India’s plan to spend over $500 billion on infrastructure in the Eleventh Five-Year Plan has opened up new growth opportunities for companies that execute as well as finance infrastructure projects. IDFC Projects, the development arm of Infrastructure Development Finance Company (IDFC), is betting big on the new opportunity.
With focus on power and roads, the company is planning to invest about Rs 8,000 crore in power projects alone in four years, Pradeep Singh, managing director of the one-year-old company tells Sudheer Pal Singh in an interview.
IDFC is a financing institution. What was the rationale behind floating IDFC Projects?
IDFC has been focusing on lending and policy-advising. But it has also been trying to occupy various infrastructure segments. It first took equity in some projects, then started managing third-party funds.
IDFC Projects, the development arm, was a natural step to aggregate debt, equity and being able to mobilise them. So now we are becoming owners of projects, rather than just being lenders or passive investors. By being owners, we are becoming active promoters.
You have just signed a memorandum of understanding (MoU) with BHEL and the Gujarat government for a 3,200-Mw power plant. What will be the ownership pattern of these new ventures and where are you going to raise funds for the Gujarat power project?
It (the Gujarat power project) is to be through a joint venture company. In most of our businesses, we expect to be partners with people with technical expertise, as we are not a technical company. The JV company in Gujarat is with Gujarat State Electricity Corporation Ltd (GSECL) and Bharat Heavy Electricals Ltd (BHEL).
Three of us will contribute the capital. We can also mobilise our share of the capital and blend it with our own money. Our share of the capital in the project, which is of Rs 8,000-8,500 crore, is 48 per cent. This money will come from our balance sheet. I expect the JV to be in position by February this year.
Going by reduction in BHEL’s market share and history of project delays, was it a natural choice as an equipment supplier?
BHEL is a partner mostly because the plants made will be using super-critical technology, which is supplied by BHEL. The company has an agreement with Alstom. It’s always useful to have an equipment supplier as a significant shareholder. We do not want them just to deliver the equipment and leave. One of our objective was also to provide opportunity of super-critical technology to a domestic supplier.
What is the fuel supply situation for the Gujarat power plant?
We are working towards getting a new coal linkage allotted to us by the Central government. We are also exploring the possibility of utilising the coal that is currently available to the Gujarat government. It will be a combination of two. The bulk of the power produced will go to Gujarat, at least in the first phase.
To what extent have you been able to achieve the targets you took into consideration while planning the joint venture? And going forward, what are the positives and the downsides that you have identified?
Our mandate, to begin with, was not tied up to specific targets. However, as it turned out, we very quickly jumped into a water project in Haldia in December 2007. But since then, we have examined more than 50 projects across sectors, including real estate. We wanted to look at real estate as there is an overlap that is beginning to happen between real estate and infrastructure.
But currently, we have decided to focus on power and roads, and some special projects in the real estate domain. We have also set targets. Like in power, we have a target of 3,000 Mw in the next four years. The entire 3,000 Mw will come from the Gujarat power plant. We have also increased the target recently. Also, we have joined in a recent MoU signed between BHEL and the Karnataka government for another 2,400 Mw.
What are the new sectors you are looking at apart from power and roads? Are you also considering IT and telecom?
Ports can certainly get added into our portfolio and Special Economic Zones too. But we do not want to look at typical real estate projects. We looked at real estate as a part of the broad canvas of infrastructure. Telecom is a very crowded sector. It doesn’t fit into our way of doing things. It’s a pretty mature market at one level. So we are not particularly keen on looking at that.
In power, what are your plans for the future projects you are looking at?
There is an idea we have been developing for a long time, which is on evacuation of power from the Independent Power Producers (IPPs) from Chhattisgarh. We are in conversations with the state government, the Central Electricity Authority (CEA), the Ministry of Power and with the IPPs. Some 17 IPPs have already signed MoUs for the evacuation of power with us. The idea is to form a separate company for evacuation.
What are the major challenges which you have identified for this new business?
We do not want to approach individual IPPs for evacuation like any contractor does. We want to create a third party intermediation by creating an integrated network. One of the biggest challenge is that the timing of these plans coming up could be highly variable. Taking a decision, on whether to make an investment today for evacuation from a plant that may not come up for three years or do I keep adding the capacity, is a challenge.
What is the rationale behind this new idea?
For the first time in the country’s history, there will be such an enormous concentration of coal-based power projects in a small territory with the pit-head concept. There are 50 MoUs that have been signed by the government of Chhattisgarh alone, let alone Jharkhand or Orissa.
And currently, the evacuation of power is falling between the central transmission utility (Powergrid) and the state transmission utilities. And what is happening is that even in these MoUs, the generators are asked to make arrangements for evacuation. That is a very inefficient way of doing things. The new idea will lead to savings in the cost of power as transmission distances will come down.
What is the investment estimate for this new plan?
The investment may not be very large... say Rs 500-700 crore for Chhattisgarh alone. But that also depends on how many IPPs come on-stream. I don’t want to commit on any number.
One of the major positives for your business profile is that currently the thrust area of the government’s policy focus is on public-private partnership (PPP) model for infrastructure projects. But after the current financial crisis, there is a growing discontent that even the PPP model might not be as sustainable or reliable as they are believed to be.
I think it is a big mistake to think of PPP as means for mobilising private capital. The PPP is driven by the desire to improve the efficiencies on the system. Therefore private capital is a consequence of PPP, and not a driver of it. Also, whether a PPP project is attracting a lot of private capital or not, is not the only benchmark for its success. For example, the National Highways Authority of India (NHAI) projects get 40 per cent subsidy. Does that mean that PPP is a failure in roads?
I would say No. Again, PPP’s ability to produce more efficient solutions is because the incentive structures are correct. Also, what is happening today in the market will not stay forever. I am not particularly worried about the long-term impact of the current crisis on the growth of PPPs in infrastructure. Also, we must analyse, why some of the PPP projects have not been able to attract enough interest of late.
For example, there are a number of road bids by the NHAI, which are not receiving bidding interest. There is a ned to take a harder look at the project structure... for example, at the technical specifications that are being bid out, grant support being provided and the kind of concession agreement and restrictions that are being imposed. Some of the road projects today are being packaged in a manner which are not making them attractive for PPP. For example, some of the projects are being over designed.
Some of the traffic estimates are not found reliable. This is one of the structural problems because of which the bidding interest has been lowered. The project cost estimates, which have been used by the NHAI, are old and unreliable. They are estimating the project costs at much lower levels.
This lowers the effective grant support, which should be ideally 40 per cent of the project cost. Second, there is a provision for compensating the lenders and investors in the event of default. At that stage, the termination payments are linked to the estimated project costs. This creates a huge risk for the investor.
What are such structural anomalies you will face in power sector projects?
In power projects, the biggest challenge is fuel supply. Coal blocks need to be allotted to people who would quickly develop them and not to those who sit on them. The allocation should be more transparently.
IDFC is focusing now on less capital intensive but more capital-market-oriented businesses... like asset management and equity broking. Don’t you think such businesses are more vulnerable to market volatilities?
That is why this is a diversification. It’s a mix of stable incomes with relatively more volatile incomes.
