Fuel supply, PPAs remain key issues in power sector: 3i

In an interview to CNBC-TV18, Anil Ahuja heads of 3i India Infrastructure Fund, spoke about his reading of the sector and the road ahead. 

Below is the transcript of his interview with CNBC-TV18 Q: Give us your view in terms of how important is the National Investment Board (NIB) to the infra space and what is the possibility of it coming through? A: I am not fully aware of what is going on there. Q: What is the least dirty piece in infrastructure now? A: Honestly, I do not know. I would have had a very easy answer to that which would have been roads. But unfortunately even in the road space the experience that we have had included stuff like toll collection becoming an issue, significant delays in land acquisition, interference at the ground level both justified and unjustified. So, I think the issue that we are dealing with is pretty significant. What I would like to touch upon is the RBI credit policy and the minor disconnect, which seem to exist between the finance ministry and the RBI, regarding interest rate and whether that matters. There is so much hoopla about whether reducing interest rates by half a percent or one percent would make any difference. The reality is that if you looked at the existing uncertainties in the infrastructure space on account of hundred other things, the interest rate change would have a very small impact on how people would perceive further investment in infrastructure. I would actually take it one step further and say that it is difficult for people to try and predict outcomes of projects. So, this would impact investment spending not just in the infra space but also broader investment space. That is the real issue that we are dealing with. If the policy framework which is operational was to be totally cleared, I think we would have a lot more certainty and capital inflow on all fronts and the situation would look a lot better. Q: There have been some moves to ensure fuel supply linkages for coal plants and on gas nothing has happened. Do you see light at the end of the tunnel with the moves that are already afoot? A: I do. I think there are two sides to the problem. One is the fuel side, which is whether it is gas or coal. On the other side is the power purchase agreement. The fact is you are sitting in middle in the private space where you are doing the generation. Now either you fix the coal as in the fuel supply or you revise the power purchase agreements. Either of those two or both of those or a combination thereof is actually going to solve the problem. My personal preference would be to fix the fuel because that keeps the cost structure under control. Having a power purchase agreement revised essentially pushes incremental electricity cost or power cost through the system. That will show up in inflation in couple of months or couple of years which I think is a suboptimal solution. Q: Are valuations looking lucrative at this point in time and any sort of deployment of funds that you would see at current levels? A: Honestly, we are sitting on a lot of dry powder at this point in time. The issue is how do you predict a time line? The single biggest problem in an infrastructure project is time. Any delay, actually impacts the project in a very significant way. It takes projects from extremely profitable to actually being loss making and impacting even the realization of the debt for banking system. So, we have to look at the time delay. All the estimations we have made so far have been challenged for one reason or the other. How do you predict a transaction or a project if you are working with no clarity on when a certain approval will come through? Whether a certain approval that has granted will be revoked and what other bottlenecks or challenges you may face along the way? It is one thing to predict demand and supply and other to predict or hedge commodity prices. It is a whole different ballgame to try and predict time lines because those are definitely not in anybody’s control. Q: You just said that you are sitting on a lot of dry powder, what is keeping these deals from going through? A: Two things – one, everyone who is investing in this space are sitting on a large portfolio and would like to see some clarity on that portfolio emerge first. Second, when you look at these and you start, everybody has got slightly burnt over the last couple of years. With that mind set, when you start evaluating these projects, going forward you start taking worst case scenarios. When you put those worst case scenarios, these deals don’t make sense. So, that is really what is going on. I actually suspect most of us are operating with extremely conservative valuations and assumptions at this point in time