Dragged by issues specific to the infrastructure sector — ranging from a lack of clarity on fuel linkages and power purchase agreements (PPAs) in case of generation projects and divergence betwen traffic estimates and actual revenues in case of highways — and an economy seeing fledgling recovery, Infrastructure Investment Trusts (InvIT) are likely to see limited participation initially.
In fact, according to infrastructure players and analysts, launch of InvITs in India is still a good 18-24 months away. Even with changes being made to the bidding model, such as in highways where the government is ready to take on risks involved with traffic estimation and toll collection upon itself through hybrid bidding, and plans to introduce the plug-and-play model in the sector as a whole, such projects will take a few years before they become operational and InvIT-able assets.
Samir Kanabar, partner, EY, told Fe that an initial public offering (IPO) after an initial private equity placement would generate more value for an infrastructure asset than an InvIT in the current scenario. “In case of REITs (real estate investment trust) it is easier to arrive at valuations of assets as the annual revenue, which is rentals from a building, is more or less fixed. However, in case of an infrastructure asset, uncertainities around traffic in case of roads and plant load factor in case of plants makes valuations difficult from the InvITs view point.”
Engineering major L&T had expressed its interest in listing some road assets under a business trust in Singapore last year. However, it finally decided against it. R Shankar Raman, chief financial officer, Larsen & Toubro, told Fe the company felt it was not getting THE “right pricing” at that time. “India’s GDP was low and we felt that the discount being offered to cash flows of assets that are of 25 years’ concession was not reflective of the true value of the assets.”
Later in the year, Canada Pension Plan Investment Board (CPPIB) agreed to invest over Rs 2,000 crore in L&T’s infrastructure arm L&T IDPL, which has business interests in the development of roads and bridges, ports, metro rail and power transmission lines, among others. Raman had in June 2014 said that the intention of listing those assets was intact, the benefit of which would accrue to CPPIB as well. However, he did not talk about the status of the listing.
Analysts also say that the instrument will limit its effectiveness to only a few players, mostly in highways sector, who have a pool of assets and which have been operational for a long duration. Manish Aggarwal, partner, KPMG India, said that for these assets the revenue certainty is more or less acheived — they have passed the phase of traffic volatility, and there is some surety of returns that they can give even as the power sector constinues to be mired by issues around PPAs and fuel linkages.
“Projects that have certainty of revenues and have been operational for long are very few. In fact, a large number of assets have become operational only recently, so they will take a long time to get to that phase where they will be suitable to be listed under InvIT,” Aggarwal said.
Meanwhile, big infrastructure players are awaiting clarity on the tax structure and say the participation will be limited in initial stages, which will not be soon either.
Raman of L&T said, “The demand from the industry was to do away with MAT and DDT; however, it does not feel like that those tax concerns have been addressed fully. The finance minister has spoken only about rationalising capital gains, and that in any case is a very small component of the tax structure in a business trust.” Business trust units will attract a short-term capital gains tax of 15%. (‘short term’ for these units is set as three years.)
Raman added that the concerns being raised over arriving at the valuations of projects were “genuine” and it will take a while for the projects to discover whether their traffic estimates or plant load factor are on the mark. However, he expected that the disclosures on such instruments would require highlighting the risks involved. Despite the risks, Raman expects financial institutions to participate in InvITs before retail investors. “If they want to remain invested in infrastructure as an asset class there is not much of an option, but it will take time for InvITs to gather pace.”
Meanwhile, Mukund Sapre, executive director, IL&FS Transportation Networks, said the company already has a set of operational assets that can be pooled to put under InvIT, and awaits clarity on the taxation structure. Virendra D Mhaiskar, chairman and managing director, IRB Infrastructure Developers, said that the company would be interested in going for InvITs, and awaits clarity on taxation.
It’s a long, winding road
* According to infrastructure players and analysts, launch of InvITs in India is still a good 18-24 months away. Even with changes being made to the bidding model, such projects will take a few years before they become operational and InvIT-able assets
* Big infrastructure players are awaiting clarity on the tax structure and say the participation will be limited in initial stages, which will not be soon either
* In case of an infrastructure asset, uncertainities around traffic in case of roads and plant load factor in case of plants makes valuations difficult
from the InvITs’ point of view