by admin | May 25, 2021 | Opinions
By Taponeel Mukherjee,
Issues around infrastructure creation in India bring to the fore some core themes that are worth analysing. The structure of infrastructure companies, cost over-runs, retail investor exposure to credit funds, and the need to recycle assets to real-money balance sheets are once again in focus given the problems that IL&FS is facing currently.
Firstly, one must assess whether it makes economic sense for infrastructure companies to be publicly listed. Being publicly listed has its advantages in terms of greater scrutiny of financial information and the liquidity available to the company through share sale. Additionally, listed companies have their own stocks which are a “currency” of sorts to attract and retain top talent.
But public listings also mean implicit pressure from the markets for quarterly performance, something an infrastructure business, which is long-dated by its very nature, is not particularly well suited to handle. For all the advantages of being publicly listed, it is worth pondering whether in an Indian context quarterly pressure of results can hinder infrastructure businesses from making the correct decisions keeping the long-term goals in mind. While scrutiny of financial results is crucial, so is the capacity of the infrastructure business to focus on the aim of creating long-dated assets.
A better level of corporate governance is essential for infrastructure businesses, given the scale of investments, the lack of alternative uses of assets once created, and the urgent need to develop such assets. Whether publicly listed or not, overall corporate governance standards need to improve to create a more robust ecosystem.
Secondly, there is the constant debate on the public versus private aspect regarding infrastructure creation and asset management. The truth is that both are essential. The way forward for India to create the requisite infrastructure both in respect of quantity and quality will require the private sector to work together with the government.
There are issues that a public-sector project or a private sector company face, but this does not necessarily mean that there is a fundamental issue with all such projects and companies. Transparency and effective policies will be crucial. Project-wise analysis is required to determine as to who is better placed to take care of the three essential components of each project, i.e., Build, Operate and Finance.
Given the complexity of infrastructure assets, a “one size fits all” solution will not work. While issues around land acquisition and the time required for approvals have seen improvement over the years, India needs to ensure that such problems continue to receive constant attention. The issues above are generic to the infrastructure sector regardless of the ownership of the asset.
Thirdly, to boost infrastructure creation and credit flow one needs to have a more efficient process with regards to credit risk pricing. Credit ratings must reflect the embedded credit risk to enable the higher flow of credit into the sector. For instance, a rating should ideally move through downgrades and upgrades in notches to reflect the gradual re-pricing of credit risk. Such credit systems provide the investor base with greater confidence in both the rating system and the credit quality of the underlying market.
A jump in credit rating indentation over multiple notches over a short span of time tends to imply that the credit risk in the system isn’t being priced at the right pace. To further enable efficient and constant re-pricing of ratings to reflect credit risk a secondary market in credit products must develop. Only with a secondary market for credit products can credit genuinely be priced and assessed by the markets.
Fourthly, the investor base for the financing of infrastructure assets deserves attention. On the retail mutual fund side, the credit funds that have invested in infrastructure have provided the sector with much-needed capital and retail investors with an opportunity to earn attractive returns. But till a secondary market for credit products develops in India to aid credit risk pricing, retail investors will need greater education on what returns and risks infrastructure assets present. Short-term liquidity in a fundamentally illiquid investment may not always be easy to come by.
On the institutional investor side, the need for more “real money” (pension funds and insurance companies) investors cannot be over-emphasised. A greater share of infrastructure assets in India must be on balance sheets that hold the assets to generate returns to match liabilities, and not from a pure financial return perspective. The ability of a “real money” investor who has a long-term horizon of 20 years or so to manage short-term revenue fluctuations from an asset is far greater than it is for a financial investor with a much shorter time horizon.
Issues that infrastructure creation faces present us with opportunities to learn and implement solutions. An iterative process that continually imbibes new learning is essential for India to create the required infrastructure that a rapidly growing economy will need in the decades to come.
(Taponeel Mukherjee heads Development Tracks, an infrastructure advisory firm. The views expressed are personal. He can be contacted at taponeel.mukherjee@development-tracks.com or @Taponeel on Twitter)
—IANS
by admin | May 25, 2021 | Opinions
By Taponeel Mukherjee,
For ideal risk management in infrastructure finance, it is vital that the capital market infrastructure and the microstructure of the financial market aid such effective risk management. For the Indian economy, infrastructure investors must have access to more financial instruments to hedge risks. Essentially, the financial markets require greater microstructure.
India needs a liquid bond future to be the central focal point of the market. True, past attempts to create a functional bond futures market haven’t yielded the required results. But from a risk management perspective, a bond future such as the US Ten-Year Future or the Japanese Government Bond Future is central to hedge outright “duration risk”. Because this future allows market participants to hedge the risk from an outright movement in interest rates and instead switch into “curve risk”.
