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The investments in the infrastructure sector traditionally focused on low risk assets such as toll roads, and utilities but with the private investment in the sector increasing exponentially maintaining competitive pricing has led the investors to explore assets which are likely to yield high returns albeit with complex risk profiles. Keeping up with the global trends, the government of India has off late designed concessions in various sectors which were not traditionally regarded as high investment opportunities such as medical education, tourism etc.
For a project to successfully attract private capital it must be designed to allure the risk appetite of the investor while assuring high returns, challenging as it may be, various changes in the infrastructure investments have been witnessed to strike a balance between the risks and returns, such key changes have been discussed in this article.
NITI Aayog (erstwhile Planning Commission and the think tank of the Government of India) has been instrumental in advocating the increased private investment by way of public private partnership (PPP) in various non-traditional sectors as mentioned above. The last year witnessed many such tenders being rolled out which interestingly showcased the governments desire to not only leverage the private expertise and financing in various sectors but also its willingness to monetise the assets by claiming revenue share from the private concessionaire. In decades gone by, annuity payment and viability gap funding had found a consistent place in the bid out concessions, however, the recent trend has paved way for introduction of revenue share and premium as bid parameters. This paradigm shift has diluted the existence of caps on revenue allowing concessionaires a free hand to claim revenue from the users.
The Ministry of Railways, Government of India, recently issued an RFQ for allowing private participation in the train operations on selected route. While many view this attempt to privatise the railways with contempt and have raised political debates around it, this move is also perceived as a move to revamp the railways in India both in terms of operation credibility and technological advancements. The model concession agreement for the private operations of the trains issued by NITI Aayog allows the concessionaire to levy and collect passenger fare from the users as it may deem fit without any limits prescribed by the authority.
Another step towards encouraging private investment has come forth by recognising the financial institutions (FI) as eligible bidders for the infrastructure projects. These FIs fulfil the financial net worth for the qualification and are provided flexibility to partner with an eligible technical expert by way of sub-contract. By allowing FIs to upfront bid for projects, instead of them passively acquiring strategic stake in such projects, serves multi-fold purpose: (a) cash-rich FIs are able to offer competitive yet bankable bids; (b) coming in as sub-contractor to an FI the project developer is released from the pressure of upfront infusion of significant equity; and (c) parties are better placed to assume risks suited to their strengths, where the operational risks are transferred to a project developer on a back to back basis.
Such structure was recently witnessed in the tender rolled out by DMRC for the leasing of the rolling stock at Line 5 of the Delhi Metro.
Infrastructure projects attract various strategic investors such as pension, debt, private equity and multilateral agencies. These strategic investors bring on board opportunistic strategies, placing a greater focus on growth, either organically or through acquisition, allowing for improvement of operations and reduction in overall risk profile of the investment to change the market’s perception of the asset. Once complete, a strategic investor could exit the venture after effectively crystallizing the value of these improvement efforts. This transformation of course has been made possible on account of the strategic investors adopting active management of the portfolios, repositioning investments, and recruiting an investment and management team that could manage companies. Actis’s creation of wind power platform named Ostro Energy, which was eventually acquired by ReNew Power at an appreciated value, is an example of such transformation of assets.
Private placement of funds, consolidation of assets and mergers and acquisitions have become common in energy and infrastructure sectors. With an increase of such transactions, the employment of newer instruments of investment (OCDs, CCDs, NCDs, Green Shoe Option, Green Bonds etc.) and tax-efficient structuring gained prominence. This period also witnessed opening up of newer infrastructure sectors, such as defense, aviation, urban transportation, healthcare, hospitality, SEZs, education, urban street-lighting, battery storage etc. for greater private participation.
The announcement of ‘Atma Nirbhar Bharat’ has infused new vigour in the industrial sectors recovering from the impact of COVID-19. The policy changes such as fast track investment clearances, incentive schemes, creation of land banks, adoption of more liberalised environmental clearance norms, promise to lure the investors swift processes and higher returns. The Ministry of New and Renewable Energy is advocating for levying additional duty of 15-20% on solar modules, solar cells and solar inverters and providing land parcels across major ports to set up production units for local manufacturing of solar equipment to promote local manufacturing. The government has also announced commercial coal and mineral mining to be accessible to the private participants
With readily available raw materials within the country the cost of development and operation of infrastructure projects will be considerably reduced providing higher rate of returns and lucrative opportunities for investors.
Anuja Tiwari is a Partner and Mallika Anand is a Senior Associate at DSK Legal