Potholes on the road to investing in India infrastructure

Macquarie's Asian Infrastructure Conference in Singapore contemplates how or whether private investors can gain from improving the shambolic state of Indian infrastructure.
India's shambolic infrastructure is well known but sometimes the scale can still astonish. For example, two-thirds of villages have less than 100% electrification. There is 120,000 tons of untreated garbage daily. Sanitation on average stands at 28%. Water supply in the major cities is less than four hours per day. There are 10% base power shortages and 15% at peak.

For investors, this means an obvious opportunity: India needs lots of infrastructure built, now. It was a major topic at the Macquarie Asian Infrastructure Conference recently held in Singapore. Investors sense a bonanza but it's not quite that simple.

Take roads, for example. Anita George, director of infrastructure for South Asia at the International Finance Corporation, the World Bank's private-sector arm, says Indian roads need $70 billion in the next five years.

So one wonders, if infrastructure is a great opportunity, why aren't the Indian tycoons jumping in? The Tatas are buying Corus (formerly known as British Steel), one of the industrial crown jewels of their former colonial masters. Why don't they spend that money on the $500 billion needed in the next five years to pay for Indian infrastructure? The answer may be an obvious one. They see infinitely more profit with less histrionics elsewhere.

$500 billion could be characterised as a great opportunity, or alternatively you can see it as a mountain so vast, that as a potential venture with commercial upside, it will be one that never pays off, because of the difficulty of finding an exit point. An exit made harder as there is still so much supply of other projects lacking capital and so little demand.

George estimates that 25-30% of the bill will come from private money, a quarter of which will be equity and the remaining 75% of their stake from external leverage.

An infrastructure fund might nevertheless hoover-up assets wherever they are well-priced, can generate fees and offer a bond-like revenue income. Still, will intelligent investors want to pay 2% management fees plus performance fees for dropping their money long-term into the metaphorical new equivalent of the black hole of Calcutta?

Macquarie already has a prospering infrastructure business in India today. It has a portfolio of telecommunications towers which it hopes to grow fourfold in the next 10 years.

"We expect strong growth in the tower business as a result of increased wireless subscribers, greater rural coverage and the rollout of new technologies,ö says Macquarie's Shubham Majumder. But other sectors such as state toll roads look trickier.

Putting aside the financial risks, the operational hurdles are vast.

"Its extremely difficult, or often impossible, for an existing huge metropolis to just build a new water and sewerage system, expanding what is in place below the streets, more so if there is nothing already there" Danish infrastructure engineer Benjamin Wieland told AsianInvestor.

With urbanisation in India rising from 29% to 40% in the next 10-15 years the water systems are going to be stressed.

"Individual people use as much water in Delhi as they do in Paris," says Anita George. "Some people are prepared to pay for private water though. A greater political problem is being allowed to charge for it."

ThatÆs an important distinction. Can you imagine the reputational situation for an infrastructure fund when tens of thousands of demonstrators launch an angry protest about high water charges, electricity tariffs, road tolls and bridge toll charges.

If this gaping shortfall of infrastructure was in Switzerland or Germany, you'd say it was a great investment opportunity. But, is Indian infrastructure a challenge or opportunity? The answer is: it is in India.
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