India: guiding growth through infrastructure development
April 2019 | SPECIAL REPORT: INFRASTRUCTURE & PROJECT FINANCE
Financier Worldwide Magazine
April 2019 Issue
India today is at a strategic inflexion point of greater economic prosperity and unprecedented economic boom. India’s journey on the path of economic reform has transformed it into one of the world’s fastest growing economies. Infrastructure has been one of the cornerstones of the country’s development, with exponential growth over the past decade.
The new India has an evolved outlook towards infrastructure development in the country. There has been a paradigm shift in the approach to building infrastructure, from need-based to an integrated long-term development strategy. All infrastructure sectors in India provide excellent opportunities, with public-private partnerships (PPPs) identified as the most suitable mode for implementation and funding of most infrastructure projects.
The roads & highways sector has been exemplary in establishing PPPs. With a plan to double national highways in India to 200,000km, the Bharatmala Programme was launched to develop 66,100km of additional road network, including expressways, economic corridors, international and border roads. Innovative financing models such as the recycling of existing and operational roads are being implemented to generate funding for greenfield road construction.
India has been clocking consistent double-digit growth in the domestic aviation market, putting it on track to become the third-largest in the world by 2027. To meet the huge demand, 100 new airports will be built over the next 15 years and 400 existing airports will be upgraded.
The railways sector has also recently opened up to 100 percent foreign direct investment (FDI). Six dedicated freight corridors are being built to minimise freight movement time. Seven high speed railways are also being built across the country, with the first already under implementation. Four hundred railway stations are also being redeveloped as central points in cities.
Significant physical infrastructure is being created to accommodate India’s growing population through the ‘Housing for All Mission’ by building 100 new smart cities, rejuvenating 500 existing cities and providing affordable houses to all by 2022.
By 2022, India is targeting installation of 227GW of renewable energy capacity, which will require a four-fold growth in the sector from the existing installed capacity of 60GW. By the same year, India will ensure that every house has electricity, which will be achieved through additional renewable energy sources.
The country’s mammoth infrastructure needs are estimated to reach $4 trillion by 2040. The Indian government has increased its infrastructure spending significantly in the last four years to over $60bn annually, to reach targets for infrastructure development. However, to bridge the gap, the country has developed a comprehensive institutional framework for private participation in infrastructure.
Institutional investors, including sovereign wealth funds, pension funds and private equity funds, are becoming active players in the Indian infrastructure growth story. Investing in infrastructure assets, characterised by long-term contractual arrangements and regulation, is a means to reduce portfolio risks through diversification and to access higher risk-adjusted returns for institutional investors. These investors also expect infrastructure to provide additional benefits, such as inflation-linked returns and long-term stable cash flows. Institutional investors have increasingly participated in the financing, building and operating of infrastructure through PPPs. The aggregate value of global infrastructure investments reached its highest level in 2016, at $413bn. Investor appetite for infrastructure has grown steadily since the global financial crisis. Long-term patient capital owners are increasingly adding infrastructure to their asset allocation.
The progressive PPP framework has attracted various institutional investors to include India in their infrastructure allocations. Additionally, India now offers a very mature secondary market for exits, which adds to the attraction. Canadian pension funds are a good example. Canada represents 9 percent of the total universe of assets under management and is home to some of the largest and most experienced infrastructure investors. Five major Canadian investors (Brookfield, CPPIB, Fairfax, CDPQ and PSPIB) have invested about $20bn in India, focusing on national highways, airports, real estate and logistics assets. To date, these investors in aggregate control over 1000km of national highway concessions, one airport, multiple logistics assets and a significant chunk of commercial real estate. All these funds have directly or indirectly established their presence in India with dedicated teams that are growing fast. One of these pension funds is committed to investing more than $20bn in India over the next five years.
To give further impetus to private investments in the county, the government has established a new asset class – recycling of infrastructure assets. ‘Asset recycling’ as a concept refers to the monetisation of existing assets that are operational and revenue generating. Monetisation requires the private concessionaire to pay a lump sum upfront to the authority against the right to collect revenue from the asset for the term of the concession. This model has been established very successfully in India.
The maiden project to be executed under this model was the recycling of operational roads by the National Highways Authority of India (NHAI). NHAI identified nine of its operational tolling roads and bundled them together, giving away the right to toll them for 30 years, along with responsibility to operate and maintain the roads, to a private party. The authority spent over a year creating the right model and screening investors, both domestic and international. The creation of an efficient model, which minimises risks being taken by the private party and promotes transparency in information sharing, brought significant value to the government. Australian fund manager Macquarie won the bid for these assets at a quote price of $1.5bn, against the base price set at $1bn by NHAI. The project received bids from three other international and domestic institutional investors, including Canadian fund manager Brookfield, IRB-Autostrade and Roadis-NIIF. The success of this bid showcases the maturity and attractiveness of Indian infrastructure.
Various other asset classes are now emerging. India recently privatised six of its airports, where the bid parameter was revenue share per passenger. All institutional investors with a presence in India, such as international airport operators and domestic conglomerates, bid for these six airports. Domestic giant Adani, which owns ports and logistics parks in the country, won all six bids, which showcases its bullish approach towards the domestic aviation industry.
Similarly, India is undertaking a massive exercise to privatise its city gas distribution. In this endeavour, it has brought 70 percent of its population under the city gas network, wherein 228 cities have been bid out to private parties for setting up compressed gas pumps and domestic piped natural gas (PNG) connections. Institutional investors have forayed into this area, with fund managers like I Squared Capital setting up platforms to bid for these long-term city gas distribution projects.
India has created various other asset classes which present opportunities to institutional investors. One very interesting model currently being tested is procurement of rolling stock (coaches) for metro operations. Delhi Metro is the largest metro establishment in the country, running over 216km in New Delhi. This entity has been procuring rolling stock by way of funding received from Japan by way of G2G lending. With a view to becoming self-sustainable in the future, Delhi Metro identified a model whereby rolling stock will be made available to it on a lease basis, where payment is made based on the availability of trains. This model has been created to attract long term patient capital owners, such as institutional investors, which can partner with rolling stock manufacturers to provide trains under a PPP model instead of upfront procurement. After elaborate stakeholder discussions, the model is being tested out for the first project for 100 coaches in March 2019. If successful, the same model will be adopted for metros to be constructed in more than 50 cities across India. This alone is an asset class worth more than $20bn.
These are just few examples of the way infrastructure assets have evolved in India. The government is working aggressively to identify various other asset classes which can be monetised in a similar fashion. These include transmission lines, warehouses, oil strategic reserves and telecom towers, to name a few.
The most tangible evidence of a nation’s progress is its infrastructure. The world has witnessed how highways turned around the US economy, and how ports and shipping gave much-needed impetus to China. It is now India’s turn.
Prerna Soni is the principal investment specialist at Invest India. She can be contacted by email: firstname.lastname@example.org.
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