Infra investments on despite financial crisis
A survey jointly undertaken by the Ernst & Young and Assocham has revealed that the global financial crisis has not significantly dampened investor confidence in India for infrastructure investments. Over 84% of the respondents believe that last year’s crisis had a very limited/short-term impact and the activity is expected to pick-up in the next few months.
Interestingly, the survey says “close to 85% of our respondents confirmed that the current environment is conducive to raise infrastructure-focused funds”. Some of them believe that this is the right time to start investing as the stretched valuations of the recent past are becoming more realistic.
However, majority of the respondents cited inordinate delays in getting approvals and a complex regulatory environment as major factors hindering private equity (PE) flows in the infrastructure.
The E&Y-Assocham survey further states the challenges faced by PE investors while investing in Indian infrastructure. While 73% respondents stated delay in getting approvals, 68% points out complex regulatory mechanism, 58% stated delay in financial closure of projects & long gestation period of infrastructure projects, 53% blamed non-transparent bidding process and 45% to prevalence of single asset investments.
An Assocham spokesman said infrastructure projects typically involve a long payback period, whereas the debt that is available for financing infrastructure project matures in a period of 7–12 years. Meanwhile, regulatory procedures, delays in project implementation and several unplanned cost escalations create concerns regarding the financial viability of projects and disrupt the free flow of investments by PE houses.
Further, respondents cited project or investment risks on account of contractual structures, aggressive bidding or incomplete traffic estimates as some of the key issues faced by them while investing in infrastructure projects. Some of the respondents also viewed delays in completing land acquisitions as an additional factor that hinders PE investments. The delay in land acquisition leads to execution delays, and this in turn, results in escalation in project costs, impacting IRR from the investments.
Respondents primarily believe that an underdeveloped bond market in India impacts the financing of infrastructure projects. Unlike other developed nations, where a vibrant bond market serves as an alternative avenue for financing/refinancing, the bond market in India has not grown substantially. Thus, the underdevelopment of bond markets in the country poses hurdles in accessing funds for the sector. PE investors cited concerns such as the unavailability of long-term fixed rate financing over a long-term concession period as one of the impeding factors in infrastructure financing.
Despite the credit crisis, PE investors remained positive about the returns expected from their investments in infrastructure projects. Around 50% of our respondents expect to achieve a targeted 20–25% IRR from their investments in infrastructure projects. Notably, another 31% of the respondents target more than 25% IRR on their investments.
The fundamental driver for high-return expectations is the underinvestment in the sector, which calls for a rapid development in the infrastructure landscape, and hence, higher returns. In addition, infrastructure assets are characterized with low-operating costs coupled with predictable cash flows, which provides for a relatively high and stable return on investment.