Shailesh Pathak, CEO, L&T Infrastructure Development Projects recommends that even as India moves towards becoming the world's third largest economy by the next decade, the infrastructure sector needs to focus on the timely execution of projects. Speaking to INFRASTRUCTURE TODAY in New Delhi, he says that international investors see more value in completed infrastructure projects.
With the general elections due, do you see the pace of infrastructure development sustaining at the present levels?
All leaders, cutting across party lines, talk about how important infrastructure is for the growth story of India. It is more a question of execution and financing: How much money can be put into infrastructure? Would it come from the government or from the private sector? And that number can only go up. We are fortunate to have Larsen and Toubro (L&T) as well as Canada Pension Plan Investment Board (CPPIB), Canada's largest pension fund, as our shareholders, and we are quite sanguine about the next decade.
Do you find the valuation of the ongoing and proposed infrastructure projects attractive for investors?
We have seen that completed infrastructure assets with stable cash flows have substantial interest from international dollars - mainly global pension funds and insurance companies. We at L&T IDPL launched our infrastructure investment trust (InvIT) in May 2018, the first privately-placed InvIT. Out of the Rs 37 billion raised, 55 per cent is from global investors. However, international investors are not so keen about infrastructure construction projects. Since 2009, I have been recommending that the government could finance infrastructure project construction and, once completed, the infrastructure asset should be offered to long-term patient capital, including global investors. This was quoted in The Economist magazine article, 'RIPPP' in December 2012. The toll-operate-transfer (TOT) of highway projects by the National Highways Authority of India (NHAI) is based on this premise.
But given its relative novelty in the Indian market, is InvIT a safe investment bet at this point in time?
The assumption in an InvIT is that these are stable cash flow yielding assets with proven tolling record of over two years. Such assets would deliver cash-flows on a risk-mitigated basis for the next 10, 15, or 20 years depending on concession life. That is a fair assumption because India's roads will not run short of traffic and Indian airports will not run short of passengers for at least the next two decades.
What models of funding have worked best for the sector since 2014?
The best model for completed infrastructure assets is TOT, successfully executed by NHAI. In Bundle 1, NHAI delivered about 690 km of highway in over nine projects, which are completed and earning toll in the states of Gujarat, Andhra Pradesh, and Orissa. The reserve price was Rs 62.58 billion, while the winning bidder paid Rs 96.81 billion. That is how governments at all levels can monetise an asset. The best example of constructing infrastructure is the Delhi Metro or the Dedicated Freight Corridor, where you have guaranteed funding by the government and multilateral or bilateral agencies such as Japan Bank for International Cooperation (JBIC), coupled with efficient project management and execution. It includes two distinct approaches: one for monetisation and another for construction.
Is there any possibility of a revival in PPP projects in telecom and power?
Telecom is a largely private investment with little government participation. There are several examples. Undeniably, the impressive drop in data tariffs is driven by competition among private telecom majors. On the power front, financing has been available for renewable energy projects, largely by private developers. Given the International Solar Alliance (ISA) and India's target of 175 GW of renewable energy, this segment would continue to attract interest from private investors.
Has the country also been able to curtail cost and time overruns?
Of course! Take L&T for instance. Our group has delivered several marquee infrastructure projects over the last decade within cost and time. At the same time, as a large company, we are a leader in digitalisation and use technology across all our businesses to control costs and enhance revenues using artificial intelligence and machine learning.
The likelihood of total infrastructure investment gap to widen to $526 billion in next 25 years. How can this situation be best avoided?
This is more of a macro question that is discussed in conferences by observers. Ultimately, projects are at the micro level. Whether allocated funding for infrastructure is being converted into infrastructure construction at a fast-enough rate is the real challenge. In the next decade, India is going to emerge as the third largest economy in the world. To ensure that, our execution capacity in infrastructure construction needs to rise rapidly. Today, if we have the capacity to deploy, let us say, Rs 1 trillion in infrastructure and, of that amount, not even Rs 200 billion is actually constructed and spent in projects, we certainly have a problem that deserves our immediate attention.
Which initiatives do you perceive as driving the sector's growth in FY19?
In terms of construction, every single sector, and in terms of investment, every single operating asset irrespective of the sector. Today, a completed power transmission line is amenable for investment by a global pension fund. And, so are completed metro rail projects in Delhi and Hyderabad, among others. They can easily be monetised through long-term investors, and the amounts thus raised may be re-deployed for fresh construction, creating a cycle for investments.
Although foreign pension funds have been around in the country for over a decade, what has suddenly got them interested in the infrastructure sector?
India's growth projections over the next decade are unanimous in predicting that the next decade is going to see sustained growth rates. This attracts long-term, patient-capital looking for risk-mitigated cash flows from infrastructure assets. As mentioned earlier, India is expected to become the world's third largest economy by 2030, behind only the US and China. Ceteris paribus, that is, with other conditions remaining the same, it is 11 years and counting.
Does that mean we will see a lot more interest from them in the coming days?
Most certainly! Several Canadian and Australian pension funds, apart from others, are in discussions with us for further investments.
How can some of the challenges be addressed on priority to both support and strengthen the sector's growth?
First, let us be agnostic of engineering, procurement, and construction (EPC) and PPP, and understand that construction is more important than investment. Whatever needs to be constructed, must be done. Second, both the criticality of contract management and quick dispute resolution need to be improved rapidly. Third, all governments at the union, state, and city levels, should monetise infrastructure assets, wherever possible. Fourth, both in construction and operations, let's use technology and digitalisation, wherever possible.
- Manish Pant