While the situation has improved over the last five years or so, Sandeep Upadhyay, Managing Director and CEO, Centrum Infrastructure Advisory believes the country still has a long way to go in terms of attracting sovereign funds, which otherwise are keen to invest in emerging market with a stable geopolitical environment that currently prevails in India.
With general elections due this year, do you see the pace of infrastructure development sustaining at the present levels once the new government gets sworn in?
The demand for upgrading existing infrastructure facilities and creating new ones is humongous in our country. Whichever political party comes to power to form the next government, the significance and the urgency towards infrastructure spend cannot be ignored. However, given the challenging financial environment and the overhanging risks associated with the implementation of infra projects in the recent past, the government and authorities need to constantly finetune and improve the rollout plan and execution strategy. Given the significant impact of upgrading infrastructure on the social and economic index, there is no scope of complacency whatsoever. So, it is imperative to step up the speed of implementation of projects, and I am sure this would be high on the agenda of the political party which comes to power.
The infrastructure sector requires Rs 50 trillion investments by 2022. Has the country been able to effectively hardsell the potential of the Indian infra growth?
A large part of the investment required for funding projects on a sustainable basis has to come from the pension and sovereign funds, since they are best equipped to absorb the long-term nature of financing risks in the sector. One of the keys drivers to attract such marquee investors, including other sources of institutional financing, is to maintain consistency in policies and regulations. While the situation has improved over the last five years or so, we still have a long way to go in terms of attracting these funds, which otherwise are keen to invest in emerging market opportunities with a stable geopolitical environment that currently prevails in India. As far as the domestic investors go, we certainly need more specialised institutions like IIFCL, NIIF, PFC, REC, and IREDA with better understanding of risks associated with long-term financing, rather than just depending on the public sector banks, which so far have played a dominant role in infrastructure financing.
Do you find the valuation of the infrastructure projects attractive?
While the mergers and acquisition activity has picked up over the last two years or so, I have no inhibition in acknowledging that it is still a buyers' market. With investment and buyout opportunities emerging from IBC, distressed, special situation, and growth segments, there is a wide spectrum of deals available for investors to choose from. This would not have been possible without the pricing expectation from sellers that would have moderated in the backdrop of a compromised financial position. Hence it is fair to conclude that the valuation is relatively attractive from the buyer's perspective at the moment.
What initiatives do you perceive as driving the sector's growth?
In my opinion, in the current regime, the weakest link is financing. Improving the overall financial environment may possibly bring the biggest impetus required to drive growth in the infrastructure sector. Everything possible, from easing taxation structures, making the cost of borrowing cheaper, and deepening bond market, to increasing the number of specialised financial institutions should be exercised, keeping in mind a consistent policy and regulatory framework which may enable the stakeholders to give a strong message to the investor community in the coming fiscal.
What models of infrastructure funding have worked best since 2014?
The current government, after coming to power, has exhibited progressive thinking towards launching new models of development, which are very relevant in the current environment. Highway sector for once has completely moved to the asset light model. As far as the private sector goes, the financing risks have come down considerably as the authority continues to pursue the development predominantly through the EPC and HAM model. As far as greenfield development goes, for other segments within infrastructure - whether it is urban, railways, or water - the government should continue to pursue a similar asset light model till the banks and financial institutions are ready to absorb the risks associated with the typical BOT format. New trends that emerge would be driven by the monetisation of operational assets under the control of various authorities like NHAI, AAI, and IR. TOT in highways, and brownfield development initiative in airports, are good starts, and I expect, the activity in similar segments to pick up gradually.
Is there any possibility of PPP revival?
PPP format in our country needs an overhaul. The Kelkar committee report aptly suggests rationalising the stakeholder risks and pursuing a more balanced approach towards risk sharing between the government and private sector participants. Unless this is followed pragmatically and the stakeholders' dispute resolution process is expedited, I doubt if the PPP initiative would thrive in any sector or format.
Has the country been able to curtail cost?
We have certainly matured in some sectors like roads and highways; however, in general, data on curtailing cost and time overrun are not encouraging. This is due to massive inefficiencies in project planning and execution. In some cases, the delay in projects is also attributable to fundamental issues such land acquisition, clearances and approvals, or lack of clarity in the contractual and bidding framework. What is really alarming is the nature of some of these issues that have remained more or less the same over the last two decades or so, and the reforms brought about have done little to move the needle by much in terms of bringing in efficiencies in the sector.
The likelihood of total infrastructure investment gap to widen to $526 billion. How can this be avoided?
While I agree with the overall estimate of the corpus required to be deployed for the next 25 years, I expect the gap to be much more than $526 billion. The advent of investment from long-term investors like the pension and sovereign funds is refreshing. However, we need to go a long way in terms of exhibiting consistency in policy, progressive regulations, and decision-making to attract investment from these long-term institutions and multilateral funds in India on a sustainable basis. As long as we are able to move out of the traditional sources of financing and activate the alternative sources of long-term financing, including deepening of bond market, encouraging new models of monetisation like TOT and InvIT, we can effectively close the potential funding gap mentioned above.
What are some of the challenges that cannot be left hanging any longer?
As I mentioned, the weakest link as it appears at the moment is financing. While there is a concerted effort to improve the situation, perhaps it is also clear that it is not enough. So, we cannot be complacent on this front and the open issues should be addressed on priority. Apart from this, it is also critical to constantly innovate on the rollout model for implementation of projects. The risks reward matrix for the stakeholders needs to be iterated with respect to the prevailing market conditions to avoid long spells of sluggish patches in the sector.
The demand for upgrading existing infrastructure facilities and creating new ones is humongous in our country.