Interested in asset monetisation, next-gen road projects: IFC A-Pac head

International Finance Corporation (IFC) has been a leading investor in Indian infrastructure projects. Isabel Chatterton, Asia Pacific regional industry head, Infrastructure and Natural Resources at IFC spoke to Shreya Jai on newer possibilities and government announcements in this space. Edited excerpts:

The Union Budget this year focused on increased spend on infrastructure, asset monetisation, innovative financing methods such as InvIT – the same sectors where IFC is active. What scope do you see in these areas?

The concept of infrastructure spending, asset monetisation and the whole aspect of creating these new development financing institutions is very interesting. We have seen attempts to create similar institutions in many countries and this type of institution is not alien to us. I think the purpose is to understand first, how it fits within the current infrastructure finance ecosystem that already exists, not only within India, but also outside India.

There are a very few countries in the world today like India which has decades of experience, through the PPP space, and having systematised, standardised contracts in the road, energy sector. There is definitely a large number of assets that could be monetised. This is something that we will look into. But, the devil is in the detail. We will need to look at the pipeline of assets to be monetised and whether or not we could support this initiative and provide a defined role.

The budget allocated a very large amount for highway construction and railway projects. India has done a lot in the road space over the last few decades. It would be interesting to see what exactly the vision for railways is and what role we could play in the renewable space.

In the renewable energy space, while the growth has been impressive with aggressive tendering, micro issues such as contract obligation by states, payment, lack of PPA still remains. How do these issues impact investors such as yours?

These issues definitely impact us. We’re fully aware of the the sector's situation. Even before Covid, there were very few countries that could match the growth of India. But the reality is that this growth comes at a cost. Most of our portfolio, to some extent, touches national takers, like SECI, NTPC. So we're less exposed to state payments. But we all need to be concerned about the fact that the tripartite trade agreement including the state discoms hasn't been put to test yet.

Having said that, an institution like IFC, we really take a very long term view of the sector. We recognise that in the near term, the sector faces an unfortunate concentration of issues that could scare some. If an asset is of good quality that has a 25 years PPA, visibility to robust cash flows, we're quite comfortable, but there are some issues with a five to seven year immediate term. And we're prepared to look at structures that would require different kinds of financial engineering.

The renewable energy market could benefit from having a truly integrated grid across the region. India could play a catalytic role in bringing together the governments across the region to discuss energy integration and to make sure that there's a proper grid.

Another sector for long term investment is roads. While in the past there has been a lull in tendering projects, the recent government decision indicates strong growth in the sector. What is your outlook for the road construction and allied infrastructure space?

The road sector, to some extent, is mature in India, because the large number of PPPs is based on the annuity model. In my view, we are in the second generation road sector today in India. Secondly, the InViT structure that has been reformed from what it initially came out. This is like a renaissance of the road sector.

There is one aspect that India is densely populated. Therefore the complexity of designing, implementing and selecting these road assets is a bit higher than in other countries. But nevertheless, we are committed to the road sector, to our current exposure in the sector, and we will continue to do so. We certainly see the potential to take part in this next generation of road assets.

As a strategic investor, would you be interested in the InvITs and asset monetisation that the Indian government is planning?

We are familiar with the InvIT structure because we actually participate in some platforms. But we would need to look at it on a case by case basis. The demand for infrastructure is such in India that these structures are going to be part of everyone's investment over the next five years. In the past, banks and NBFCs were the major sources of capital for infrastructure projects in India. But we then ended up having this huge rise of non-performing assets in the financial space and we are having all these commercial banks and NBFC taking a step back revalidating the exposure to the sector.

The government has been directing an additional pool of capital through different mechanisms. But most of them have relatively limited exposure to infrastructure projects, because of many issues, the regulatory cycle, the issues of credit, quality related constraints etc. We need a bit more depth and liquidity of the debt capital markets in India. And we would need to see a few more infrastructure IPOs. We are all concerned by the supply of capital in the infrastructure space. So we need to support the government in being creative in how to attract direct investors to the sector. We'll see if all of these new budget decisions are going to entice infrastructure investors to recycle operational assets and to hopefully, bring in institutional yield seeking investors.

Apart from the traditional energy and infrastructure sectors, is IFC looking at newer sectors to invest in India?

Last year, under the infrastructure group, we created a new unit called ‘upstream’. These are staff who were hired specifically to look into early stage investments and helping us develop the investments that hopefully will be ready for us to invest in in two to five years

We are of course looking at the discoms space, commercial and industrial distributed generation, the captive solar panels serving an industry, storage and renewable storage, and the hybrids. We're starting to look again at a small hydro.

We are also looking at the intersection of telecom with energy grids. If we could digitise the grid, in other sectors outside energy, we're looking at it for the entire space of e-mobility, buses, battery charging, we do think that that is a critical space for us to work. We are already working together with our colleagues in the World Bank on this whole space of mobility.

How has the increased sensitivity towards ESG targets impacted IFC?

For us, it has impacted us in two ways. When we're considering equity or cost of equity investment in companies, we are definitely seeing an uptick in ESG linked investors. Second, we are seeing change in the volume of products that have ESG linked criteria. As a matter of fact our treasury colleagues have developed ESG linked products already. We are now able to offer these products as well to our sponsor.

In addition to ESG, we are also looking at gender bonds as well. It's definitely a new frontier business for us. We've done one gender bond in East Asia, but I would like to see some of those in South Asia.