Our focus will be on financing infrastructure in economically weaker states in India

IFC’s emphasis will be on sectors like agriculture, power, water and ports in the years to come, as the World Bank’s arm will invest around $20 million in Pragati India Fund, which will focus India’s low-income states like Rajasthan, Orissa, Meghalaya and Bihar. Anita Marangoly George, Director, Infrastructure–Asia, International Finance Corporation (IFC), tells Rahul Kamat why, in spite of the current economic scenario, India still remains the favourable country for new investors.

India has a reduced growth rate and several policy issues are hampering investment. What is the investment strategy IFC has adopted in this new environnment?
India is the largest country with good exposure. We had invested around $900 million in India last year (July-June). As far as our investment strategy is con­cerned, we are here for long term business. We invest in projects with long gestation periods and usually try to stick around with our sponsors who we work with on long term basis. Interestingly, IFC services have wit­nessed a major demand when the market has wit­nessed a downward trend. Our role is to have a developmental impact and target markets that are new and emerging.

Subsequently, do you have a significant risk appetite to make sensible investments?
We definitely have a sensible risk appetite and risk return base appetite. IFC is unique in that we invest only in emerging markets. So our mandate is to support the private sector and its growth in the emerging markets for which we are very well equipped to counter the risk and understand the markets. We analyse the ups and downs in the market and accordingly we invest.

Hence, we act as a catalyst to attract the private investors and financiers to approach the emerging sectors in the markets. A case in point, we had invested in a hydro-based power plant in India. Local banks were not comfortable to finance such projects, so in this case we structured the entire financing module while under­­standing the risk involved in it and invested in the project.

Similarly, we had invested in India’s first grid-connected solar power project, and since then we have been investing in such projects more than any other financial institution.

IFC has a dual strategy of directly investing in companies and putting money into private equity and venture capital funds. What are the factors that determine the investment choice?
We have three strategic pillars: growth, climate change and global integration. Each project in the market has to pass through our filters for positive impact. So you can witness that IFC is being involved in investing a lot in renewable energy because that has a direct impact on climate change. It also helps in terms of inclusive growth because access to electricity is a key path of growth. And the third on global integration has quite a few projects, for example, we are doing a trans­mission line between Nepal and India. It will help us to tap the hydro power capacity in Nepal.

However, we do not see ourselves as the only player in town who can do this and obviously we come across as private equity funds. In fact, many PE firms have approached us because they know that if IFC makes an investment as a partner in their venture funds, they can leverage on the brand IFC. We seek funds that can reach smaller firms whom we may not directly be reaching out to. Recently, we invested in a fund that invests in low income states, and that is a high priority for us as part of our inclusive growth agenda.

Have you seen good exits for IFC’s PE investments in India?
IFC has seen exits through IPOs in India, although, in our equity investments we tend to be a long-term partner, often staying for 7-8 years on average. We have partially exited Usha Martin (where our first investment was in 2002) and BILT (2004).

According to you, which sectors have maximum potential to invest in?
You must have witnessed the recent power cuts across the country recently. And so, for us, power would be the key sector to invest. As I mentioned earlier, IFC has put a lot of efforts in the power sector, mainly in renewable energy.

Another sector which has great potential is water. IFC has been offering both advisory and investment services. As a result, we had made an effort to stay focus on the water sector. Meanwhile, we are also looking at sectors like health and affordable housing. We would like to structure our investment in such a way as to make private projects financially sustainable.

You have also made heavy investments in the ports sector…
Globally we have done more than 50 transactions for different kinds of port projects which include both container terminal and bulk commodity terminals. In Asia, we have made a successful investment in the South Asia Gateway Terminal in Colombo and in India we have made an investment in Visakhapatnam Port. At present, we are considering investing in two ports which I cannot name.

I understand Gujarat Pipavav is under consideration as well.
Yes, it is one of them, but it is premature to talk about it.

Power sector is under a lot of stress as bankers have curbed the investment. What are the steps needed to improve the viability concerns?
Most of the state utilities despite of hike in tariffs have not been able to recover from its debt ridden situation. The recent Northern and Eastern Grid collapse has made the Centre and state governments understand the importance of adequate power genera­tion and curb the transmission and distribution losses. Since India has been blessed with natural resources such as wind and solar, the government should leverage the advantage from them.

