26 Apr 2016
With Indian Prime Minister Nahrendra Modi executing a new modernisation push for his country, foreign investors and the government are taking lessons from the challenges of the past 15 years to bring about more fruitful and effective infrastructure development.
A 1.25 billion population - two thirds of whom are under 35, GDP growth rebounding to a forecast 7.5 per cent, headline inflation numbers which have lowered to their sub-5 per cent target, and consequent low interest costs make India’s macro economic environment one of the best in the world. [Maquarie data]
“Everyone talks about Modi as the developer,” India head of Macquarie Infrastructure and Real Assets, Suresh Goyal, says of the Prime Minister who came to power eighteen months ago.
Already in the first quarter of this year, government capex spending has increased by 18 per cent, while the number of stalled projects is being reduced as the government makes a conscious effort to intervene and speed up key approvals processes.
“Modi is trying to fix things quickly, so we need to wait some more time until the message about change flows through. Having said that, we are beginning to see a lot of interest from long term, sensible investors back in the country,” Goyal says.
In July 2014, the country officially announced a push for foreign investment into its railroads, part of a $US128 billion upgrade of the country’s rail infrastructure that will include new tracks, 400 stations, a $US15 bn bullet train service and a $US12.5 bn dedicated freight corridor.
The government is also implementing aggressive privatisation targets, raising taxes on energy products to take advantage of declining oil prices and raising the cap on foreign direct investment across 15 sectors, including Defence (FDI inflows increased by 18 per cent in the nine months to September 2015).
It’s cornerstone $US6 billion National Infrastructure and Investment Fund is, Goyal says, a means for the Modi government to encourage confidence among foreign investors that India is serious about developing infrastructure, and doing it sensibly.
The NIIF is structured as a Fund-of-Funds platform, in which the government holds a 49 per cent stake. Cash-rich public sector undertakings and foreign investors will hold the controlling stake, with each of the funds that the NIIF seeds run by external, professional investment managers.
“There are scars in the minds of investors from what happened in 2013-14,” Goyal says, referring a devaluation in the currency, which, mixed with high inflation led to a rapid correction in asset valuations and the exit of capital from development projects.
But with India in its second wave of infrastructure development, private capital that invested ten to 15 years ago is looking to exit, and domestic developers who suffered following the global financial crisis are selling assets.
“We are seeing a stream of opportunities coming up, as these assets are being traded from one private party to a fund like us,” explains Goyal.
“If you have the capital, and you have the capability to own and manage long term assets, it’s a good opportunity in the market at this time.”
There is also interest in the renewable energy sector, as Modi begins implementing plans to increase the country’s green energy capacity from the current 30GW to 100GW by 2022.
“That’s massive. Even if it is only half achievable, that is still massive,” Goyal says, noting that falling solar panel prices mean India is at an inflection point, with power prices from solar almost at the same level as coal fired power assets.
Common to all the infrastructure asset classes of renewable energy, highways and rail, is the fact they are primarily under the control of the central government, which is exhibiting a renewed focus on increasing transparency in government.
“The government has taken away the discretion in investment deals,” Goyal explains, as it tries to move into a rules based government.
There is also mounting evidence Modi’s enthusiastic pursuit of government to government engagement with countries such as Japan, Korea, the US and Australia is paying off.
Japanese companies are looking to invest about $US5 billion into a dedicated freight rail corridor; Canada’s $US268 billion pension group has already invested $US2 billion, and the UAE’s Abu Dhabi Investment Authority is equally interested, Goyal says.
“Sophisticated investors who are spending the time to understand the market are making investments. I think it’s about six to twelve months away before India becomes fashionable for a lot of fund managers. But the good thing is, the direction is perfect.”