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Private investment in infrastructure at crossroads

Sanjay Sethi     September 13, 2016

Sanjay Sethi
Private investment in infrastructure is now officially down to a trickle, except in solar energy, which is a story for another day. The reasons for that are not far out to seek but this piece is not about how we landed here, on which tomes have already been written, but whether we can crawl out of the hole we have dug ourselves in.

Let's first acknowledge that we are an infrastructure and capital deficit country with limited domestic capital (public and private sector combined) to meet our gigantic infrastructure requirements and will likely remain a net importer of capital for developing our infrastructure for decades to come. It is therefore incumbent upon us as a nation to make productive use of as much of the investment already ceded to the ground, as is possible.

We can ill afford to extol the virtue of creative destruction ala rich western nations at this stage of our development when millions still do not have access to nutritious food, safe water, shelter, electricity and quality education and healthcare. For example, can a poor country like ours, afford to have trillions of rupees worth of investments stuck in stranded gas-based power assets (for want of gas) and coal-based power assets (for want of off-take by state utilities), while millions of Indians go without electricity.

Let's also acknowledge that foreign capital will not come gushing into areas from where home-grown companies are withdrawing, especially into greenfield infrastructure development, which remains a quagmire much beyond the navigational capacity of most foreign companies. These companies are used to far more organised and predictable environment than India. If we want private investment in greenfield infrastructure, there is no option but for Indian companies to take the lead, at least for the next few years.

This brings us to some big-ticket issues - how do we inject life back into a moribund domestic investment climate?  Do we allow existing crop of home-grown companies to fold up or be carved-up and sold or is there any merit in trying to nurse some of these companies back to health? What follows after (and if) banks fully recognise NPAs by March 2017 - will they start to lend again despite their capital constraints and lending experience over the past few years?

While RBI's recent policy pronouncement aimed at progressively weaning large borrowers away from bank funding to debt capital markets will eventually lead to widening and deepening of the corporate bond market and couldn't have come a day sooner, it could take years before its effect are felt on the ground. The larger question today is that even if the banks are willing and able to recommence lending or guarantee corporate bonds, is there enough domestic private capital available for meeting even a part of the ever-growing infrastructure development needs of the country?

On the current stressed-asset situation, there is no walking away from the fact that both the developers as well as the lenders would need to take deep write-offs for a large number of projects to become financially viable and many projects would need to change hands in the process. But do we have the institutional mechanisms in place for our public sector banks and infrastructure lending institutions to take a prudent view on write-offs, without fear or favour?

Over the past few months, many international investors have announced their plans to set up Asset Reconstruction Companies (ARCs) in India, some of these as tie-ups with domestic banks (let's set aside the conflict of interest issue for a minute), but will these initiatives lead to meaningful volume of asset churn and consequently to productive assets?

Will these ARCs be willing to spend crores of rupees and management time on due-diligence ahead of participating in competitive bidding for each asset or should the lenders be allowed a more pragmatic and effective approach to enter into one-on-one negotiations with pedigreed buyers to close transactions? Is it therefore already time for RBI to tweak its Strategic Debt Restructuring (SDR) process, which is likely being used more as a tool to "kick the can down the road" and buying 18 months of reprieve rather than resolving the underlying project viability issues arising mainly out of massive cost and debt escalations in projects?

Also, how do we utilise the wealth of experience amongst professional managers notwithstanding the health of their employers? Is it time for us to think about fostering an environment (and perhaps creating a policy framework) which actively encourages private capital to back professional managers to take over and manage existing infrastructure assets as well as to create new assets, and get some preferential treatment (tax or otherwise) in return?

Sadly, there are no easy answers and a lot of hard choices to be made if we wish to resuscitate private investment in infrastructure. Are we up to it?

The writer is an infrastructure specialist and MD & CEO of Nestor Consulting India, an independent infrastructure investment banking firm.

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