to consolidate post-construction operating assets Second, we have a strategy to create a fund of funds, where we anchor and invest in homegrown fund managers, while we are also developing a strategy to invest in greenfield assets with a higher risk-return profile. Each fund has its own team and is targeted to investors based on preferences and risk appetites.”
This strategy is similar to the one being employed by the wider market to cater to the demands of the many investors interested in gaining exposure to the asset class.
“Indian infrastructure currently offers two kinds of products,” says Chordia. “One is to invest in operating assets for long-term cashflows, wherein there are already contracts in place and cashflows are predictable; the second opportunity is to invest in development projects. This will require a different kind of risk capital. We see the market in India has started developing towards risk capital being used to develop assets and then flipped to long-term yield investors. This provides a win-win situation for Indian developers and long-term investors by focusing on their core strength.”
Such funds are still at a less mature step, according to Ramchand, although he believes this is set to change in the coming years.
“I think India-dedicated funds are still at the take-off stage,” he notes. “We’ve had India-based funds but they are driven hugely by investors from outside India. We’re going to see more India-based ones coming with a blend of Indian money and money coming in from abroad. There are large pools of capital in India, too.”
For IDFC, a shift in strategy is expected following its acquisition by GIP, one focused more on construction and development of assets.
“What we are going to be conceiving is a permanent capital vehicle with our Fund II portfolio, which has four operating platforms and can be morphed into an institutionally owned and professionally managed domestic infrastructure company,” Sinha explains. “We’ve been fortunate to be at the right place at the right time and executed a roll-up strategy to aggregate assets and form these platforms. If we were to conceive that strategy today, it would be difficult to execute. Those assets are simply not available on a go-forward basis, which is why we will have to recraft our strategy for the next fund.”
Part of the previous strategy has been investing in India’s renewables sector, a market that has experienced strong growth in recent years. However, Bagla queries if changes in the market are making this a different proposition to investors now.
“We had an interesting comment by a deep-pocketed European pension fund that today’s technology-disrupted renewables world is not really the most ideal world for the traditional infrastructure investor and there has to be a new genre of investor for this one,” he says.
His concerns are shared somewhat by Sinha, who believes the distribution and transmission aspect of renewables investment is not receiving adequate attention, leaving projects stranded. Prime Minister Modi has set ambitious targets to install 175GW of renewables by 2022, but Sinha thinks this focuses too much on generation.
“There is this issue about just chasing growth for the sake of growth by some in the private sector, rather than focusing on long-term sustainable yield as an investor,” he believes. “As a fund investor, I like to say that I always like to take the sixth or seventh bus. I want to make sure that the first five have reached the destination. There is no point jumping on the bus like a herd to a fancy destination without ever getting there. The Indian opportunity is large enough, so the wait does not mean missing the bus.”
Clearly, the journey is far from complete, yet given India’s growth in recent years, it would seem the country and Sinha’s bus are certainly travelling in the right direction.
Around the table
Ramesh Abhishek, Secretary, Department of Industrial Policy and Promotion
Abhishek was appointed as DIPP secretary in February 2016. He has held a wide variety of roles within Indian federal and state governments since 1990. He has also worked with the Supreme Court of India and the UN mission in Kosovo.
MK Sinha, managing partner & CEO, IDFC Alternatives
Sinha joined IDFC Limited in 2005 as an executive director and was responsible for project finance and business development following a 10-year period working with GE. In 2007, he became president of IDFC Project Equity, a role he held until 2012 before heading up IDFC Alternatives.
Deepak Bagla, managing director & CEO, Invest India
Bagla became head of the Indian government’s investment promotion agency after it was formed in 2014. This followed a seven-year tenure as partner with 3i in India, a period which included the closing of its $1.2 billion India Infrastructure Fund.
Sujoy Bose, CEO, National Investment and Infrastructure Fund
Bose was appointed as chief executive of the government-founded NIIF in June 2016. He joined from the IFC, where he worked for 23 years and was global co-head of infrastructure when he left. Prior to the that, he worked for Citibank India.
Karunakaran Ramchand, managing director, IL&FS Transportation
Ramchand has worked for IL&FS Group since 1994, becoming chief executive of the group in 2000 and setting up IL&FS Transportation Networks in 2008. He held public and private roles before joining the IL&FS Group and chairs the Federation of Indian Chambers of Commerce and Industry’s Infrastructure Committee.
Subahoo Chordia, head of infrastructure fund business, Edelweiss Financial Services
Chordia joined Edelweiss Capital in 2007 as head of its infrastructure, industrials and real estate business. He remained in the role for nearly 10 years before moving to his present role with Edelweiss Financial Services in July 2017. Prior to joining Edelweiss, he worked with Axis Bank and IDBI Bank.