$40-50 bn PE is needed in five years

M K Sinha, President and CEO, IDFC Project Equity Company, explains why private equity will rally through a period of concern about infrastructure.

What are the major issues today in infrastructure finance in our new environment?
Although the projects are finan­ceable, execution delays can render pro­jects unprofitable. We have to cross the last hurdle of execution in developing privately sponsored infra­structure, requiring a balancing of stake­holder interests: forest clearance, land acquisition, perm­its and clearances, land acquisition, utility shifting in the road sector, fuel and coal, per­mi­ssions relating to mining and land acq­ui­sition in the power sector, regul­ation issues such as the Model Concession Agreement in railway sector. Governance issue has come back to haunt the telecom sector.

The government wills infra projects, rather than a viable plan initiating it. How would you see that issue today?
The pri­vate sector should not look at infrastructure as an unreasonable pro­fit making opport­unity. If you start making 25-30 per cent equity returns, you should start getting wor­ried, because you are serving a public needed essential serv­ice Acceptable levels of prof­it may be in the range of 14-18 per cent equity return.

Infrastructure is an essent­ial sector. The interests of all three stake­ho­lders-gov­er­­n­­ment, private player and public-needs to be pro­t­ec­ted. The only way to ensure this balance is to have an inde­pendent regul­ator. In the abs­ence of indep­en­dence, policy will be diff­icult to change. For e­x­­­a­m­ple, Delhi Electri­city Distribution has not been able to revise tariffs because regulators have not per­mitted it. These dis­tri­bu­tion util­ities have run up los­ses of Rs 1,900 crore.

How do you see things unfolding for PE investors in infrastructure as things stand today?
What holds true for a private sponsor should do so for PE investors as well: investors need to be realistic about the kind of returns in infrastructure investments as against traditional growth equity where you make 25 per cent kind of return for 2-3 years and then re-invest. Very few investment opportunities offer that kind of return on sustained basis. Infrastructure offers that opportunity, if it is done in the right way.

Could you talk about opportunities specifically for PE?
In the 12th Plan, quarter of private funding comes from the PE stakes. Anywhere between $40-50 billion is needed. And we only have a $1 billion fund!

A PE fund typically is usually high risk-high return, but by the nature of infrastructure, the risk is considerably lower, too, right?
An infrastructure fund is meant to invest in relatively low risk assets because the public uses the assets everyday. Essential services will rake in lower returns in IRR, but since this is over the long term, investors make a money multiple comparable to conventional PE.

It's said the exit route for the private equity in infrastructure is limited.

The concern is more to do with making the inve­stment into Special Purpose Vehicles (SPVs). When you invest in infrastructure, it is ideal to invest at the asset level where you have minimum liquidity. You need to be creative about your exit options: we follow multiple exit options and that is the most challenging bit of our fund management.

Can you describe those options?
You can follow aggregation strategies, a trade sale through a strategic investor, or a packaged sale of a uni­form portfolio to an annuity seeker. In an ultimate case, you could have the lifting of the full fund. The traditional exit provision which are IPO of the asset or a strategic sale is another option.