Foreign investors vie for deals in India’s infrastructure sector, but hurdles persist

As if stalled projects, debt-laden developers and weak overall growth weren't enough, these last few weeks have seen further bits of bad news descend on Indian infrastructure. First came the news that the world's largest India-dedicated infrastructure fund, 3i, with a corpus of around $1.2 billion, would make no new investments in India — the value of its Indian investments fell by around 17% in 2012-13.

"While the case for infrastructure development in India remains unaltered, private infrastructure investment in India has faced more political, market and macroeconomic challenges than we expected when we initially made our commitment to the India Fund in 2007," said the board in its 2012-13 review.

Barely a week later came the news that the Tatas would buy out another fund Actis, from a roads sector joint venture the two had set up three years ago. This time the news was better — Actis is not disengaging wholly from the country but rejigging its portfolio of investments to focus on the power sector.

And the qualified bad news turns into partial good news when you dig deeper. Sector experts told ET Magazine that even as some foreign investors throw up their hands in disgust and leave, there are others, both foreign and domestic, looking for a good deal. "We believe this sector [specifically roads] has huge potential," says Sanjay Ubale, managing director and chief executive of Tata Realty and Infrastructure Ltd (TRIL). "There is a lot of value to be found in a number of projects," he adds. TRIL Roads, a subsidiary (and which was Actis' venture partner), recently acquired stakes in three toll road projects in Tamil Nadu from IVRCL, the Andhra-based developer. But there's a caveat here as well. There are definitely investors from India and overseas looking for bargains, but will any deals actually happen?

If they do, and it's a big if, such deals could go some way to relieve developers of some of their debt burden and contribute toward lifting sentiment in the sector. Also, they would come at the right time, when Indian banks have little leeway in extending further funding. But what's likely to hold investors back from signing on the dotted line?

The PPP Cycle

The pall of gloom over infrastructure, to some extent, is almost welcome, since it provides a big, and perhaps much needed, corrective to all the hype over public private partnerships (PPPs) in the years that preceded it.

Indeed, as securities firm Espirito Santo pointed out in a research report last month, such boom-bust cycles of investment are hardly unique to India. "PPP investment has often been a cycle of hype and then disillusion, as infra players become overly optimistic about their execution capabilities, government reform and future forecasts, only for those expectations to come crashing down," says the report, pointing to examples in Latin America and Southeast Asia in the '90s and 2000s.

In Latin America for instance, the sector was opened up during the '80s and '90s, and a private sector boom ensued. However, macroeconomic problems caused an eventual slump and over 30% of projects were renegotiated by governments.

Perhaps the most visible evidence of the 'hype' in India's case was in road projects in the past couple of years, with players bidding as much as a few hundred crores in premium to the government, to bag projects which were decidedly unviable at that price.

Another example is the boom-bust cycle in thermal power plants, as dozens of players scrambled to set up power projects in Chhattisgarh and Jharkhand, with little thought to where the fuel would come from. A third example, as ET has reported, was the signing of dozens of hydropower projects in Arunachal, again, with little thought to viability.

India, according to the Espirito Santo analysts, is at a stage in the PPP cycle where government is taking at least some action to fix outstanding problems, private players have moderated their expectations, interest rates are set to decline, and even fuel risks, on coal for instance, should gradually ease. To put it more bluntly, the sector has hit rock bottom, and there's only one way it can go from here. "...Many of the issues plaguing the sector are cyclical in nature rather than structural," says the report.

Fresh Entrants

Or perhaps not. "If you go by the number of people visiting the country, then yes, there is substantial interest in investing in India," says Athar Shahab, chief executive of Uniquest Infra Ventures, a joint venture of Khazanah, the Malaysian government's sovereign wealth fund, and IDFC. "But I am not sure how many deals will actually happen in the current environment."