FCC

Construction risk is higher than post-construction risk

2018-09-01

The National Investment and Infrastructure Fund (NIIF) is planning a third fund targeting investment in greenfield projects, with a view to provide long-tenor financing. Sujoy Bose, Managing Director and Chief Executive Officer, NIIF shares some insights, particularly on the roads sector. Excerpts. You already have two fairly large funds, still not fully deployed. In fact, capital raising isn't over as yet. What are you aiming to do with a third fund? We are structuring the strategic investment fund which will be our third fund. Our aim is to do transactions that solve problems that we are not solving with our other two strategies. It is an ambitious goal that we are setting ourselves to raise a really long-term fund such that we can do greenfield projects because greenfield projects take a long time. The gestation period is long and you need a different set of investors. The type of investors that we are getting into the master fund are investors that are more focused on operating assets. Certainly, there is a huge market and room for that fund in the current scenario in India but we are also aware that we need to focus on development and greenfield. We want the tenor and we want the mindset of investors that will be able to work with the risks related to the construction of projects. Aren't investors averse to construction risks in emerging markets (EMs)? Construction risk is higher than post-construction risk not just in India but anywhere in the world. A lot of studies have been done which shows post-construction risk is not that different. However, it is higher in emerging markets than in any other market. Hence, we need investors with the right mindset to be able to address this need. When we have got all our funds operating, we will have the ability to work in different ways with different investors and with different opportunities. Today, there are relatively large projects, whether it is the Nagpur-Mumbai corridor, the Mumbai-Delhi expressway, Mumbai-Vadodara or the Sea Link in Mumbai. Each of these are upwards of about `200 billion. What do you have in mind? I think the relatively easy thing to have done would have been to take money from the government and put it into something. That's not what we are trying to do. What we want to do is take the Rs 200 billion from the government which they are investing in the NIIF and use it to become a channel for substantially more capital into this sector. We are bringing in the equity capital, leveraging, partnering with others to expand this pool and alongside this equity, we will be able to bring in debt. To answer your question, our focus is not to say that we want to put in all the requirements for the projects you mentioned, but we want to be the catalyst, that with our capital we can actually finance the rest of the projects. Taking an example of a greenfield airport, we bring in the money through all these funds structures, the platforms we have and once we are in there, we would like to bring in money from other investors who are specifically interested in this project. This is what we are trying to do. Who are the categories of investors who can take up such construction risk? I think it depends on the sector. If you look at airports, the international airport operators are interested. There are platforms of operating companies backed by pension funds who have actually done greenfield airports in several other countries. In each of the segments, there are a lot of discussions on how to make those sectors more attractive to those kinds of capital. In roads, I think, for the greenfield aspects, because of some of the historical land acquisition, environmental approvals and other issues, we'll see how the interest from international plays out. I can see this is why the National Highways Authority of India (NHAI) has gone in a direction towards more of Engineering, Procurement and Construction (EPC) and the Hybrid Annuity Model (HAM) projects rather than what they did in the past, which was Build, Operate, Transfer (BOT). NHAI has made a lot of changes with respect to land acquisition, etc., led by the Ministry, nonetheless. All I am saying is where the capital comes from will depend on the sector, on the opportunity and the structure of the concession. What I feel the government has done quite well recently is that they have understood that different things are more attractive to different types of people. Developers are willing to take certain kinds of risk while investors are willing to take certain other kinds of risk, hence the Toll, Operate, Transfer (TOT) model, the asset recycling approach. Then, you have the Infrastructure Investment Trust (InvIT) products which have started to bring in the more passive kinds of investors. The interesting thing happening from both the sector reforms as well as the product reforms sides are instruments are being created to appeal to different types of investors. I think this is very good and we don't need to go and sell everything to everyone. I think it's much more important and better to sell products that people want to buy because that's where you get the highest price. Look at TOT, this is a perfect example of that. Are you ruling out international capital in under-construction road projects? I shouldn't be ruling it out because I am sure there are international developers who would be interested in this sector. All I am saying is the pension money, where the pension sovereign money has been coming in the roads sector, I see that more focused on operating assets. Tell us more about the SIF and about the investors who will invest in the SIF; investors with longer-term horizons. Worldwide, strategic funds are being set up to make investments. NIIF is different from a sovereign fund in the sense most sovereign funds are investing outside their country. NIIF was set up specifically to bring in the capital, to become a channel for capital into the infrastructure sector in India. That is our primary focus now. Over time, things may change but our primary focus right now is India. Some of these SIFs have been set up with a similar purpose. With respect to the SIF, there are other types of investors; I don't want to name them now but these are much more long-term investors. In some cases, I'd say they are development-oriented investors who, we believe, our initial assumption is that there will be interest. As I said, we are still testing. The way we go about structuring funds is we come up with a thesis, then test the thesis against potential investors and if need be, adjust the thesis to make something that is marketable. This is what we did with the master fund. We spent a substantial amount of time initially going around speaking to the Abu Dhabi Investment Authority (ADIA) and several others to understand what they were saying. I remember my first meeting was with a bunch of pension funds and it was one of the most useful meetings because I got a lot of input into what they were really looking for. We then tweaked the structure to actually address those inputs. That is what we are going through with the strategic funds. We have a general thesis as to what we want to do; we believe there will be some investors who will be interested but we will have to report back once we have tested the thesis and we have more clarity on what we are doing.