Rupee dive forces investors to reconsider infrastructure
The Indian government may have committed $1tn to infrastructure spending over the next five years, but domestic and foreign non-governmental investors remain wary of the political and economic bottlenecks facing the country.
The rupee hit new lows last month, pushing investors to re-examine their exposure to Indian infrastructure, just months after 3i, the UK private equity investment group, decided to end all infrastructure investment in the country.
David Sloan, director of the Asia arm for Eurasia Group, a political risk consultancy, says recent currency turmoil will only further undermine confidence that was already waning.
He says: Even before the current rupee crisis, private investors were very wary about Indian infrastructure. How foreign investors will now hedge against further rupee devaluations is the million dollar question.
Sasha Riser-Kositsky, an Asia researcher at Eurasia Group, says the biggest hurdle for Indian infrastructure is land.
The World Banks competitiveness index shows that it takes 295 days to acquire a lease for public land in India twice the global average and 99 days to acquire private land, versus a global average of 61 days.
Indias infrastructure development record is also poor. Historically just one in four greenfield infrastructure projects have been completed on time.
Investing in Indian infrastructure therefore has the potential to be an enormous mess, Mr Kositsky says.
A drop in foreign flows to Indian private equity infrastructure-related deals further demonstrates the growing unease among private investors about projects in the country, according to Mr Sloan.
He estimates that there were 56 private equity deals relating to infrastructure in 2010, worth roughly $31bn. In 2012, this dropped to 30 deals worth roughly $850m. I imagine that in 2013 the numbers will be way down, Mr Sloan says.
But despite this bleak outlook, there are pockets of opportunity for investors willing to invest long term.
Tanmaya Misra, the Mumbai-based manager of JPMorgans Asian Infrastructure fund, has avoided greenfield projects that expose investors to construction risk altogether.
Instead, he has prioritised projects that promote sustainability and benefit local communities in order to mitigate the political and regulatory risk of permits being declined when projects become unpopular with local communities.
Mr Misra adds that JPMorgans current investments in Indian infrastructure have been unaffected by the recent currency movements, as such fluctuations tend to affect projects in their building phase when equipment needs to be imported.
He also shakes off concerns over Indias energy market, which depends heavily on oil imports. Roads, for example, counter-intuitively benefit from fuel price increases, as drivers that usually opt for longer, cheaper routes instead take toll roads to save on fuel costs.
Unless there is a severe drop in gross domestic product growth, which is still at 4-5 per cent a year, Mr Misra believes road traffic will remain at a similar level, to the benefit of investors in road projects.
In a recent research report, JPMorgan points out that Indias urban population is set to double to 500m by 2030. The urbanisation process in developed countries, however, is likely to come to an end, with 90 per cent of developed populations already living in cities.
With the city populations likely to boom, urban healthcare is consequently another area Mr Misra has honed in on, having invested in two Indian hospitals, including a 15,000-bed private facility in Mumbai.
Mr Riser-Kositsky adds that private sector ports are another bright spot for Indian infrastructure. There is substantial foreign interest in ports, mainly because there is recognition by a number of big multinationals that India will need more coal imports, he says.
Even if [Indias ports] do not look good in the short term, they do in the long term, as India will import coal from Australia and Indonesia and export iron ore when iron ore imports ramp up again, he adds.
Mr Misra expects carefully selected infrastructure investments in India and elsewhere in Asia to return 15-20 per cent a year net of fees, based on current deal underwriting by JPMorgans investment teams.
However, Eurasias Mr Sloan remains unconvinced by the positive announcements from Indias government regarding its commitment and ability to attract infrastructure spending.
Although the government has recognised that infrastructure investment is a huge problem for the country, doubts linger over how rapidly administrative change is taking place.
The government announced that 36 stalled infrastructure projects were cleared in August, but other reports suggest up to $3bn of investment remains blocked, according to Mr Sloan.
He says: The government has set ambitious fiscal deficit targets and capital spending has been slashed in a huge way.
Because of that, the government will not be able to meet its commitment for infrastructure spending. There is not much that is positive to say on India at the moment.