In common parlance, “curve risk” is the risk from the movement in the interest rate differential between two points on the yield curve. The not-so-successful attempts in the past have valuable lessons for us which must be factored in future attempts in this regard.
To further boost long-dated debt markets, the importance of improving liquidity across the government bond curve, especially in the long-dated tenors beyond 20 years, is beyond question. Having a deep and liquid government bond market will allow market participants to hedge “curve risk”.
For example, for an investor who wants to lend for 25 years to a corporate entity (through a loan or a corporate bond), the investor is primarily interested in the risk of the corporate balance sheet. The investor’s interest is driven by their expertise that allows them to value and understand corporate credit.
With both “duration risk” and “curve risk” hedged, the investor is left with the “spread risk” between the 25-year bond issuance and the government curve. Enabling investors to get access to instruments that allow them to manage risks they specialise in, will be the real driver behind creating successful long-end lending in Indian infrastructure.
Additionally, India needs to develop the onshore interest rate swap market further. The Reserve Bank of India (RBI) has initiated steps to improve liquidity in this market, but we need to continue to do so in the foreseeable future. Swaps allow investors and market participants to hedge duration (outright interest rate risk) and have exposure to the spread risk between the bond and the swap rate.
As an example, if a highly rated government agency was involved in the construction of infrastructure projects and wanted to issue 30-year debt to finance the project. A liquid swap market would enable more market participants to subscribe to the bond if they can hedge the interest rate risk using an interest rate swap.
The investor investing in the bonds is primarily interested in the credit quality of the agency issuing the bonds. The investor’s expertise might be exclusively in analysing the “spread risk” and not necessarily in predicting the direction of interest rates. A functional interest rate swap market will allow both the investor who is comfortable taking the outright interest rate risk and the investor who is solely interested in the “spread risk” to be a market participant. Essentially, a more significant pool of capital can be mobilised through the availability of swaps.
The creation of liquid and functional markets in bond futures, government bonds and interest rate swaps is essential for infrastructure financing in India. These instruments allow the infrastructure market participants to allocate the various risks to the institution best equipped to manage the risk, thereby leading to an efficient market.
For infrastructure projects and companies to succeed not only must construction, legal and operational risk be allocated to the institution best equipped to handle the risk, but also the financial risks in the market be allocated to the institution best equipped to handle it. Not only is the risk managed better, but the cost of credit is lower for good financial assets as market specialists can charge the right risk premium instead of overcharging to create a buffer for a risk they are ill-equipped to manage.
A functional financial market also reduces the dependency on bank loans to finance infrastructure in India. Less reliance on banks for infrastructure financing ought to be a priority, especially considering the issues Non-performing loans (NPAs) plaguing the banking sector.
The development of current capital markets for a more robust financial microstructure will involve deregulation of markets to an extent like allowing greater foreign participation in Indian financial markets. For sure, allowing foreign participation in financial markets will add volatility to markets. However, despite the increased volatility, well developed financial markets are worth considering as a tool to boost Indian infrastructure. Additionally, it is hard to obtain a Pareto-optimal policy decision.
(Taponeel Mukherjee heads Development Tracks, an infrastructure advisory firm. The views expressed are personal. He can be contacted at taponeel.mukherjee@development-tracks.com or @Taponeel on Twitter)?
—IANS
by admin | May 25, 2021 | Opinions
By Taponeel Mukherjee,
We are at the midpoint of 2018. The chance to attend an infrastructure conference at this juncture was the perfect opportunity to reflect on, and re-examine, issues confronting the Indian economy. A bevy of distinguished delegates ideated on the next significant steps to finance Indian infrastructure at the annual meeting of the Asian Infrastructure Investment Bank in Mumbai. There are some critical takeaways from the meeting, allowing us to revisit some interesting themes.
The success of the National Highways Authority of India’s (NHAI) toll-operate-transfer model and the ability of the government to create infrastructure assets effectively once again brought to the fore the advantages and need for “asset recycling” done well.
Attracting long-dated patient capital such as pension funds and insurance companies into greenfield infrastructure projects will be challenging, given that such funds are not adequately equipped to undertake construction risk. Therefore, a significant method to finance new infrastructure will be through government participation in the construction phase — and mobilisation of the capital pool through asset monetisation after that. This asset monetisation will provide the government with the capital with which to create new infrastructure.
Covered bonds as a financing instrument made for an interesting discussion. Despite the relatively smaller bond market in India, the creation of a covered bond market framework here is one that merits attention. In common parlance, one can think of covered bonds as those that have recourse both to an issuer and a pool of assets. Covered bonds in Europe, especially Germany have been a game-changer for over a hundred years. It would be prudent to see what potential they have in India.
