India's fast-growing economy desperately needs better transport and communication links and more power assets if it is to be sustained, but sourcing the capital to pay for their development hasn't kept up with demand.
Bespoke new infrastructure investment vehicles should help to address that to some extent and is attracting the attention of global asset owners, among them the $280 billion-Canada Pension Plan Investment Board (CPPIB).
CPPIB has already said that it wants to lift its exposure to India as part of a plan to more than double its emerging market assets by 2025, potentially representing some $80 billion of additional investment, and it is zooming in on infrastructure.
“We do see interesting opportunities in renewable energy and roads. We also continue to explore opportunities in the core and regulated infrastructure sectors,” Suyi Kim, senior managing director and head of Asia Pacific, CPPIB, told AsianInvestor late last month.
“We are already invested across infrastructure, real estate and financial services, as well as invested in funds and equities and, expect to grow in all of these areas in India as part of our overall expansion of investment in emerging markets,” she said.
The fund had C$7.2 billion ($5.5 billion) invested in India as of March-end, 2018, across all asset classes.
India needs about $4.5 trillion of investment in the next 25 years to build up its roads, airports, ports, rail and power networks as well as other urban and rural infrastructure, according to the government’s 2017-2018 Economic Survey, published in January.
Renewables form a key part of that ambition: according to an October 2017 report by the International Energy Agency, India is expected to more-than-double its current renewable electricity capacity by 2022 -- estimated to be around 70 gigawatts at the end of May.
But there is a massive funding gap, especially in traditional power and telecom projects, following a series of failed public-private partnerships and due to the high accumulation of debt at private sector companies, among other things.
The launch last year of infrastructure investment trusts, or Invits, has tried to address that, with only limited success, but with big foreign players like CPPIB entering the frame, that could yet change.
In May, CPPIB put down $125 million in a private placement of newly launched IndInfravit Trust, a road-focused Invit sponsored by local firm L&T Infrastructure Development Projects that initially aims to acquire five operational toll roads.
The infrastructure equivalent of real estate investment trusts (Reits), Invits are structured as listed securities, pooling money from investors to buy assets that provide a cash flow over time.
“[They are] a well-designed and efficient structure under the Securities and Exchange Board of India (SEBI) fold," Kim said. “CPPIB likes the strong governance framework, the attractive risk profile as well as the established SEBI regulatory framework of the Invits,” she said.
CPPIB finds Indian infrastructure appealing because of the country’s growth potential as well as its need for foreign capital, given the relative lack of domestic capital, Suyi said.
India's GDP expanded by 6,5% in year to March 31 and is projected by the government to grow between 7% and 7.5% in the current financial year, which in India also runs to March-end.
The way infrastructure investments are structured also helps.
“The evolved concession agreements are an essential element for infrastructure investors which balance risk and return,” Kim added.
Concession contracts, a public-private partnership under which ownership rights continue to reside with public authorities while operation rights and associated returns are transferred to private players, have become increasingly popular as a way to attract private sector participation in infrastructure projects around the world.
“As long-term investors, we take careful account of the length of concession agreements – it’s always better to have agreements that have as long .. an investment horizon as we do,” she added.
Nevertheless challenges remain for investors, even for the likes of CPPIB.
The limited size of some of the investment opportunities is one barrier, although as Kim noted the issue can be resolved by joining forces with other investors and platforms to aggregate transactions to reach the right scale.
“Historically there have [also] been some uncertainties around specific regulations in some sub-sectors and some projects which rely on land acquisition have been subject to delays,” she said.
Hence, the Canadian pension fund continues to monitor the time it takes to resolve infra-related disputes in India along with the evolving regulatory framework, Kim added.
India, China and Brazil are key focus markets as CPPIB attempts to boost its emerging market assets to one-third of total assets. Emerging markets account for 15% of its overall assets currently.
“It’s also worth noting that CPPIB’s total assets are projected to be C$476 billion by then, compared to C$356.3 billion today. Looking even further out, which we do as long-term investors, our assets are projected to be C$800 billion ($611 billion) by 2030,” Suyi said. "So you can see how meaningful that one-third will be."