India has capacity to absorb high levels of investment

S.B. Nayar, chairman and managing director of India's state-owned infrastructure financier India Infrastructure Finance Company Limited (IIFCL), has a bird's eye view of what is arguably India's most exciting and also, ironically, most difficult sector - infrastructure. In an interview with Consulting Editor Arnab Mitra, he speaks of how investor sentiment has improved tremendously over the last two years and how the sector is now poised for a quantum jump. Please give us an overview of the Indian infrastructure sector. Do you see any real improvement in investor sentiment in this sector What is the main difference from, say, a year ago The investor sentiment towards this sector has witnessed a positive change. The process of clearing and approving projects has become much faster. The bidding process has also been changed - projects are put out for bids only after getting all clearances; so, the risk of these projects getting stalled mid-way due to regulatory issues has almost been eliminated. The real investments are now expected to pick up. India needs more than $1 trillion investments in infrastructure over the next few years. Where will this money come from Which sectors will benefit What role will IIFCL play in this transformation Fifty per cent of this humungous sum - or $500 billion - will have to come from the private sector. Seventy per cent of this amount - or $350 billion - will have to be raised as debt. This would be double what we have done in the past five years. Due to sectoral/group exposure and capital constraints, banks cannot fund this huge requirement. We need to develop a vibrant debt/bond market in India to efficiently channelise our savings towards nation building; as our financial institutions are still relatively small compared to their global peers and we need large institutions for this. We have to scale up and create one or two mother institutions to take the lead in appraising and advancing money for infrastructure creation. I think power and ports sectors have tremendous headroom for growth. People are sometimes surprised when I mention the power sector in this context. But looking at the statistics - India's per capita power consumption is expected to double in five years. As power consumption rises, our existing installed capacity will not be enough to meet the demand. So, we will have to expand this sector. Our sea ports are doing well and I believe demand will continue to grow as trade - both domestic and international - continues to expand. Airports are also another sector that I expect to do well. At IIFCL, we are scaling up our operations to meet the challenges ahead. We have become lead lenders and can sanction loans based on our own appraisal. We would like to take a leadership position in this field. For the first time in India, bonds that are partially credit-enhanced by IIFCL have been successfully placed. IIFCL has also popularised mezzanine funding in key sectors to mitigate equity shortage. The government has also actively involved IIFCL in many policy initiatives and it has been a part of many committees/working groups set up by the government. Except for roads and to some extent railways, India's infrastructure sector is limping. What factors are holding it back What are the main bottlenecks What is needed to get it back on its feet again When do you expect the sector to pick up pace again Earlier, the infrastructure sector witnessed a number of issues. India has only a handful of large companies that can implement such projects. Further, you can't build infrastructure with high costs of debt. It is also difficult to get long-term finance in India. Then, the banking sector is grappling with a non-performing asset problem. These issues make financial closure difficult. A billion-dollar project still needs a consortium of 15-20 banks. In this context, the 5:25 scheme (which allows banks to advance long-term loans with repayment periods of 20-25 years, with periodic refinancing, say, every five years) will aid long-term lending and help companies in this space. The roads sector is doing very well. Railways is picking up. The power sector, too, is chugging along. The problem of coal shortages has been resolved and enough coal is available for generating power. The only problem is with distribution. State-owned distribution companies are not buying power because they do not have the money. There has been a case of a state not renewing its power purchase agreement. Decisions like this worry investors and lenders. The government has announced the UDAY scheme to address the issue of nursing state-owned distribution companies back to health. This should boost the power sector. I expect the renewable energy sector in particular to do well as it has a quick turnaround time. You can set up and start generating power in one year. Why should large investors - sovereign and private - invest in Indian infrastructure Large investors are interested in India because in present times no other country can give better returns. And India has the capacity to absorb such high levels of investment. We must realise that Indian infrastructure will have to be built by Indians. Also, not every foreign investor would like to take the execution risks that come with large infrastructure projects. We can sell completed projects to these investors - like foreign pension funds and others - who will be satisfied with lower but relatively risk-free returns. The money from such sales can then be used to finance fresh projects. This will allow us to recycle funds efficiently and build the requisite infrastructure. What is IIFCL's role vis-à-vis the National Investment & Infrastructure Fund (NIIF) How will NIIF transform India's infrastructure sector We are in it for a short period. Our mandate is to bring investment proposals for NIIF's consideration. NIIF is expected to be operational this year. It will leverage and provide a platform to the overseas investors to participate in the Indian infrastructure space. Since the fund will be managed by professional investment managers, the investors may bank upon their evaluation of the projects. What is the way forward for the infrastructure sector in India I think the government has made it amply clear by its actions that it means business. The government has clearly stated that infrastructure development is top priority in order to improve the economic growth of the nation. It has resolved several issues plaguing the sector. A high level Project Management Group has been set up which has already managed to bring several stalled projects back on track. Land acquisition, however, remains an issue. There has been massive improvement in the ease of doing business in the country but there is scope for more. And finally, states, which play a major role in the development of infrastructure, sometimes, need to coordinate and cooperate better with the central government and the implementing agencies for better overall results.