To some extent, the government is proactive in giving push to the renewable energy (RE) sector by ince­n­­tivising it. Earlier, India barely figured on the RE charts, whereas now it is the fifth largest RE nation in the world. We are working with RE companies and in the next five months you will hear several deals that we have closed.

Jawaharlal Nehru National Urban Renewable Mission (JNNURM), a public scheme for urban development, has not been so attractive for private players. But the government has approached IFC to set up a mechanism which can attract the private sector. Can you elaborate?
When JNNURM started, IFC provided much feed­back to the government on bringing in more private sector involvement on public-private partnership (PPP) and engineering, procurement, construction (EPC) models. I have observed that many private players who chose the EPC route saw compounded annual growth rates (CAGRs) of 30-40 per cent over five years. So the government is more inclined towards awarding projects under EPC segment for JNNURM-I. But for JNNURM-II, the government will focus more on awarding projects under PPP segment, which was not such a big hit in the first phase. Earlier this week, we had discussion with the Ministry of Urban Development; they are very keen to implement projects on PPP.

But according to private players, PPP model is not a feasible concept in JNNURM because of the size of the projects from which the return on investment is not so attractive. What has been your experience?
In my view, there are several types of projects involved in JNNURM, which can be implemented based on PPP. One of them was sewerage network for Thane region. This particular project required an investment of $100 million which is viable for any private player to bid for but such projects will not give private players to recover cost from the users. Although the project is based on BOT, the collection will be done by the Municipal Authority, and not by private player. Hence, the government is endeavouring to develop a hybrid solution for such projects to make them look attractive for private investment back-up.

Recently, the Cabinet Committee on Infrastructure has given its approval for monitoring PPP projects in India. Surely that comes as a sigh of relief for a financier like you?
Definitely. It is a good idea and in the right direction. We also in mid-2000 had done a review of all PPP projects in India and came out with an interesting observation which includes the size, type and the sectors involved in PPP section. For us, it was an opportunity to learn because while India is one of the largest markets for PPP, we are nowhere near to the developing countries. I can say that India is just a drop in the ocean as far as PPP market is concern. And, the monitoring system for PPP would definitely change this situation, where government can track the progress of the projects, its hindrances etc.

This system can be disseminated to states too, given that many states have undertaken PPP projects. IFC has been working as an advisory group with many state governments on PPP projects to help and bring them out in the market, where it will attract private players.

How do you see the mix of your business in India in the next two years?
The advisory business is growing extremely well. We see huge demand for it. We are working on PPP projects in Rajasthan, Orissa, Bihar and Meghalaya. We see great potential to develop new market opportunities. On the investment side too, our balance is well placed. Investing in Pragati India Fund is also just one avenue of going into low-income states further.

Since Pragati India Fund will focus on low income states, which states have you identified as low-income states?
Pragati India Fund will focus on SMEs in low-income states. It will provide growth capital to start-ups outside major urban centres, creating jobs and promoting inclusive growth. SMEs typically receive only 5 per cent of all the PE capital, forcing them to rely on high-cost borrowing. The fund is planning to raise total amounts of about $100 million in its first close and IFC has committed about $20 million. This fund would be able to help small and medium enterprises in these low income states to bring them to a certain size and make them more investable not only for IFC but for all the private equity funds that we have in the country who are looking at these types of new opportunities to invest in companies.

The fund is more focused on geography than sector. But we expect that they (states) will have some inte­resting transaction in sectors like healthcare. The states include Bihar, Chhattisgarh, Jharkhand, Madhya Pradesh, Orissa, Rajasthan, Uttar Pradesh and West Bengal.

What are the disbursements from IFC in 2011-12 as well as first quarter of the current financial year?
In 2011-2012, we had committed to invest around $900 million and has a target of around $1 billion in the nest year. In terms of projects we have so far invested in more than 40 projects across various sectors.

We have invested roughly about a third each in infrastructure, financial markets and services (including private equity funds), and in manufacturing and agri­culture business.

Our debt-equity ratio is about 80:20, and we are try­ing to see what we can do sensibly on the equity side both directly as well as through private equity funds.