Road projects are still attractive from a lending perspective.

December 2013
Athar Shahab, CEO, Uniquest Infra Ventures

Uniquest Infra Ventures, a JV between Malaysian firm Khazanah Nasional Berhad and IDFC, has acquired equity stake in Jetpur Somnath Tollways Pvt Ltd (JSTPL), which is implementing a 124-km BOT project connecting Jetpur and Somnath in Gujarat. At the helm is Athar Shahab, Chief Executive Officer, Uniquest, who has over two decades of experience in the field of investments, project financing, project development and project management. He was previously deputy managing director, IDFC, and has been involved with several infrastructure-related initiatives of the Government of India. In an interview with CW, Shahab spoke about infrastructure funding challenges from an investor's perspective...

Give us an understanding of the role played by your organisation in the infrastructure space. Also, tell us about your current project portfolio.
Uniquest Infra Ventures continuously scans the market for investment opportunities; wherever something worthwhile is found, we try and structure it appropriately. Our current focus is the roads sector where we have an investment in the Jetpur-Somnath Toll road project. It is a 124-km highway connecting Jetpur near Rajkot to Somnath in Gujarat, a corridor that connects places of industrial and tourist interest to the coastal region of the state. It is an approximately Rs 1000-crore project where we are investing approximately Rs 230 crore of equity. We have also made a commitment to acquire majority in an operating toll road project; a public announcement on this will follow soon. There are several other bids and acquisition projects in the pipeline. We have been prequalified by NHAI as number three in their annual prequalification list. We are currently evaluating bids for new expressway projects.

Apart from roads, are there other sectors you are looking at?
Not currently. Right now, we are only focused on roads because we want to build size and scale in one sector before moving to any other.

What are the factors that guide your choice of investment in a project?
It is mainly commercial viability, ease of execution and ease of operation.

What are the problem areas of funding? What are the challenges in the Indian context right now?
The environment for funding in infrastructure is currently quite tight because lenders have not had a very good experience across sectors.

Most infrastructure projects have got involved either in land-related or environmental consent-related problems. Power projects have additionally suffered on account of fuel, Programme Partnership Agreement (PPA) related and receivables related issues. In road projects, you have the problems of utilities shifting and ROB approvals. Even after you have completed the project, sometimes there are local challenges against toll collection. Despite all these challenges, I would say that road projects would still be more attractive from a lending prospective compared to other sectors. Right now, anything to do with thermal power will find it very difficult to attract funding. Renewables are finding it easier to get funding these days though not every project would be viable or sustainable in the long run.

Are you saying that projects are not viable from a lender's perspective?
I think if we are careful in selecting the projects and do our due diligence properly, we can still find enough projects in this country that are worthy of lending and investment.

Your first choice for investment was the road project; was that a deliberate choice?
I would say that it was a very well thought out move. Quality of investment decision-making is a key strength for Uniquest.

What is the impact of the depreciation of the rupee on your business?
If you have foreign capital that is already fully invested in the project and if the project does not have any revenues denominated in foreign currency -û obviously most projects do not have it -û then the investment returns will be affected to that extent. So all those people who have equity from abroad invested in infrastructure projects have a serious issue of servicing it at the current level, which is very different from the one at which the investment decisions were made. But for someone like us who has just begun to invest, this is not much of a problem.

What is the extent of funds available to you for investment in infrastructure projects?
Sufficient to say, we have enough commitments to invest in projects. And that we have an appetite to invest in more on an ongoing basis.

To what extent has the shortage of funds affected projects?
I think you can see that in the response to the NHAI bids where people are not really coming forward. All the promoters who have not been able to complete projects are facing a problem because the banks are not willing to lend to them till their existing projects are completed. Even for other promoters who have a good track record otherwise, there is generally a negative perception about infrastructure projects; so on both counts lenders are quite reluctant to fund new infrastructure projects.

What are the challenges faced by lenders and what are your recommendations for reform?
Lenders are facing a twofold risk. One, execution challenges have been far greater than estimated. Hence, there is a need to bring down the level of execution risk, which means that if land and environmental consents and other approvals are promised to be delivered in a timely manner, they must be delivered. Second, the commodity prices have gone up sharply. Going forward, banks will have to be realistic in estimating the extent of inflation on these prices and make sure that there is enough cushion in the project cost to deal with the challenge. Also, the challenges faced revolve around economic prospects. Roads traffic has been subdued as it is directly linked to economic growth. If GDP growth is tapering down, there is no way road traffic can go up, and this is affecting the financial viability of many projects. We need to have more conservative estimates of the traffic. I think with these kinds of safeguards, if they choose the right projects that are not aggressively bid, where land and clearances are already available, if there is a cushion in the project cost to deal with unanticipated changes to scope and commodity prices inflation and traffic projections are conservative enough, you still have a strong lending case.

Do you think changes in the MCA will induce more funds into the sector?
The current MCA is a fairly rigid document. It needs to be amended to reflect the true reality of the investment environment in India. It will be a positive step forward and should attract additional capital, with new investors. It should give better comfort to lenders.

India is faced with $ 1 trillion of project finance in infrastructure. With foreign investments having dried up, where will this come from?
The demand is there, but the environment should be conducive for lenders to lend. The need for Indian infrastructure is so huge that you will need a lot of foreign capital to come in, including debt capital. If domestic lenders themselves are shaky in this environment, how can you expect long-term lenders from abroad to come and participate?

What is your outlook for the sector in terms of finance?
We have seen a number of positive changes happening in the past year, at least in the case of the National Highways Authority, and that gives us hope. They have stopped bringing projects to the table where land is not in place or environmental clearances are not done. They are also trying to review the MCA, which is a positive thing. They are trying to find ways of restructuring the premium of existing projects, which is also a welcome step. We can see efforts being made in the roads and the power sectors. Going forward, the private sector has to be much more modest, not aggressive. Bankers must do their due diligence and insist the Government to fulfill its promises. For its part, the Government has to provide land and clearances, and revamp the concession framework to make it more amenable to investment. If all three stakeholders investors, lenders and government work together, we can bring glory back to infrastructure.