Neeraj Gupta, Principal Investment Officer, Transaction Advisory Service, International Finance Corporation (IFC), feels that with the revival of investments in Indian infrastructure, it is pertinent to reduce payment-related risks to make it sustainable..
Are the government's policies tangible or bankable enough to spur private sector investment?
I think in many sectors the policies are conducive. The most recent example is the Rewa Ultra Mega Solar Project, where IFC was the lead public-private-partnership (PPP) transaction advisor. We helped structure the bidding process to include a three-tiered payment security mechanism. This was a first of its kind initiative in the country that holds tremendous importance, as payment security is a chief concern of the private sector.
In case of state governments, each one has a different credit profile, balance sheet and market perception. Our bidding process for the 750 MW Rewa project in Madhya Pradesh received unprecedented market response with 20 bidders cumulatively offering 10 times the projected capacity. Several reputed international developers participated in a state-led bid for the first time. Thanks to the competitive bidding, also for the first time, solar energy tariffs fell lower than thermal power rates, without viability gap funding, and India found a place among countries that have achieved grid parity.
Give us a sense of the emerging key trends in infrastructure finance globally and in India?
Globally, there are a lot of opportunities coming up. In the last five to seven years, deals and financing were quite subdued for the infrastructure sector. But now, the number of deals taking place in the market is picking up, and that is happening across geographies in emerging markets. For example, the state government of Odisha was looking for ways to increase clean energy production. In 2013, it sought IFC's assistance to develop a pilot rooftop solar project in Bhubaneswar and Cuttack to kick-start the market for rooftop solar projects in the state. IFC also helped Bhubaneshwar improve its street lighting infrastructure.
There is another trend of newer avenues opening up to the private sector. The core infrastructure sectors will continue to lead the deals for the private sector involvement, be it highways, expressways, ports, airports, renewables or power generation assets. Newer sectors, such as transportation and railways, are likely to see a strong involvement of the private sector. Additionally, a lot of activity is being witnessed in healthcare (both greenfield as well as brownfield), agribusiness, industrial corridors and cities. Another core area of infrastructure financing that is happening is in cities and urban areas to accommodate the growing population.
Do you think our infrastructure sector can compete with North America and Europe in attracting investments?
I think India is not in competition with the Western economies because the profile of investments is very different. The US and Australia are also coming up with huge infrastructure programmes. The US is targeting about $1 trillion investment only in transportation. In the last two decades in India, if you see highways and expressways, for example, most of the players that have come up are either localised regional players or Indian players. French companies are the largest operators of highways all over the world. But we haven't seen them coming in a big way in India, yet. However, India's solar sector has seen interest from leading global players. But in core infrastructure, people still differentiate between the emerging markets, such as India and the US. I wouldn't say that we would lose out or are at risk of losing out because of the big-ticket investments that are supposed to come to the US. India will find its own space, and its regional and local players will come forward and step up investment in these projects.
What in your view are the most fundamental sector-level reforms required to make the Indian infrastructure space sustainable?
The most fundamental reform required to make the Indian infrastructure space sustainable is to make sure the payment-related risks are mitigated. IFC is working across sectors, such as renewables, Namami Gange Programme and healthcare. In the solar sector, the federal government is in talks with the World Bank Group to mobilise guarantees for the payment security mechanism.
You are all for making our cities self-sustainable. Do you think megacities such as Delhi and Mumbai are ready for municipal bonds or munis?
India now has nearly 4,600 cities. My personal view is that not more than 50 to 100 of these cities are financially bankable or viable to raise municipal bonds, primarily due to lack of revenue generated by them. Even if you include the State Finance Commission grants from the government, they unfortunately do not have the kind of surplus that allows them to expand rapidly, invest more and service municipal bonds. IFC has been closely monitoring this space. For example, there are cities such as Mumbai which have more than Rs 420 billion cash in hand, and invest that money in short-term deposits that can easily raise municipal bonds. States like Maharashtra, where octroi collection was recently abolished, have a good source of revenue. Similarly, there are some cities in Gujarat, Andhra Pradesh and Tamil Nadu with sound revenue sources. And, the most recent example is of Pune Municipal Corporation, which is the first local body in the country to issue municipal bonds, raising Rs 2 billion. There was a very high market interest in it.
But an opportunity definitely exists...
An opportunity is there provided some tough decisions are taken. When a city is generating resources, it should raise revenues through user fees, such as those charged for water, solid waste management collection or effective management of property tax. There are a number of cities doing wonderful work and the smart cities scheme is providing them with not only funds but also a sense of competition. For example, IFC has been working with Bhubaneswar for the last eight years on its smart city proposal. It was recently ranked as the number one city by the American Planning Association (APA). It is remarkable to see that within a year, the city's revenues have increased from Rs 1 billion to Rs 1.3 billion.
In India, currently, most cities are not even collecting 50 per cent of the requisite property tax. If they just work on improving those processes and mechanisms, for example, enabling GIS-based property tax collection system, they can easily enhance their revenues by 20 to 30 per cent annually. This can lead to many mid-sized cities raising municipal bonds or commercial financing. IFC has the wherewithal to lend commercially to cities. We have provided over $500 million to the city of Izmir in Turkey. There is no reason why we cannot do that in India if we see a good opportunity.
Is the PPP still a relevant model to solve India's unique infrastructure requirements?
The PPP model fundamentally is a very sound concept. In the past, people used to talk about privatisation after the (Margaret) Thatcher government in the UK rolled out large-scale privatisation. PPP, which is a partnership between the private sector and government, is a softer way of outsourcing things to the private sector. However, you cannot apply the same model to every sector. There are sectors where citizen interface is large and things need to be handled carefully. There are sectors where there is zero customer interface, where more radical models of PPP can be adopted. We need to be careful in applying the relevant PPP model.
What has IFC's overall experience been as an advisor to the Indian renewables space?
IFC is a pioneer in renewable energy in India, investing in the sector since 2009. Our portfolio companies today have set up over 3 GW of different forms of renewable-power projects in the country. In the PPP space, we have worked as advisors to the government in both large ground-mounted solar projects and MW-scale rooftop solar projects. For large-scale solar projects, we have targeted the state governments and for rooftop solar projects, we have mostly targeted the city governments.
On the investment side, in January this year, we partnered with our Global Infrastructure Fund, a private equity fund managed by IFC Asset Management Company, and committed $125 million in equity to Hero Future Energies, the renewable energy arm of the Hero Group. This will enable the company to set up 1 GW of greenfield solar and wind plants in the next 12 months across India. With this partnership, we are helping accelerate the transition of the renewable energy generation business to mainstream power sector. Through the Global Infrastructure Fund, we are also bringing in the support of international institutional investors. Such a development will boost the confidence of other large business groups and international investors to contribute to India's ambitious renewable energy targets and make a significant difference in ramping up renewable energy capacity in the country through private sector involvement.
But given the continued dip in tariffs would private sector find solar energy an attractive proposition?
It is the private sector which is coming up with those tariffs. If we dig deeper into how tariffs have gone so low for some projects, there are specific reasons. I don't think that is a matter of great concern because even a large-scale solar project like the Rewa Solar Park in Madhya Pradesh achieved financial closure earlier in April 2017.
- Manish Pant