‘Equity capital will elude power, infra sectors’

The Planning Commission estimates $1 trillion investments in the infrastructure sector during the current Plan period ending March 2017. Given the challenges surrounding the sector, these targets may not be achievable, says Vikram Limaye, Deputy Managing Director, IDFC.

Business Line spoke to Limaye to get his views on the outlook and prospects of the infrastructure sector. He believes that availability of equity, and not debt capital, will be the biggest challenge for infrastructure companies in future.

Excerpts from the interview:

Are infrastructure investments really at a standstill as everyone believes? Where are investments still happening?

Different sectors are facing different issues. We are all aware of the issues faced by the power sector — particularly thermal power projects. There have been no new thermal power projects planned for the past 18-24 months. In renewable energy, we continue to see activity primarily in the wind segment. A little bit in hydro- and solar, but not as much as in wind.

Road sector (highways) has been active, although in the last few months, the new bids have slowed down.

The problem with roads has been that the bids that have actually been awarded so far were quite aggressive, and therefore, financial closure has not been achieved for several of them.

For the port sector, again, the hope is that there will be more activity going forward, because there were projects that were supposed to obtain bids in the last 18 months that have not yet been done.

In telecom, there are still enough uncertainties that need to get sorted out. The Government has at least come out with the reserve price. We will see how the auction takes place, which circles get bids, and so on.

About a trillion dollars of infrastructure investments are slated for the 12th Five Year Plan. Is this achievable?

For the 11th Five Year Plan, the track record is not bad. The objective was $500 billion in investments in infrastructure. As per Planning Commission estimates, we are likely to end up at somewhere around $450 billion. The 12{+t}{+h} Five Year Plan talks about $1 trillion, which is large given issues surrounding execution and the already lost time. I don’t think we will get to a trillion dollars in investments. Even if we can invest $600 billion, it would be pretty good.

Has IDFC shifted focus from power to other segments of infrastructure financing?

The primary change in the last 24 months is the shift away from thermal power. Once clarity emerges on issues facing the power sector, lenders will get comfortable.

The availability of equity capital, not debt capital, is going to be a bigger obstacle for power and infrastructure. Many developers had plans of raising equity as part of their growth plans. Given where their stock prices are and the sentiment surrounding infrastructure, it will be very difficult in the near term to raise equity capital for infra.

There has to be a revised framework in which power plants will get developed. There has to be clarity in terms of how risks will be shared and what kind of returns investors can expect to earn in infrastructure. The philosophy surrounding allocation of coal and merchant power also needs to be clarified. That has implications for equity returns and the investment decisions of developers and investors.

Have you done any loan restructuring?

We have done some restructuring. But that is rescheduling where the economic viability of the project is not an issue. The nature of infrastructure development is such that there are delays, but these delays in many cases will not affect the fundamental viability of the project.

The other point I would like to make is that other types of lending, whether it is SME lending or retail lending, result in a certain portion of restructured assets migrating to NPAs.

That may not be the case in infrastructure. The nature of the infrastructure business is such that things may not go as planned, given the extent of government involvement and number of approvals and clearances required and how long it takes to execute a project.

There will always be something that crops up along the way. This requires change of course, which requires rescheduling, which results in some delays and cost overrun. Even if that were to happen, it doesn’t make the project unviable once it becomes operational.

How will a sovereign rating downgrade affect India?

No downgrade is a good thing, because it is a reflection of loss of confidence. Not only will the cost of capital go up but the access to capital would become more restricted, as some of the investors globally can invest only in investment-grade paper. The spreads and the cost of borrowing would go up dramatically.

We are still very much dependent on foreign flows. So a downgrade will not be good in terms of financing our current account deficit.

COMMENT NOW