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Major factors hindering private equity (PE) flows into Indian infrastructure sector is due to delays in getting approvals and complex regulatory environment impact, besides regulatory procedures and long payback periods, reveal a joint study of ASSOCHAM and E&Y.

It further highlights that tardy progress has been observed in recent times in accumulating PE investments to upgrade India’s infrastructure in key areas of roads, highways including railways is also due to exit time frames and other hurdles that set aside investment in infrastructure sector apart from other sectors.

Releasing it’s findings, ASSOCHAM spokesman said that absence of vibrant bond markets in India is also a handicap for private equities to keep off India and therefore, it is highlighted that under developed bond market in India impacts financing of infrastructure projects.

Unlike other developed nations where vibrant bond markets serves as an alternative avenue for financing and re-financing, the bond market in India has not grown substantially, added ASSOCHAM spokesman.
Thus, the under development of bond market in the country poses hurdles in accessing funds for the sector.  PE investors often cite concerns such as unavailability of long-term fixed rates financing over a long term concession period as one of the impending factors in infrastructure financing, points out the study.

According to it, delays in getting approvals and a complex regulatory environment as major factors hindering PE flows in the infrastructure sector.  Challenges faced by PE investors while investing in Indian infrastructure still comprise delay in getting approvals, complex regulatory environment, delay in financial closure of projects, long gestation period of the infrastructure projects, non-transparent bidding process and prevalence of single asset investments.

On the issue of regulatory procedures and long payback periods, the study indicates that infrastructure projects typically involve a long payback period whereas the debt that is available for financing infrastructure project matures in a period of 7-12 years.

Meanwhile, regulatory procedures, delays in project implementation and several unplanned cost escalation create concerns regarding financial viability of projects and disrupts free flow of investments by PEs houses.
In addition, investment risks on account of contractual structures, aggressive bidding or incomplete traffic estimates are some of other key issues confronted by PEs while investing in infrastructure projects.

PEs investors also view delays in completing land acquisition as an additional factor that hinders PE investments as delay in it leads to execution delays and thus in turn, results in escalation in project costs in impacting investments from private sector.

The study concludes that exit time frames and regulatory hurdles associated with infrastructure projects are the characteristics that distinguish investment in this sector from the rest.

On the future outlook of PE investments, the study, however, adds that despite credit crisis, PE investors could be positive about returns expected from their investments in infrastructure projects as India assures lot of prospects in it as it is its focused area for development.

As the infrastructure sector in India continues to evolve and mature over the next 5-10 years, it will pave the way for increasing opportunities for various sub-segments require large capital commitments. Synergies between PE investors and infrastructure industry in India are expected to further strengthen as PE funding is expected to emerge as a vital source of financing to meet major capacity expansion plans of infrastructure companies, concludes the study.

Source:  ASSOCHAM

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