A recent tie-up with the largest fund manager in Australia, AMP, has had UTI scouting for the right projects to invest $500 million. It also believes that investment in infrastructure is necessary to protect its other investments. In an exclusive interview to The Financial Express, Basudeb Sen, executive director, UTI, spoke at length on how they view the sector. Excerpts:

UTI has so far been the biggest investor in the infrastructure sector. What is your long-term view on it?

UTI is very optimistic about the sector. There are two reasons for this. One is the lack of infrastructure. This problem is only going to increase as the other sectors of the economy grow. Investment inother sectors will not take place unless infrastructure grows. Second, today there is a demand constraint that only infrastructure growth can solve. Construction of this infrastructural facilities is going to generate demand for the core sector. UTI therefore believes that the Indian economy has reached a stage where infrastructure will provide the best investment opportunities for the next few years. As one of the largest mobilisers of private savings, we are looking for investments in the sector. The important thing is that investment in infrastructure has become necessary to protect our investments in other sectors. If infrastructure continues to be a constraint, other sectors will suffer - we must understand this interdependence.

What are your concerns?

Let me classify the risks. The first is project construction risk - cost and time overruns. This risk has declined considerably in the last three-four years. We have now identified the reasons for time and cost overruns. Lenders, shareholdersand sponsors have all learned to control this risk. The other concern that savers may have is the long gestation period - especially since the saving profile may not match. After doing a lot of work together, now lenders and project developers have realised that it is possible to unbundle risk, maturities and yields in project investments and repackage it to suit investor needs. So new instruments are now available which will allow us to use savings from various schemes for infrastructure projects. So we are finding solutions to our concerns.

Do you feel infrastructure projects will generate the kind of revenues that are being talked about?

Yes. That is another concern. The lack of revenue is not due to lack of demand for infrastructure. The demand is certainly there. The issue is one of remunerative prices for infrastructure products. Developments in the last three years indicate that risks even on this account are reducing. But we are still not totally satisfied.

How important is a stategovernment guarantee?

A guarantee is one thing. The next step is whether the guarantor is capable of honouring its contract. So rating institutions should evaluate how much a state can guarantee, given its level of revenues. A guarantee can be reneged on. So there is now the escrow, induction of trust and retention accounts. Three years ago, these concepts did not exist.

What about pricing reforms?

Ultimately prices have to be adjusted. In some areas, legislation has made it possible to have price escalation on a rational basis. For instance, the regulatory authorities being set up in the power sector. Earlier this had been resisted, now it is here though the implementation will take some time. But as investors, we cannot take a position that we will not fund until every everything is in place. But as the risk of pricing is reduced, we would be able to take a larger exposure. We anticipate that this will happen, just for the economy to sustain.

Which sectors would attractinvestment?

I think power first, then telecom. In telecom, investment opportunities will exist where companies start expanding operations. In telecom, pricing and policy has become more consistent. In power there are fewer unknowns -- cost is known, the technology, its costs and policy are well-established. Regulatory authorities will ensure that consumers are protected and producers are able to recover their costs.

As guarantee becomes unviable in more and more sectors, the government will have to move towards setting up regulatory authorities to usher in pricing reforms. So a social process begins pushing everyone towards the right policy. There are fewer problems in ports sector. There are small projects happening quietly. When companies set up private jetties, investment is going into infrastructure, but it is going in the company's books. We have invested heavily in MSRDC. We are willing to invest with other companies but we have to be convinced that our interests would be protected.

Wouldyou invest in a project without a government guarantee?

What if MSRDC's second debt issue does not have a guarantee? Whether UTI will invest without a government guarantee or not has to be seen in some perspective. We invested in the first MSRDC issue because of the guarantee. But we may not go in for the second one, even with a guarantee. The guarantee may not be sufficient comfort if it is not backed by revenues. As guarantees become less relevant, the company will seek something else. The other mechanisms will have to come into force. In fact, the guarantees by government may force the right pricing.

There were some reports that AMP has withdrawn due to political uncertainty.

Our tie-up with AMP is very much on. In fact, we are now listing out investment opportunities where we can start putting in atleast $100 million of $500 million.

What changes do you expect in the infrastructure sector? The real areas where the government will need to conserve its resources and provideguarantees is water supply, sanitation etc, where issues of pricing are more complex. So we will see the government differentiate between commercial infrastructure such as power and telecom and civic infrastructure such as sanitation. It will withdraw from the former and pay attention to the latter. Those will also throw up some investment opportunities for us. Guarantees for telecom and power today will in future be for sanitation and civic facilities.