Investing In Indian Infrastructure

I have been a vociferous critic of India's infrastructure story. I don't deny that India has a chronic deficit of infrastructure and that investing in Indian infrastructure should be a lucrative opportunity. However, my concern has been with the manner in which investors got carried away by the Indian infrastructure story and with the financial shenanigans committed by India's so called infrastructure companies.

I do believe that a useful infrastructure asset (like an airport, bridge, road, power plant, office building etc.) built efficiently and of usuable quality is invaluable.

I would hazard to state that a majority of infrastructure assets built over the last decade have some corruption nexus and have been built with cost padding and siphoning of funds from debt to equity.

However, I would like to classify these assets into two types. Those that are useful and have been built well and those that are not particularly needed or have been built very poorly (and will probably need to be pulled down in the future). In my view the former category of assets can present future opportunities for investment. In those assets, the problems have been primarily financial and original investors (equity and/or debt) have probably already taken marked to market losses and write-downs. With the burden of inefficient capital expenditure lifted and restructured, these assets could become valuable cash generators over time. Obviously the credentials of the new operator and the capital structure of the asset remains as relevant as before.

Another view that I've held is that well built and well run infrastructure assets are low but steady return generators (12 - 15% nominal INR) over very long time periods (20 - 30 years). These assets may not provide the best investment opportunity for someone with small amounts of capital to invest with very high opportunity costs. However, India is a young country and Indians need to invest in assets that can give them visibility and cashflow over very long periods of time.

As the insurance and pension sectors in the country improve and mature, as India's financial markets get more disintermediated and public sector banks lose their monopolies and as Indian investors gain more confidence in financial assets (as opposed to land and gold), the demand for steady and long duration cash flow generating assets will increase.

Therefore, over time, we are likely to see large investment houses in India start offering vehicles/funds that own and manage these long duration cash-flow generating assets. The emergence of such investment vehicles will make large ticket infrastructure assets substantially more liquid than they are today. It is then likely that building efficient assets for sale to investors will become a viable business model for infrastructure companies. They will then be able to recycle their capital and improve their own return ratios.

Vinayak Chatterjee of Feedback Ventures is a veteran of the Indian infrastructure sector and I tremendously respect his opinion. He wrote a column recently expressing his optimism about the future of good infrastructure in India. I am inclined to believe him. I am optimistic that India will build a lot more good infrastructure going forward and that investing in that infrastructure will become a profitable endeavor for investors both domestic and foreign.
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