In a bid to revert back to 9% economic growth, Prime Minister Manmohan Singh set an investment target of at least Rs 2 lakh crore for core sector projects in the current fiscal on Wednesday.
Infrastructure investments play a key role in boosting the economy. Noting that over USD one trillion would be required for key sectors in the next five years, the PM urged for the involvement of private sector.
In an interview to CNBC-TV18 Anil Ahuja, head of Asia, 3i Asia Limited said: "If we don’t fix the infrastructure problem the country’s growth rate will dampen and there is no way to fix it."
In this meeting the Prime Minister also set ambitious targets for investments in ports and aviation sectors, power generation, coal production and railway freight carriage for 2012-13.
But Ahuja feels there is a time lag of three- four years between projects being awarded and projects coming on stream. "Raising a target for how much road contracts will be given is not going to help anybody. What is going to be important is how many kilometers of roads get built."
Ahuja, who is also a big private equity (PE) investor in some infrastructure stocks highlighted that currently, PE interest in infrastructure space is muted. "There is a price at which private equity will buy, but the risks at which PE has seen unfold in infrastructure has been stuff that they could not have imagined."
However, he is extremely hopeful that the Prime Minister’s initiative will yields some results in FY13. "The solutions strangely are so easy and so evident, we have to figure out how we get about implementing them."
Below is the edited transcript of Ahuja’s interview with CNBC-TV18. Also watch the accompanying videos.
Q: According to you what should be the approach that the government needs to take? Is it setting sector targets or is it that some building blocks like maybe land acquisition rules and environment rules need to be clarified or should they just take up a few 10-15-20 important projects and just ensure that those get implemented getting into all the macro and micro issues for those. What is really the best strategy for the government?
A: The most important thing for the government is to wake up one morning and to realize that if we don’t fix the infrastructure problem the country’s growth rate will dampen and there is no way to fix it. The lag between wanting to make the announcements and the projects actually coming through is three to four years. So, things have reached a point where we will not be able to achieve targets three-four years out.
We don’t have to wait for Mumbai Airport to be completely chockablock before we get to a point where we decide that Navi Mumbai needs to be built. If you take power as an example, just look at fundamentally what has been done. If you look at the entire chain of power, from the fuel to the end consumer everything is in government hands, just one block has been privatized, which is generation.
The fuel is controlled by Government of India, generation is privatized to some extent or there are private companies and investors like us and other players in the market who are participating in that. The distribution is with the government and the end consumer’s pricing is still set by the government. So that is a very, very fundamental issue, because until they allow a full chain to be privatized or a full chain to be able to operate on commercial terms it is very difficult for the sector to be cleaned up.
Q: With regards to the PM's meeting what exactly did you take out of it? Was it just improving sentiment in the short-term or do you think that delays are now just going to get increased or rather improved at this point in time?
A: We have reached a point where talk is not going to do much for investor sentiment. Raising a target for how much road contracts will be given is not going to help anybody. What is going to be important is how many kilometers of roads get built. That is a far different number. Taking 8,800 to 9,500 does not materially alter anything for anybody who is investing in the capital market.
If you go back to 2009, Kamal Nath’s target of 20 kilometers a day, you multiply that by 365 days you are at 7,000 plus. So, you are not so far from there. If you look at where the reality is we are running at just above 10 kilometers a day.
The reality of what we are delivering and what targets we are setting, I think that gap is huge. The biggest disappointment in the sentiment was how Coal India reacted to a presidential directive of signing FSAs and delivering coal. That sets the tone for how much value the market is going to attach to talk.
Q: Coming to private equity (PE) specific issues, we know that the bunch of infrastructure companies whether they are road contractors or park on tractors are deep in debt, there are bunch of them who are wanting to sell some of their BoT projects, get private equity into interest in them, so that they can release some of their capital what is the PE interest in these?
A: PE interest in infrastructure right now is muted. I would say that there is a price at which private equity will buy, but the risks at which PE has seen unfold in infrastructure has been stuff that they could not have imagined. Even if you look at the public market, if you take all the infrastructure companies be it GVK, GMR, Lanco, JP Associates, etc where are they trading compared to their life time highs, most of them would be 80% off.
The strongest infrastructure company in terms of how much are you off from lifetime highs is probably L&T, which maybe about 40-50% off from its life time high. With that kind of confidence loss for investor it is difficult for them to be gung-ho about buying into stuff based on projections. So, world has come to a point where projections are no longer acceptable and we want to check reality.
Whether it’s a road or power project it doesn’t matter. People who are willing to say you have an LoI from Coal India, you have a PPA with a state electricity board, you have a production schedule, your plant will be up in so many years and the amount of units you will produce all that is out of the window because all other aspects of contract don’t seem to hold.
If you look at road project today, you are dealing with significant delays. Whose responsibility is land acquisitions and delivery of land acquisition? Whose responsibility is unrest and state level issues? I don’t know the answer to that, but it makes investors extremely nervous. I have heard the view that if people will not put money into India where will they go. That is true to an extent, but it is not something that we should sit on assuming that the money will automatically keep flowing because the end investors have a choice, they just choose not to invest.
Q: Considering that we are dealing with so many existing bottlenecks within the infra system you don’t expect FY13 to be better despite the Prime Minister’s initiative?
A: I am extremely hopeful that the Prime Minister’s initiative yields some results. There needs to be more concrete action. The issues facing some of these sectors are well understood. The good thing is that everybody knows what the issues are. The question is do we have the political and the bureaucratic will and ability to do something about them? Do we know what the issues with power are? Yes we do.
There are issues on the fuel side which is linked to coal. Has there been talk and discussions around centralizing or creating a coal body which is responsible for both production and sourcing as in importing incremental coal? If we need 650 million tonne we can produce 450, let’s import 200. Let’s coordinate that 650. Today what is happening? You have got coal moving from Chhattisgarh to Gujarat and you have got imported coal moving from Gujarat or Mundra to a plant in Uttar Pradesh.
The rake capacity is being used up. The solutions strangely are so easy and so evident, we have to figure out how we get about implementing them. I recognize that we are a democracy and I wouldn’t change that for anything, but we have to recognize that some of it is coming at a very, very high cost.
Q: In FY13 do you see 3i picking up any stakes at all, or do you think you will just wait out this political term?
A: No, I don’t think we will wait out the political term. I think that’s two years. We will be jobless if we waited out the entire political term.