Karunakaran Ramchand, Managing Director, IL&FS Transportation Network believes that the Rs 6,920-billion Bharatmala project will bring a lot of opportunities for private players. Edited excerpts:
What are your views on tollûoperate-transfer (TOT) model? Do you think TOT would enable more asset recycling, thereby aiding NHAI to garner higher proceeds through monetisation?
The recent TOT bids have shown that this model can be ideal for international institutional investors who have appetite for long-term investments and access to low-cost debts. The corpus generated from the proceeds of project monetisation can be utilised by the government to meet its fund requirements for future development; operation and maintenance of highways in the country and development of highways in unviable geographies. The advantage with this model is that it frees investors from construction risk and help them look at de-risked brownfield road assets. Looking at the current market trends, we believe TOT would enable more assets recycling.
Does this model also pose a high refinancing risk, and how?
Probably! We will have to wait and watch.
How have you aligned your strategies to leverage government opportunities?
IL&FS Transportation Networks is one among the oldest players in the road development space in India. We have more than 10,000 lane km of operational portfolio across India and are quite optimistic about the Bharatmala programme. We have aligned our strategies and believe there would be ample opportunities for a large player like us who holds expertise in developing road or tunnel networks under the publicûprivate partnership (PPP) mode as well as engineering, procurement and construction (EPC) mode. Bhartmala project, the second largest highways construction project with a potential investment of Rs 6,920 billion, is definitely a tremendous opportunity in the near and long term for our company.
According to you, with such a massive programme in place, what are the best funding options available that can be leveraged by both road developers and investors?
Traditionally, we know infrastructure investments have been financed with public funds. However, in the current macro-economic scenario, there could be a reduction in the level of public funds allocated to infrastructure in the near future.
Conventionally, banks have been providers of infrastructure loans. Infrastructure projects may not generate positive cash flows during the early phases. Infrastructure investments see positive developments in the equity market. The creation of liquid market for project-specific bonds can also complement syndicated loans for project finance. The recent market trends that we observe are the development of co-investment platforms leveraging institutional investors' capital in project finance; some of the large funds are comfortable with direct infrastructure investments. During the last couple of years, we have been active in the United States. The special tax treatment of municipal debt has kept the borrowing costs low for municipalities and projects, thus enabling them raise funds for infrastructure.
We are sure such issues will have strong demand from household savings and financial institutions. Public-private partnership will play a larger role in this kind of a huge programme.
Besides these modes, can any other source of funds be explored?
We should also explore measures like 'land value capture mechanisms.' It is natural that development of transport infrastructure will add value to land and real estate. In China, many cities have financed half or more of their urban infrastructure investment directly from land leasing. Considering the current scenario, the government could evaluate issuing default guarantees to allow private promoters to access commercial loans and enhance the creditworthiness of the operation. These kinds of financial instruments will improve the ability of the developer to honour debt servicing during the ramp up phase of the project, when the risk of default is highest during the early years of project lifecycle.
Which mode of development has had the best success in terms of project execution?
We have observed success in project execution in both the PPP and EPC modes of development. There has been lacklustre performance in both the modes coupled with the structural issues added to mixed performance. An earlier study, I recall, had found that the completion performance of PPP projects were far superior to those under the EPC mode.
The government is considering raising money from pension funds. Will retirement funds suffice to meet the actual demand for capital?
Globally, long-term capital is raised via capital markets where the major investors are pension and insurance funds. In India, they were severely constrained by regulations. The government's move for raising funds through pension funds is a win-win proposal for developers and investors because there is a neat fit between the long-term horizon for the infrastructure projects to mature and the retiree money portfolio. Investment in infrastructure sector could be an advantage since infra assets provide better risk return features coupled with long maturities. Infrastructure assets have greater cash flow stability when the project matures. For developers, it would be a real relief due to the current restrictive commercial bank capital requirements. Pension funds might not be in a position to meet the total demand, however; they are in a position to boost the current investment climate.
The government has set up agencies such as the National Investment & Infrastructure Fund (NIIF). Are they helping in the funding of road infrastructure projects?
I believe the aim of the fund is to pool investments from long-term institutional investors or funds and utilise the same in making investments in greenfield and brownfield infrastructure projects. Recently, they bid for TOT projects along with Holland's Roadis.
- RAHUL KAMAT