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Three Needs of Indian Infrastructure: Revenues, Revenues & Revenues

Therefore, though much has been written and said about the opportunity and the challenges that Indian infrastructure involves, the next step should be a renewed focus on "revenues" that assets can generate

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By Taponeel Mukherjee

The current discourse on infrastructure focuses on the amount of funding needed for its creation. While the talk about the need for funding is essential, to indeed create more funding for infrastructure, the infrastructure ecosystem itself needs to start focusing more on “revenues”.

“Revenues” here mean the returns the infrastructure assets will generate to compensate the investors for the risk undertaken. Essentially, revenue generating mechanisms and greater clarity amongst investors on the revenue generating mechanisms that will create the cashflows to deliver investment returns are the keys to unlocking funding. In finance parlance, the discussion needs to focus both on the quality and the quantity of the cash flows from the infrastructure assets.

To move towards greater clarity on revenue generation, a clear catalogue needs to be created where all infrastructure assets required are broadly classified under three categories.

The first comprises assets that have a revenue-generating capacity to adequately compensate investors for the risk, e.g., a high-quality airport. Second, assets that have the revenue generating capacity, but need subsidies to provide an adequate return to the investors for the risks involved, e.g., a Metro railway project. The third are assets that have economic benefits but do not themselves generate revenues at all, e.g., a non-toll road asset.

For assets that generate revenues, the emphasis must be on clear contract design that elucidates the revenue waterfall for the asset and on the predictability of the cash flows. It is important to realise that the investors who are looking to invest in Indian infrastructure are mostly managing global portfolios across asset classes. Therefore, Indian assets need to compete with other asset classes from both India and abroad to attract capital. The greater the clarity around revenues and the associated risks, the easier will it be to draw a more substantial quantum of money for infrastructure, and that too at lower costs.

Infrastructure financing through improving “revenue visibility” and “revenue predictability” leads to a virtuous circle whereby greater clarity around revenues leads to both greater quantity and lower cost funding, which in turn helps more viable projects to take off. The “asset monetisation” scheme that has been in talks in recent times will get a significant boost if the focus on “revenues” is built up further.

Mumbai Metro One announced on Monday that it has achieved the 400 million passenger mark on its 1,423rd day, which is almost within four years of its operations.
Mumbai metro station (Representational image). Wikimedia Commons

For assets that require part or full subsidies, the government will need to get greater clarity on what component of the budget will finance the much-needed infrastructure. Across infrastructure sectors such as water, power evacuation and highways, clear demarcation of fund allocation, usage and results will be crucial in delivering the much-needed assets.

It is also important to note that there is significant dispersion in the revenue generating capacity of assets within the same asset class. For instance, certain commercially busy stretches of roadways may lead to lucrative toll-road contracts whereas roads elsewhere might have significant economic benefits such as border roads but might need subsidies from the government for their financial viability.

The ability to implement flexible policies that consider the variability of financial returns from various assets within an asset class will help improve “revenue” generating capacity for infrastructure overall. For instance, given the variability in the wind energy capacity of various sites, India’s wind energy policy needs to account for the fact that highly competitive auctions that may work on the best wind sites may not be conducive to rapid infrastructure creation once the best sites are exhausted.

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Additionally, besides the revenue sources, ensuring investors that contracts will be enforced without demur or recourse is essential. In a world with increasing macroeconomic volatility, pricing of revenue streams from infrastructure assets will vary as the various determinants such as the cost of funding, initial capital expenditures and foreign exchange rates vary. Therefore, the better the contract enforcement mechanism, the higher the risk-adjusted revenues from infrastructure projects, thereby greater the investor interest in Indian infrastructure.

Therefore, though much has been written and said about the opportunity and the challenges that Indian infrastructure involves, the next step should be a renewed focus on “revenues” that assets can generate. We must ensure that measures are taken to improve “revenue” visibility, and to provide alternative financing solutions when asset revenues are not sufficient. (IANS)

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HP Considering India as a Key Focus Area

India is key focus area, 3D printers next big thing

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HP India
HP unveils 65-inch gaming display with soundbar at CES 2019. Flickr

India is a very attractive market with high brand recognition for a computer hardware producer like HP, said HP Inc’s President for Asia Pacific and Japan, Tian Chong Ng.

The Asia Pacific region — in which India is a key focus area — has been the fastest growing for HP and provided 16 per cent revenue growth last year.

In Q1 of FY2019 it registered 8 per cent growth year-on-year, said Ng in the course of the HP Reinvent 2019 conference, the company’s largest global partner event.

One reason for that is — India – and also the Asia Pacific region — tick marks on demographics trends which provide clear wins for HP: rapid urbanisation and more millennials are joining the work force.

While HP is very positive on India and recognises its potential, there are no plans yet for setting up a manufacturing base in India. Ng said it already has a manufacturing base in China apart from others in Vietnam, Thailand and Japan.

HP
HP. (IANS)

“There is an existing ecosystem in China and we don’t have plans for setting up a manufacturing base in India, he said.

One focus area is the 3D printer, which offers HP great opportunity. Construction and automotive sectors are the focus areas here. Meanwhile, an MoU has been signed with the Andhra Pradesh government.

“To be successful in India demands that we understand it,” he said.

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HP is also pushing gaming in a big way. However, this has not led to any thinking for manufacturing mobile phones in India, despite the high number of gamers in the country spurred by affordable android phones and cheap data.

“Our strength is the PC business and we offer a whole family of products in that space,” Ng said. (IANS)