We expect the curve to be upward-sloping from 2022-23 onwards, and initially, we expect an average of $50 billion annually as a realistic amount.
R Shankar Raman, director and group CFO, Larsen & Toubro
While there is potential for an infrastructure buildout, R Shankar Raman, director and group CFO, Larsen & Toubro, believes we need better regulation to ensure investor returns are protected and also guarantees for all clearances and certifications. Shankar Raman tells Shobhana Subramanian that unless investments get the projected returns, it will not be recycled.Edited excerpts:
How much infrastructure do you see being built in the next few years? The potential for investment in infrastructure in India is $80-100 billion per year, and if we can do this consistently over the next four or five years, we would have created $500 billion of infrastructure. We expect the curve to be upward-sloping from 2022-23 onwards, and initially, we expect an average of $50 billion annually as a realistic amount. There are six to ten active players, so each will have an opportunity of $8-10 billion a year. We don’t expect a bump for the next 12-18 months since the recovery will take time.
What will be the split between public and private sectors? About $10-15 billion would be private capex and $35 billion would be from the public sector. The states have smartly tied up with multilateral agencies; so, they should be able to do the capex. The multilateral agencies have opened escrow accounts, and we get paid through those, so the governance around this is good.
Which areas are likely to get the biggest allocations? Water, followed by power transmission and renewable energy. The fourth would be urban congestion.
What do you make of the sharp drop in solar power tariffs? The pace of the slide in tariffs has been rapid. Technology has helped bring down the price of panels; today, we have rotary panels, vertical panels and revolving panels. To some extent, competitiveness is better. But, the investor needs 13-15% returns; else, this is not going to be sustainable. I am concerned that at `1.99, and if this trend continues, we may soon have a situation where, like in coal power plants, you won’t have people to put up the facility. It is important that private capital is respected and the return that they earn is appreciated. Unless they earn these returns, they won’t be able recycle them; it will be a one-off investment. I make this point to our pension funds, insurance companies and IRDAI to encourage insurance companies to invest in these projects. Don’t depend on just private capital. Private capital is shy. When it encounters risks that it can’t handle, it will go elsewhere, whereas committed capital is what is required.
How do we address the government reneging on PPA contracts? There is a need for stricture against reneging on signed contracts. We need iron-clad central legislation. After all, people have incurred costs at a point in time, based on certain projected cash flows and current economics. All the rest remaining the same, we can’t say that the contracts have to be renegotiated because the tariffs of recent projects have come down. I think the government must pass legislation to make sure there will be no reopening of signed contracts, especially if it has the potential to affect returns. We cannot, at will and local fancy, change the regulations. One of the reasons L&T is so shy of investing in this sector is lack of confidence.
Several projects seem to be coming along nicely… We are surprised with what we have seen in funded projects. The high-speed rail project, for instance, was finalised within 45-60 days; so, the momentum is picking up. The top leadership in the government believe infra is a job-creator, so wherever there is multilateral funding, they are pushing projects. However, sustainability is going be difficult because these projects are lumpy. Nonetheless, it provides a breather for modest, consistent scale to catch up. Also, many companies that are implementing projects are not creditworthy; so, the banks are shy. It’s not that many firms have gone under, but they have barely managed to service their debt. In this environment, it is going to be challenging for banks to take extra risks on credit calls.
Could this, in any way, slow down the awarding of projects? Capacity could turn out to be a constraint. In the government system, unless there are three or four bids, they somehow feel it is not proper price discovery. So, not being able to find half a dozen bidders is also becoming a bit of a constraint in releasing these projects. One can understand that they want adequate responses to the bids.
What is the key learning-set from the Hyderabad Metro? We underestimated the risks in PPPs. There is a big mismatch—between the public and private sector—on the pace at which decisions need to be taken. We need to seek time insurance. This project has suffered a 3-4 years’ time overrun and, in that time, we have accumulated a lot of interest. We normally build in a cushion for time overruns, but we underestimated political risks. A constitutional change left us falling between the cracks—Andhra Pradesh moved away and Telangana was not willing to take over. Even election-led risks today are far sharper than in the past. Normally, we don’t expect projects that are under way to be shelved. But the nonchalance with which some succeeding parties approach a project is something we completely underestimated. The risks of dealing with government and government policies have been our biggest learning. There is nothing risk-free, but we didn’t estimate in the manner needed our ability to size it up .
What must companies do to protect themselves? If I am going to put capital to work, I need to have the guarantee for all clearances and certifications. It is suicidal to enter a project and believe clearances will come. We should have thought through the consequences for overrun funding. If there is a financial closure of 70:30, and even if equity-holders are willing to chip in, it is naïve to believe banks will be as willing to support us. We never anticipated the consolidation of banks, so, that was another issue. For a while, we are going to take a breather from PPP. The project has done well technically, and it will continue to do well, and we will find an exit. But, we would not have suffered the intervening pain had governments been more supportive and speedy in clearances. There was also a change in regulations, and when this happens, no one takes the onus to ensure there is a safe-harbouring of the protection that we had under the earlier regulation. PPP is a different ball game. Asset ownership is completely different from construction; doing this interchangeably is a tall order.
When can we hope to see meaningful private sector investment? The spike in commodity prices is making me have a rethink on this matter. If the private sector is able to get pricing power back—which they have got because the input costs have gone up, and as the supply-chain partners slowly come back—there could be a bit of a demand-pull; that seems to be happening. People like us, who actually generate demand and who want the supply chains to come back faster to normalcy so that we can execute, can become flexible on the terms of trade. The keenness to get the supplies in good time so that we can execute is providing some pricing power. The fallout of this could be that people could think they could tweak productive capacity. If the demand sustains until they reach around 85% utilisation—my sense is that most plants that provide us inputs are at 70-75%—they will start thinking about top-up capacity. I don’t expect greenfield, but I expect a lot of brownfield.
What about the push from ESG? Yes, climate change and sustainability is pushing people to look at effluent treatment. The ESG (environmental, social and corporate governance) factor is getting higher weightage, and companies want to make sure there is no erosion of shareholder value, so they are going out of their way to invest. We find orders are going up from thermal power plants for fuel and exhaust cleaners. Each project could be around Rs 300-500 crore, and I see private capex coming into play. Since these are not full-blown projects, it would call for only a top-up financing.
Any demand from the rural economy? We have seen sustained good demand for farm equipment, and I do see capacity expansion. I also see good demand for medical equipment and healthcare products. Again, we see a lot of interest in data centres and back offices. One of the advantages of the pandemic is that the efficiencies of back offices in distant places, like India, have been completely tested out. Clients have been endorsing the seamless transition between working onsite and offsite.
We also see private capital in IT as players are beefing up their campuses. Earlier, they were scattered; so, there is some rationalising of office space that is happening. Many employees will be working from home, but companies also want to put all infra in one place and that is creating demand. We have enquiries from big players to create entirely alternative large campuses. We are also getting orders from cement plants for capacities of 0.5-1 million tonne.