Tuesday, December 24, 2019

NIIF and infrastructure finance - what is the additionality?

There is a growing chorus for the establishment of a Development Finance Institution (DFI) or other new strategies to fund India's massive infrastructure investment requirements. In this context, the role of the National Investment and Infrastructure Fund (NIIF) is interesting. 

There is no lack of clarity about its broad objective to leverage private capital to invest in infrastructure. But the same cannot be said about how it proposes to achieve the objective - the sectors or funds it proposes to invest, and the nature and stage of the projects. These are critical issues that need examination given public finance and the objective proposed. Unhelpfully, for a government financed entity, the website of NIIF is surprisingly opaque, without even an Annual Report. 

It would be simple if the main purpose of NIIF is to be a sovereign wealth fund (SWF), aimed at maximising returns from its portfolio, consistent with a level of risk appetite.

Since it is not an SWF, some questions assume significance. What is the additionality of NIIF's capital? Does NIIF's government shareholding help crowd-in other capital which would not have otherwise come in? Or is the mere presence of NIIF contributing to addressing some market failure? Or is NIIF ending up competing with private capital and displacing them? What other incentive distortions are happening?

In this context, the activities of NIIF are intriguing. Take for example, NIIF bidding for a stake in Ashoka Buildcon,
A roads platform operated by the National Investment and Infrastructure Fund (NIIF) and I Squared Capital-owned Cube Highways have expressed interest in buying Ashoka Concessions Ltd... Ashoka Buildcon and Macquarie Infrastructure and Real Assets (MIRA), one of the biggest foreign infrastructure investors in India, were seeking buyers for Ashoka Concessions, their roads portfolio. In 2012, along with State Bank of India, Macquarie, through its first India-focused fund, had purchased a 34% stake in Ashoka Concessions, a platform to own and operate toll-earning road assets, for ₹800 crore. The remaining stake was held by Ashoka Buildcon. Mint had reported on 29 May that Macquarie was looking to exit its roads portfolio in India... Cube Highways is currently the most active buyer of road assets in the country... The NIIF Roadis platform too has been on the lookout for road assets. Mint reported on 26 July that NIIF was in talks to acquire three roads from Subhash Chandra’s Essel group. The sale of the Ashoka Concessions road portfolio adds to the flurry of activity in India’s roads sector this year. Deal activity has been driven by large investors such as Singapore’s sovereign wealth fund GIC and Canadian pension fund manager CPPIB backed infrastructure investment trust (InvIT) - IndInfravit Trust.
Now CPPIB is close to acquiring Ashoka Concessions Ltd,
Canada Pension Plan Investment Board (CPPIB) has emerged as the frontrunner to acquire too roads developer Ashoka Concessions, and is likely to sign a deal at an enterprise value of Rs 55000 crore or $770 million... Several global and domestic infrastructure investors were in early stages of negotiations to acquire Ashoka Concessions for an enterprise value of Rs 5000-6000 crore as revenue generating highway assets continue to get investor traction. 
Also, another example from NIIF's recent bids for the airports privatisation, 
The GMR Group, the Adani Group, National Investment and Infrastructure Fund (NIIF) and Fairfax India Holdings have participated in the tender issued by the Airports Authority of India (AAI) to privatise six non-metro airports... Australia’s AMP Group and PNC Infratech Ltd are also understood to have submitted their qualification documents to the AAI when the deadline ended on Thursday.
These bids were hotly contested and Adani won them. 

Several questions get raised. What was the additionality of using scarce public finance? Given the level of competitive interest, did these markets (or atleast these particular assets) need any crowding-in? In fact, given the market maturity, is there a need for NIIF to be in the market to buy road assets or road developers or airports? In case of the Ashoka Buildcon, was NIIF merely providing the exit opportunity for MIRA? Most importantly, is NIIF, with its implicit government subsidy, distorting the market by displacing private capital?

Or consider the NIIF partnership with DP World to create an investment platform to invest up to $3 billion as equity in ports and logistics businesses in India.