It was also interesting to note the emphasis placed by experts on the potential for better contract design to help create more financing. While we have made significant strides in contract design for infrastructure projects, the Non-Performing Assets (NPAs) at banks demonstrate that more work needs to be done to align equity sponsors’ interests with those of the lenders.
Better contracts that reward equity holders for well-executed projects and hold them accountable (by penalising and locking in their cash-flows) if project execution suffers, can help create better project structures, instead of lenders who are left stranded with heavily-leveraged projects. A better contract design ensures that as cash flows from a project decline and the project is unable to meet specific pre-determined financial ratios, the equity sponsor is unable to withdraw any cash from the project.
If the project returns can meet the financial ratio conditions again, then the equity sponsor will not have the money “locked-up”. Such a contract design, as correctly pointed out by a distinguished panellist, also helps ensure, to some degree, that bidding for projects isn’t aggressive above and beyond financially viable levels. A contract design that ensures that equity sponsors have more “skin in the game” leads to a better financing market for infrastructure.
One issue that certain public infrastructure assets such as metros (rapid transit system) have faced is financial viability due to low revenues from the asset relative to the investments required. In projects such as metro train networks or industrial corridors, it is essential to realise that to ascertain the monetary value creation from the asset, merely looking at the cash flows from the asset itself is insufficient.
A metro train network or an industrial corridor project has significant value creation in the surrounding areas through increased connectivity, resulting in substantial increase in property prices. Designing mechanisms that can capture some of the upside in the property value to finance the infrastructure asset can be crucial. Design of such an arrangement will take time but is well worth the effort. The Hong Kong Mass Transit Railway provides an excellent template that can teach us a lot.
The biggest takeaway from the conference was the need for various stakeholders in the infrastructure ecosystem to engage and work together. The multilateral institutions, the export credit agencies and the government can work together to create mechanisms to boost infrastructure financing. Export credit agencies, along with the multilateral institutions, can play a significant role in both providing capital and, more importantly, in lowering the cost of capital for infrastructure projects. Given the fact that infrastructure projects tend to have an essential component of long-dated debt, the ability of multiple institutions to cooperate and fill in the financing gaps is critical.
Discussions around infrastructure and finance always point towards the large size of the infrastructure gaps and the vast pool of global capital. The ideas above might provide valuable insights into solving the infrastructure finance paradox.
(Taponeel Mukherjee heads Development Tracks, an infrastructure advisory firm. The views expressed are personal. He can be contacted at taponeel.mukherjee@development-tracks.com or @Taponeel on Twitter)
—IANS
by admin | May 25, 2021 | Opinions
By Taponeel Mukherjee,
News that Reliance Jio has raised 53.5 billion Japanese yen (approximately Rs 3,251 crore) in Samurai loans is proof that as the telecom sector in India evolves, not only is Reliance Jio pushing for changes on how businesses are run, but it is also innovating on the capital structure front. There are important takeaways for the infrastructure sector from this Samurai loan.
Tapping into Japanese investors provides infrastructure businesses in India with an opportunity to access a large pool of capital that is looking for returns in a low interest rate environment. While an Indo-Japan collaboration through Japanese technology transfers is extremely beneficial, capital transfers through Samurai loan-type transactions is an area that deserves equal attention.
Reliance Jio’s Samurai loan allows it to borrow in a relatively low interest rate currency such as the yen and eventually swap the yen back into rupees to fund investments at home. Even factoring in for hedging costs, such transactions allow companies to borrow cheaper than a similar loan in India. Most importantly, it opens up a large pool of capital in Japanese institutions and retail investors.
To get an idea of why Japanese investors, who have traditionally invested largely in Japanese government bonds and equities, might want to start looking at offshore markets such as India, one needs to understand the policy changes and macro-economic conditions in that country, especially over the last few years. “Abenomics”, extensive monetary easing by the Bank of Japan and extremely low interest rates have all contributed to the changing macro-dynamics.
The size of assets with Japanese investors is significant, with institutions such as Government Pension Investment Fund (GPIF) having a total of 162.6 trillion yen of assets under management in December 2017. This makes GPIF the single-largest pension fund manager in the world. In addition, there is a structural shift underway in organisations such as the GPIF through a series of reforms initiated in 2014 — a shift that has seen the investment focus move towards international equities, bonds and alternative assets.
It is important for India to attract a part of this reallocated capital not just from GPIF but other large Japanese financial institutions. The Reliance Jio deal has shown that there is healthy appetite amongst Japanese investors for Indian businesses that have robust models.
