India infrastructure: Building confidence

Canada Pension Plan Investment Board's (CPPIB) announcement in June that it would pump INR20 billion ($322 million) into L&T Infrastructure Development Projects, the owner the largest toll-road concession portfolio in India, represented the biggest infrastructure bet the country had seen in a long time.

The deal - the pension fund's first in Indian infrastructure - is the largest since J.P. Morgan bought a 20% stake in SKIL Infrastructure for around $400 million in 2011.

It is also welcome news when considered in the context of India's vast infrastructure needs. A recent report published by Deloitte estimates that a sum equivalent to around 10% of GDP must be sunk into the asset class over the course of the 12th Five-Year Plan (covering 2012-17) in order to achieve a 9% real GDP growth rate. This is amounts to INR65.7 trillion (about $1 trillion) at current prices.

In recent years GPs have shied away from infrastructure due to factors such as delays in project approvals, access to fuel for power plants and ongoing regulatory uncertainty. Meanwhile, many investors are still looking to get a return on deals that pre-date the global financial crisis. This makes one wonder whether CPPIB's investment indicates a rebound in sentiment towards Indian infrastructure or the exception to the rule? Some might say it is the latter.

"I think there is going to be a wait and see approach in Indian infrastructure," says Vijay Pattabhiraman, managing director and chief investment officer for J.P. Morgan Asset Management's Asia infrastructure investments. "Too many people made investments in 2006 to 2008 and currently they are all looking for exits."

The same Deloitte report maintains that of the INR65.7 trillion required, half will need to come in form on debt and equity with the government providing the rest. In the absence of a mature bond market, and with many banks reluctant to lend, the equity tranche clearly has a crucial role to play in infrastructure development. In principle, the opportunity is there; the stumbling points are finding the right spots and then finding investors comfort enough to commit.

"There is lots of stuff to buy; a lot of people are looking to sell assets," says one infrastructure-focused GP, who asked not to be named. "What is tricky is finding buyers who are prepared to put a whole lot of money in."

AVCJ Research data show that $326 million was committed to six deals last year, the lowest total since the 2009 when $138 was invested across nine deals. It is just fraction of the $1.5 billion invested over 17 deals in 2010 - a peak in terms of the amount invested, but a couple of deals moved the needle considerably, namely the $435 million investment in power generation infrastructure group Asian Genco by a Morgan Stanley-led consortium.

Infrastructure investors were arguably at their most prolific during the global boom of 2006 and 2007, which saw 20 and 17 deals, respectively, raise $673 million and $1.06 billion.

Cold feet

It is largely the investments dating back to this era that have caused the backlog of exits, leaving many groups with cold feet. A number of players paid over the odds when acquiring assets through auction processes and ran into trouble when their projects faced delays and eventually started to lose money. Some will struggle to secure an exit, and certainly not at multiples close to their entry valuations.

As a result, some investors have started to shift their strategy away from the country. 3i Infrastructure, for example, started to wind down local operations last year, citing macroeconomic, market and regulatory conditions in particular. Its portfolio includes a $245 million investment in Adani Power, which was to develop a portfolio of power plants and a $102 million investment in highway developer Soma Enterprise. Both suffered losses due to project delays.

To underscore the scale of the problem, the government's Economic Survey released in July revealed that of 239 infrastructure projects costing more than INR10 billion, 110 were delayed. Meanwhile, the total cost overrun of these 239 projects is estimated to be at around INR1.5 trillion, or 21.3% of the total cost.
"It has been a poor few years, mostly from a policy perspective," says Deepto Roy, a partner with law firm Khaitan & Co. "What we have seen since the new government came into place is a lot more emphasis being put on policy improvements in infrastructure."

Private equity has suffered due to policy uncertainty over issues such as changes in model concession agreements and pre-qualification criteria for bidding, notably in the in road sector; compensatory tariffs; restructuring of state utilities, for example in the power sector; and tariff reforms in the port sector.

Meanwhile, those who have been investing recently are focusing on operating projects so as to avoid risk relating to project approvals and delays. CDC Group, the UK government's development finance arm, is one such institution. As recently as November, CDC pledged $200 million to IDFC Alternatives' India Infrastructure Fund 2 (IIF2), its largest-ever LP commitment to an Indian investment fund. The vehicle tis targeting $1 billion and will provide long-term, equity investment for both construction and operating infrastructure projects across the country. CDC subsequently invested $25 million in Green Infra, an independent renewable power producer backed by IDFC Alternatives.

"The most immediate opportunity we saw was in brownfield and operating assets," says Alagappan Murugappan, managing director for CDC's Asia Funds. "Even IDFC has made it clear that, initially at least, they want to focus on operating assets before they go into the greenfield."

Policy solutions

In order to attract more private equity investment in greenfield projects - essential if it is to achieve its infrastructure aims - the government must implement reforms. Accordingly, infrastructure became a focus of Finance Minister Arun Jaitley's Union Budget presented earlier this year. Not only did the minister make large allocations to infrastructure, but he also set out a better policy framework for the execution of projects in order to attract investors.

One the first proposals was to set up a so-called eBiz platform to give transparency and accountability to the process of getting statutory clearance for activities including land acquisition, environment and forest clearances - a major hurdle for project implementation. The budget also addressed the need to revisit the public-private partnership (PPP) model by proposing to set up a 3P India, an institution intended to support PPPs - with a corpus of INR5 billion.

Another key decision was to announce infrastructure investment trusts. Much like real estate investment trusts (REITs), these vehicles offer an alternative liquidity channel to investors by allowing completed projects to be spun out into listed trusts that generate consistent yields through rental or other income streams.

However, issues over infrastructure come down to macroeconomics too. India's economic performance was disappointing in 2013, characterized by sluggish GDP growth and rapid inflation, and this added to investors' concerns. Recent improvements indicate the Indian economy will continue on an upward trajectory but progress is likely to be slow.

"For most investors nothing much has changed in the last year except for us having a new captain at the helm in Modi," says J.P. Morgan's Pattabhiraman, who compares Modi's premiership as being in charge of a large battleship. "It will take him at least two year to steer the ship in the direction he wants it to turn."

In the meantime, an improvement in investor confidence - especially where greenfield infrastructure is concerned - depends on policies being clearer and more concrete. Only then will investments by the likes of CPPIB and CDC seem more of a rule than an exception.

"The devil is in the details of implementation. The government needs to ensure that at a local level it can streamline approval processes and ensure reform takes place," says CDC's Murugappan."If they can resolve this, and there is evidence of it, then a lot more money will flow into India infrastructure."

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• South Asia
• Infrastructure
• Investments
• India
• Infrastructure
• IDFC Private Equity
• CDC Group
• JPMorgan Chase & Co
• CPPIB