India Infrastructure - a long term opportunity for knowledge investor
Severe infrastructure deficit in India means that the economy needs a minimum of US$100Bn worth of investments every year - at 5% of the country's GDP it's well lower than China's last decade average of 8.5%. Yet the significant size of the opportunity has failed many a private investor and lender in delivering the promised risk adjusted returns. It's not surprising. For, while on one hand, adequate and appropriate framework lacked the sector, on the other hand, several inherent risks fundamental to the sector were ignored or not priced in appropriately by the investors, developers and lenders. All this points to the knowledge capital and governance deficit, which unfortunately has been the highlighting feature of the India infrastructure story so far.
On policy and regulatory framework, India has had several shortfalls - expected of an emerging market, where private investment and financing of infrastructure is relatively young and evolving. For instance, even though the power generation capacity has doubled to c.250GW in the last decade, largely dominated by thermal coal, per capita power consumption is still at a low of c.900 units. Problem is further aggravated when utilization of power generating plants has remained low owing to both the lack of fuel supply and the poor off-take by the state discoms. For greenfield projects, challenges have been multi-fold across land, fuel and equipment availability.
Several corrective measures have been undertaken of late by the Government of India to address these fundamental risks. Coal mining related issues are being addressed following a Supreme Court directive that effectively cancelled all the mining licenses owing to what the highest court felt were allocation process related lapses. A transparent competitive bidding of the same mines has ensured effective correction providing much needed confidence to the private investor. With this significant policy change, India has moved on to open up its coal industry to commercial mining, signaling a clear shift from the past towards allowing private players full participation in the sector. Further, the largest coal producer in the world, Coal India Limited, in the country is being pushed to increase production to meet an ambitious target of 1 billion ton by 2020. However, key will be evacuation of coal and related hinterland connectivity. Towards the latter, about 50 rail projects have been identified to connect these mines with delivery points.
Transmission and distribution (T&D) losses in India have been high historically. With focus around reducing the technical losses, the T&D losses in India have been reduced to about 24% but are still very high compared to global standards. An amendment to the historic Electricity Act 2003 is being sought by the Government of India to implement the carriage and content model, as is followed in the UK, allowing a separate power supplier and separate electricity distributor or distributors. The power network would be owned by one company while the suppliers of electricity could be more than one. At present, power discoms in India supply as well as manage network that provides electricity for residential as well as commercial purposes. Further, the amendment to the Act seeks to promote provision of electricity employing smart grid concept. The suggested amendment also provides for the installation of smart meters for proper accounting and measurement of the consumption and metering of electricity. Passage of these key amendments by the Parliament would go a long way in ensuring an efficient, leakage-free and profitable T&D system in India.
Recognising environment and climate change related concerns owing to fossil fuel usage for electricity generation, the Government has revised renewable energy targets to an ambitious 100GW for solar and 60GW for wind power by 2022, expecting an investment of c.US$200Bn in the renewable energy space in India. Achievement of these targets will be largely determined by affordability of such green power without providing support through government subsidy. With per unit capex for solar power seeing steep decline over the last couple of years and the Indian renewable energy program predicated on commercial viability of the sector without subsidy support from government has ensured intense activity in this 'sunrise' sector in India. Volumes needed should guarantee economies of scale for solar power equipment and wind turbine manufacturers to further ensure grid parity with what's predominantly thermal coal power consumption in India.
The road sector development in India has been a mixed bag. While there are 250 operating road assets employing the PPP model, there are an equal number awaiting commercial operation owing to controllable risks like land acquisition, rights of way et al. Unless the concessioning authorities at the federal and state level share such risk equally with the private developer/ concessionaire, profitability of the sector shall remain a question mark. It's good to note introduction of a 'hybrid' model by the government whereby the concessioning authority is expected to share significant commercial risk involved in the project - suggested to be 40% of the total project cost. With this expected alignment of interest, the project execution should be more efficient ensuring timely start of commercial operation.
Immediate focus in ensuring completion of existing projects is key in restoring confidence of private investment in the sector. Equally critical will be availability of basic resources like land and skilled labour. Ironically, India never had a formal land acquisition law until a couple of years back when the comprehensive Land Acquisition, Rehabilitation and Resettlement Act, 2013 came into force. Addressing certain key inefficiencies in the Act, the present government is working hard to ensure efficient and timely availability of land for effective delivery of infrastructure projects. Similarly, the government aims to improve upon the existing target of skilling half a billion youth by 2020 to ensure minimum gap between education institutions and the labour market.
A year after the current majority government took office, a lot has been done on the policy front requiring governmental effort. However, concerns remain around private investment cycle re-starting. Affirmative action through increased public investment announced in the last Union of India budget should provide needed confidence to the losses ridden high cost balance sheets of domestic private developers to shape up in time and partake in the great infrastructure building opportunity in the country over the long term - hopefully, learning from lessons of the past.Author: Ajay Jain, Managing Partner, Indusbridge Capital Advisors LLP(Previously, Head - India Infrastructure Investments for SNC Lavalin Inc; Founding senior member of c.US$1bn India Infrastructure Fund sponsored by IDFC and Citigroup)