The reality is that the Indian infrastructure sector does not have the size, financial muscle and market clout to fund the infrastructure this country needs. While power projects may still go ahead, as we have 4-5 large power developers with a combined $28 billion of market cap, $27 billion of market cap has to support everything else from roads to ports, airports, sanitation, etc. Again, the needs dwarf the capital, which can be raised.
...Thirdly, markets have ignored the sector, given the poor economics demonstrated. Most infra projects/developers generate no-free cash flow, have low ROE’s and are very susceptible to project delays and policy risk. Investors are tired of projects stuck in red tape or subject to the whims and fancies of ministers. Most of the large infra projects are also seen to be disguised bets on real estate, as their entire economics depend on the monetisation of some land parcels bundled along with the project. Unless these project characteristics improve, money will not flow. Investors currently feel that only those developers who can manage the system, can make money in this space. This perception has to change.\
...India is attempting to implement one of the most ambitious public-private partnership programmes ever conceived. Driven by a lack of resources with the government, we need the private sector to step up and fund/develop $500 billion of investments over the coming five years. In a market with ROE’s of 20 per cent, investors will not give capital to the infra developers, unless their projects can be seen to deliver similar returns (adjusted for leverage). Will our public policy framework allow private developers to earn these type of project returns, on the scale needed and will the public be willing to pay the prices for infra services needed to deliver these high returns? This is a fundamental contradiction and policy dilemma. We are not a capital surplus country, our high cost of capital and high corporate returns, much lauded by investors is actually a disadvantage when trying to build out infra projects. Investor hurdle rates are too high. We need a new set of investors, satisfied with steady 12-15 per cent annuity type returns, and willing to sit through multi-year project implementation cycles.
Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of data and analysis on private equity, venture capital and M&A deals in India. View free samples of Venture Intelligence newsletters and reports. Email the author at email@example.com