To further understand why Japanese investors would have an interest in Indian debt-like investments one needs to look at data at an individual level. According to the annual survey by the Central Council for Financial Services Information, a body administered by the Bank of Japan, 54.1 percent of Japanese household financial assets are held in savings and bank deposits, with only 8.9 percent held in stocks.
When one considers Japan’s ageing population, one realises that the demand for fixed coupon paying assets such as bank deposits will only increase in the country. So, even if the average household does allocate more towards equities than they currently do, the demand for fixed income assets will still remain high as the population ages further. A three-year term deposit earns anything between 1 and 10 basis points in Japan.
This combination of an ageing population and high demand for fixed income assets in a low interest rate country shows us why there is demand for high quality interest paying investments in Japan. The fact that the total size of the financial assets held by Japanese households stood at $16 trillion at the end of June 2017, as per Bank of Japan data, gives us an idea of both the conundrum facing Japanese policymakers and the opportunity for Indian infrastructure businesses. To put $16 trillion in perspective: It is approximately seven times India’s GDP.
While Japanese capital is available, it is also discerning. Hence companies need to create robust business models, stable cash flow profiles and corporate governance standards that will satisfy Japanese investors. Over the next two decades, as India looks to create world class infrastructure, structures such as Samurai loans will be needed. As the infrastructure sector gradually recovers, capital structure innovation through channelling Japanese capital into attractive investment opportunities in the years to come will be a must.
(Taponeel Mukherjee heads Development Tracks, an infrastructure advisory firm. Views expressed are personal. He can be contacted at taponeel.mukherjee@development-tracks.com or @Taponeel on Twitter)
—IANS
by admin | May 25, 2021 | Opinions
By Taponeel Mukherjee,
The start of the new financial year provides us with an opportunity to look at developments that could herald the next big step for Indian infrastructure. These would help push the country further on to the global stage and propel economic growth. Here is our wish list for the Indian infrastructure sector in financial year 2018-19.
Inland logistics is an area that deserves attention. Given the government’s Sagar Mala project that aims to develop significant infrastructure around sea ports, it would make sense to also develop dry ports infrastructure in India. These consist primarily of inland container depots (ICDs) and container freight stations (CFS). Given the wide variety of goods being imported and exported, a greater push towards dry ports development through both development of existing policies and attracting operators and investors in the space would be welcome.
As India forges ahead with its renewable energy targets, the focus on creating a smarter power grid will also need to be kept in mind. Given the fact that renewable energy generation is variable, the current power grids may not be fully suitable for power production that comes with renewables. As the country gradually rolls out smart meters, power grid infrastructure modernisation is an area that will hopefully see increased focus. For India to truly leverage renewable energy and significantly improve energy efficiency, smarter grids are the way forward.
With the UDAN-Regional Connectivity Scheme (RCS) being implemented, it will be interesting to see what progress is made this year. The government has announced RCS with the aim to boost connectivity for both under-served and un-served airports. Regional air connectivity at affordable rates has the potential for value-creation if the surrounding infrastructure such as airports also develop. This will be the year for RCS to start delivering results as implementation gathers momentum.
As bankruptcy proceedings pick up pace, 2018-19 provides an opportunity for stressed investors to acquire valuable distressed assets at attractive valuations. These assets are across the spectrum — from shipyards to roads. Distressed infrastructure assets, despite the initial regulatory hurdles around the Insolvency and Bankruptcy Code (IBC), are an attractive entry point for patient infrastructure investors looking to enter the Indian market. This could be the breakthrough year on this front.
The year also presents an opportunity to further pursue the aim of reducing dependence on energy imports. Surging fuel prices are a grim reminder that despite the efforts made so far towards energy independence, significant work still needs to be done over the next few decades. This is the year to further improve our domestic energy production.
Agro-industry infrastructure such as cold storages and food processing facilities could do with a fillip. These are sectors that are still largely fragmented. A push, through sound government policy that aims to create a framework to attract institutional capital into the agro-industry, could be a game changer for a sector that still employs a significant percentage of the population.
The establishment of a central authority for affordable housing in India would be a step forward for the sector. A centralised authority that is a single window for policies, clearances and all issues related to the sector would help expedite the creation of much needed affordable housing in India.
This is the time for Indian infrastructure to consolidate and build on the progress made over the past few years. The infrastructure sector is a significant contributor to job creation and forms the backbone of the economy. Therefore, it is important to further emphasise on the credibility of the sector. Our wish list involves a broad range of issues that deserve constant attention this year — both from the government and industry participants, so as to ensure Indian infrastructure pushes ahead.
(Taponeel Mukherjee heads Development Tracks, an infrastructure advisory firm. Views expressed are personal. He can be contacted at taponeel.mukherjee@development-tracks.com or @Taponeel on Twitter)
—IANS