The Indian government may have committed $1tn to infrastructure spending over the next five years, but domestic and foreign non-governmental investors remain wary of the political and economic bottlenecks facing the country.
The rupee hit new lows last month, pushing investors to re-examine their exposure to Indian infrastructure, just months after 3i, the UK private equity investment group, decided to end all infrastructure investment in the country.
David Sloan, director of the Asia arm for Eurasia Group, a political risk consultancy, says recent currency turmoil will only further undermine confidence that was already waning.
He says: Even before the current rupee crisis, private investors were very wary about Indian infrastructure. How foreign investors will now hedge against further rupee devaluations is the million dollar question.
Sasha Riser-Kositsky, an Asia researcher at Eurasia Group, says the biggest hurdle for Indian infrastructure is land.
The World Banks competitiveness index shows that it takes 295 days to acquire a lease for public land in India twice the global average and 99 days to acquire private land, versus a global average of 61 days.
Indias infrastructure development record is also poor. Historically just one in four greenfield infrastructure projects have been completed on time.
Investing in Indian infrastructure therefore has the potential to be an enormous mess, Mr Kositsky says.
A drop in foreign flows to Indian private equity infrastructure-related deals further demonstrates the growing unease among private investors about projects in the country, according to Mr Sloan.
He estimates that there were 56 private equity deals relating to infrastructure in 2010, worth roughly $31bn. In 2012, this dropped to 30 deals worth roughly $850m. I imagine that in 2013 the numbers will be way down, Mr Sloan says.
But despite this bleak outlook, there are pockets of opportunity for investors willing to invest long term.
Tanmaya Misra, the Mumbai-based manager of JPMorgans Asian Infrastructure fund, has avoided greenfield projects that expose investors to construction risk altogether.
Instead, he has prioritised projects that promote sustainability and benefit local communities in order to mitigate the political and regulatory risk of permits being declined when projects become unpopular with local communities.
Mr Misra adds that JPMorgans current investments in Indian infrastructure have been unaffected by the recent currency movements, as such fluctuations tend to affect projects in their building phase when equipment needs to be imported.
He also shakes off concerns over Indias energy market, which depends heavily on oil imports. Roads, for example, counter-intuitively benefit from fuel price increases, as drivers that usually opt for longer, cheaper routes instead take toll roads to save on fuel costs.
Unless there is a severe drop in gross domestic product growth, which is still at 4-5 per cent a year, Mr Misra believes road traffic will remain at a similar level, to the benefit of investors in road projects.
In a recent research report, JPMorgan points out that Indias urban population is set to double to 500m by 2030. The urbanisation process in developed countries, however, is likely to come to an end, with 90 per cent of developed populations already living in cities.
With the city populations likely to boom, urban healthcare is consequently another area Mr Misra has honed in on, having invested in two Indian hospitals, including a 15,000-bed private facility in Mumbai.
Mr Riser-Kositsky adds that private sector ports are another bright spot for Indian infrastructure. There is substantial foreign interest in ports, mainly because there is recognition by a number of big multinationals that India will need more coal imports, he says.
Even if [Indias ports] do not look good in the short term, they do in the long term, as India will import coal from Australia and Indonesia and export iron ore when iron ore imports ramp up again, he adds.
Mr Misra expects carefully selected infrastructure investments in India and elsewhere in Asia to return 15-20 per cent a year net of fees, based on current deal underwriting by JPMorgans investment teams.
However, Eurasias Mr Sloan remains unconvinced by the positive announcements from Indias government regarding its commitment and ability to attract infrastructure spending.
Although the government has recognised that infrastructure investment is a huge problem for the country, doubts linger over how rapidly administrative change is taking place.
The government announced that 36 stalled infrastructure projects were cleared in August, but other reports suggest up to $3bn of investment remains blocked, according to Mr Sloan.
He says: The government has set ambitious fiscal deficit targets and capital spending has been slashed in a huge way.
Because of that, the government will not be able to meet its commitment for infrastructure spending. There is not much that is positive to say on India at the moment.
