Devayan Dey, Director, Capital Projects & Infrastructure, PwC India
Globally, infrastructure spending needs (on an average annual basis) have been estimated at $3.3 trillion-$6.3 trillion. While the range is large, what is important to note is that neither end of the spectrum can be termed “small”. Further, what stands out is the estimated gap in annual investment which is close to $1 trillion. As for India, the average annual investment gap is estimated at $20 billion-$25 billion, conservatively.
Significant steps towards financing
Countries have taken several steps towards infrastructure financing, be it the US pledging a $1 trillion spend on infrastructure, the UK and Germany ramping up infrastructure spends, or China continuing to spend on infrastructure. India, too, has taken up several marquee projects including Bharatmala, Sagarmala, high-speed rail, and even moving on to the hyperloop. Globally, there is already significant political and industry buy-in on the fact that infrastructure investments are necessary. However, what remains to be a key area of concern is “whether we have a strategic plan around how the investment gap will be dealt with”. The answer is both yes and no.
Innovative instruments and investments on the rise
Over the past two decades, India has seen a significant flow of private investment through the public-private partnership (PPP) mode, making it one of the largest PPP markets globally. As per our estimates, the Indian PPP asset size in the roads and highways sector alone would be in excess of $55 billion at present. With risk-adjusted models like hybrid annuity, the PPP asset base could double in the next five years. A large part of the financing in these projects, at least half of it, comes from the private sector in the form of debt and equity.
The secondary deals market, which is primarily helping in recycling equity, has seen a sharp increase in activity. Plain vanilla deals have taken off well, rising from about $150 billion globally in 2010 to around $1,200 billion in 2016. India has seen a fair share of such deals especially in the past four to five years. As per a PwC-GIIA study, over $200 billion has been raised since 2009 through unlisted funds. Of this, a significant amount has been allocated to infrastructure, given that alternative investors like infrastructure funds, pension funds and sovereign wealth funds hold an almost 50 per cent share in equity investments made in infrastructure PPP projects. Further, an estimated $110 billion of dry powder is available through unlisted equity funds. Working capital financing through structured modalities is yet another avenue that has seen traction, especially in the absence of collaterals. In such segments, international interest has also increased.
Initiatives such as toll, operate and transfer (TOT) have brought in even non-PPP assets in the secondary deals space. Beyond that, we have seen instruments like InvITs and infrastructure debt funds kick off along with the introduction of the National Investment and Infrastructure Fund. While improvements are necessary in many aspects, there is little dearth of investment avenues. The growing interest of international investors in infrastructure assets is apparent. What also remains fascinating is the fact that apart from buyer-seller convergence slowly picking up, we do see a good number of cases where investors have turned around the assets within one to two years of acquisition. This certainly improves the overall perception about infrastructure investments in India. What we need here is little of disruptions but more of incremental improvements.
Having said that, all alternative investors get on the canvas mostly at the operational stage. While that helps recycle the capital, the issues around infrastructure financing for asset creation per se remain largely unattended.
Sustaining funding and efficiency
Traditionally, discussions around infrastructure financing have remained restricted to “financing”. There are ongoing debates around risk allocation, certainty and banking issues, for which significant efforts are being made and resolutions will take place eventually. However, most discussions have avoided three aspects that need attention for accelerating and sustaining financing from here on – funding, efficiency and an enabler (in this case, industry).
Funding for financing
A precursor to financing is “funding”. For example, annuity-based PPPs often look extremely lucrative as they provide short-term relief to the government budget. But when overused beyond a threshold, it tends to reduce fiscal flexibility and space in the long term. The UK experience is quite well known. Even under innovative debt schemes, the threat to fiscal parameters increases. We do see a significant increase in these issues today, especially in the Indian states. The key question is “how will annuity or debt be serviced? Do they have the money?”
Unfortunately, there is no simple answer to this question, except for ramping up tax and non-tax revenues. In the post-GST regime, the issue of funding is becoming even more pertinent. In the current context, unless innovative infrastructure funding is thought of, infrastructure financing may hit a roadblock resulting in reduced fund appetite and expensive financing. Current models around TOT, land value capture, advertisements, etc., have set some good examples. But clearly, we need to consciously pursue them with more rigour.
Efficiency: Build more for less
Originally, the concept of private financing emerged from the “efficiency” argument. Over time though, the emphasis on the financing gap and the role of private finance hijacked the concept of efficiency. It is probably a good time now to go back to the efficiency story. There are clearly more opportunities of building more for every penny we spend and thereby reducing the infrastructure financing gap. For example, let us take the area of transport, which is often linear in nature. Moving away from solo-linear PPP projects to network-based PPPs can have a significant impact on pricing. Increased productivity and utilisation of labour and machinery can reduce the cost and improve the productivity of every penny spent. This apart, such schemes lead to increased land value increments over a larger influence area, leading to additional revenue and boosting the “funding” story.
Enabler: This time the industry
While funding and efficiency help resolve primary level issues in infrastructure financing, secondary market infrastructure financing can also benefit from improvements. It is clear that the investment appetite is not really an issue today. In India, the secondary market is relatively mature with a mix of stressed and good assets, high/ medium/low tail periods, asset as well as platform-level forums/instruments, etc. But the key area of concern for most investors (apart from tax and regulatory issues) is the “doability” aspect, which is a direct result of the dearth of “operators” in the market, who can support investments actively rather than passively. Unfortunately, in spite of the large asset base of operating assets in the country, the legacy of pure-play construction companies still prevails. Vertical integrations in operations and maintenance can not only help in making assets in the secondary market more investable, but also present a large revenue opportunity for players.