How much does NIIF's presence increase DPWorld's interest in Indian ports and logistics assets? What is the NIIF value proposition for DP World? Is the government shareholding and important consideration for DP World to commit its capital towards Indian infrastructure? Would DP World not have considered Indian port and logistics assets without this blending? Or is this partnership merely motivated by the $1 bn transferred by Abu Dhabi Investment Authority (ADIA) to NIIF as part of the inter-governmental agreement between Abu Dhabi and India?

And consider the partnership's first purchase,
Dubai’s port operator DP World along with The National Investment and Infrastructure Fund (NIIF) is buying Continental Warehousing Corp (Nhava Seva), one of the largest companies in the logistics sector in India for $400 million from its PE investors... The platform that piped PSA International of Singapore, the world’s largest port operator and Macquarie is buying 90% of the company while the Indian promoters will retain a 10% share, said officials in the know. Private Equity firms Warburg Pincus, Abraaj and IFC Washington together own 60% of the company, with the former being the single-largest shareholder at 40.4%. Abraaj and IFC own 20% while the remaining 40% is held by N Amrutesh Reddy, executive director and promoter. Continental Warehousing, the flagship company of Chennai-based NDR Group, owns and operates cargohandling facilities such as container freight stations (CFS), multimodal cargo handling terminals (MMTs) and private freight stations. It also provides express cargo and third-party logistics services.
Again, given the strong competitive interest, what was the additionality of using NIIF's fiscal resources?

It raises the question of what is the mandate of NIIF? Is it a SWF with the mandate of maximising returns from the deployment of India's foreign exchange reserves? Or is it using fiscal resources to channel private capital into the infrastructure sector? If the former, is the NIIF's pipeline and portfolio reflecting such market catalysis? 

One could argue that NIIF leveraged $1 billion from ADIA. But this raises the question as to what was the value proposition that a partnership with NIIF, an entity without any track-record, offered the commercial returns seeking SWF ADIA? Would ADIA not have put money into India without ? Did the Indian government ownership of NIIF, something a private fund would not have offered, provide a compelling enough reason for ADIA to put its money in India? In any case, is this sufficient to attract anything more than $1 billion?

Or is there a financial co-ordination role for NIIF?
National Investment and Infrastructure Fund (NIIF) of India and Canada Pension Plan Investment Board (CPPIB) today announced an agreement for CPPIB to invest up to US$600 million through the NIIF Master Fund. The agreement includes a commitment of US$150 million in the NIIF Master Fund and co-investment rights of up to US$450 million in future opportunities to invest alongside the NIIF Master Fund. With CPPIB’s investment, NIIF Master Fund now has US$2.1 billion in commitments... CPPIB joins Abu Dhabi Investment Authority, AustralianSuper, Ontario Teachers’ Pension Plan, Temasek, Axis Bank, HDFC Group, ICICI Bank and Kotak Mahindra Life Insurance as investors in the NIIF Master Fund, alongside Government of India.
In other words, was there a need for a government financed general partner (GP) (or anchor) to establish a fund to mobilise limited partners (LPs) (or co-investors) to invest in India's infrastructure market? 

Or is NIIF's investments a means to retain majority domestic ownership of important infrastructure assets?

Apart from all these above, the governance risks for such a deep pure-play investment role for NIIF are significant.

In a system characterised by close links between large infrastructure groups and political leaders, there are several corporate governance risks. If NIIF is indeed going to become a regular investor in infrastructure sector (as the aforementioned examples appear to indicate), does it have sufficient governance safeguards and oversight to avoid problems which have been a feature of such entities earlier?

Consider the example of cash-strapped GVK's efforts to prevent their competitors, the Adani Group, from buying the 23.5% stake in Mumbai International Airport Ltd (MIAL) that was being divested by two South African firms Bidvest and ACSA. GVK got NIIF and ADIA to purchase 49% stake in GVK's airport holding company which owns 50.5% of MIAL, and used the proceeds to buy out Bidvest and ACSA shares and thereby stave off Adani. The issue invited intense competition between two large and politically connected corporate groups and spawned associated litigation, with Adani Group wooing Bidvest and ACSA with an offer to purchase their stake in MIAL. 

In the absence of strong governance safeguards, given the less than transparent nexus of politics and Indian infrastructure corporates, such investments run the risk of being captured by vested interests, including in corporate battles.

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