The role of private equity firms in financing brownfield assets has been expanding. Projects under the National Infrastructure Pipeline are lucrative opportunities for investors; however, implementation is the key. Investor interest in the government’s privatisation programme continues to be high. In an interview with Indian Infrastructure, Deep Gupta, managing director and co-head of Macquarie Asset Management’s Real Assets business in Southeast Asia and India, shares his views on the current infrastructure financing scenario, the role of asset monetisation, key challenges and the future outlook…
What has been the progress in the infrastructure financing sector over the past one year?
There have been significant changes in the infrastructure financing market. The brownfield infrastructure landscape has become substantially investible as a result of the general policy framework. In addition, assets have shifted from weaker balance sheets to stronger and healthier ones, particularly in recent years. Numerous institutional investors, such as funds managed by Macquarie, sovereign wealth funds and pension funds have made significant investments in India’s infrastructure market. Infrastructure is evolving into a sector where institutional funds with patient capital now account for the majority of investments.
What has been the impact of the key initiatives taken by the government and regulators?
The government has consistently encouraged private participation in infrastructure assets over the past decade by framing policies and frameworks that allow institutional investors to participate. The regulatory framework has also evolved and, in general, remains progressive and consistent. It would be important to see the implementation of the National Monetisation Pipeline.
In terms of the future, the bond market must broaden in order to provide competitive rates for projects, as the current reliance on bank lending for long-gestation projects limits fixed rate debt and long tenor debt. The government’s efforts for green bonds are much appreciated and once it is recognised that the projects being funded feature a green element, it will be possible to gain access to a cheaper source of long-term financing.
“The bond market must broaden in order to provide competitive fixed rates for projects, as the current reliance on bank lending for long-gestation projects exposes assets to floating interest rates.”
What has been the experience with asset monetisation so far?
As a global asset manager, Macquarie managed funds that preferred to invest in projects where they could play an active role in generating sustainable value for various stakeholders – the users, the communities and the investors.
The first toll-operate-transfer (TOT) bundle acquired by Macquarie Asia Infrastructure Fund 2 (MAIF 2), a Macquarie-managed fund, has been a successful privatisation initiative by the government. MAIF 2 has established a strong organisation, brought best-in-class governance and world-class worker safety across these roads. Future Macquarie-managed funds would be interested in the government’s privatisation programme across sectors such as roads, transmission, gas pipelines and railways.
What are the key challenges that remain unaddressed?
In general, the government’s consultation with the stakeholders has been promising. Specifically, the transaction size is a potential area for consideration. A larger-sized transaction allows institutional investors to spend time and resources preparing for an auction.
Another feedback is with respect to the reserve price of infrastructure assets which is derived by consultants and in a point of time. To reflect the true value of the assets, if an auction is held with sufficient bidders, a transparent price should be established accordingly.
What is the sector outlook for the next one to two years?
The resilience of the infrastructure sector was witnessed during Covid-19, when it demonstrated a strong rebound and return to normalcy. In the road sector, traffic has exceeded pre-Covid levels, driven by strong cargo and passenger movements on trunk routes.
Similar trends were seen across the renewable energy, power and transmission sectors. We are continuing to see a rebound in the airport sector as well which was impacted due to travel restrictions.
Earlier this year, Macquarie announced the final close of its third Asia-Pacific regional infrastructure fund (MAIF 3). Macquarie continues to look for opportunities across the infrastructure space.