Decoding the hype from reality about InvITs

Infrastructure investment trusts (InVits) have a role to play in infrastructure financing and management. They are one among the several means to mobilise funds and manage infrastructure assets. Fundamentally, they are a type of infrastructure fund, a category of institutions and investors who are widely present globally across infrastructure sectors.

But it is a stretch that their impact will be anything close to be a "landmark systemic change" catalyst, as suggested here. Such simplifications only do more harm than good. In fact, some of the reasons adduced by supporters are clearly self-serving (or conflicted) ones, aimed at expanding their own market. This paper has several reasons with details refuting this argument.

Consider the article mentioned above by Suresh Goyal, the former head of MIRA in India. He argues that InVits can "bring the focus back to core objectives" for NHAI. He writes,

Over the years, NHAI has re-invented itself from a road development entity to a concession-granting one. Recently, it has developed capabilities to monetise roads through the ToT programme. For the roads developed on engineering, procurement and construction basis, it also undertakes operations and maintenance (O&M). It is not easy for any organisation, and more so for a public sector entity, to be effective across the entire gamut of its activities. By launching an InVit, NHAI can not only transfer roads but also the O&M aspects of these roads, enabling it to refocus on its development role and, thus, create the much-needed extra management bandwidth.

In simple terms, the arguments are for NHAI to transfer public assets to InVits and thereby completely outsource the management of public assets (including even the management of the management of those assets). If global evidence on even clearly defined limited infrastructure concessions, much less a wholesale transfer of the entire asset with its management responsibilities, has anything to tell us, such arguments should be treated with extreme caution.

There are two issues.

One, an InvIT does not remove the reality of NHAI needing to have the capacity to service its mandate in a world of private production and maintenance of public goods like national highways. As long as highways remain public goods, there will have to be agency like NHAI managing those roads.

NHAI is fundamentally not a road builder or an O&M service provider. It manages the construction and maintenance of national highways. It is a contracts manager. The terms of reference of contracts can always be designed to outsource the most appropriate set of activities. Take for example, this,

For NHAI, InVits create an opportunity to raise standards by factoring in equipment and processes on these roads, which will not only improve user experience and safety but also create an ecosystem for other road concessionaires to match these standards.

The NHAI can always design O&M concessions accordingly incorporating these conditions. However, having incorporated these conditions, there is no substitute, InVit or not, to NHAI having the capacity to monitor it.

Second, there is no evidence from anywhere in the developed world to make the claim that an InVit does a better job of managing highways over their lifecycle than public agencies directly. Much has been written on this, including extensively in this blog. 

To look at the other reasons adduced for InVits. Let's take monetisation. The NHAI has done all the textbook style requirements - it has bundled road packages, has announced a pipeline of projects for monetisation, and has gone about releasing them gradually. We know what has happened in terms of the lukewarm market response after the first round. In fact, it remains to be seen how successful actually is the first round of "irrationally exuberant" ToT monetisation.

I don't know how an InVit can magically alleviate hard constraints about the market's ability to absorb large volumes of infrastructure assets. Given the reality of limited foreign dry powder available to invest in infrastructure, I am not sure how an InVit can significantly change the situation for the better?  

If there are political economy and bureaucratic constraints that inhibit the processes associated with monetisation by the NHAI directly, those constraints are likely to be even more binding in transferring road packages directly to InVits.

I cannot understand how creation of InVits can help crowd-in significant amounts of domestic savings. This paper has clearly outlined the hard constraints facing private capital investments in infrastructure. It is important to not confuse expanding the pool of investible infrastructure projects with expanding the envelope of long-term private capital ready to invest in infrastructure. Policy and financial engineering has a role in the former, but much less, even negligible, with the latter.

Further, it is not as though investors, institutional LPs and retail, currently face a dearth of infrastructure investment opportunities. The former has access to infrastructure funds, and the latter have  infrastructure projects/company equity and bonds, and infrastructure sector equity and debt mutual funds. It is difficult to believe that InVit offers anything dramatically different that these opportunities do not provide.

Similarly, I struggle to understand how privately managed InVits can help with "an independent framework for settlement of issues pertaining to operating roads" which a publicly managed NHAI could not do. Where is the evidence from the world that a private managed entity like InVit has superior governance?

As to "independence" and "fiduciary responsibilities" of investment managers, less said the better.  The managers of infrastructure funds are supposed to be similarly responsible. But Macquarie's own track record in this regard, which is very well-documented and discussed in mainstream media in countries like UK on very high profile projects, are questionable and disturbing to say the least. See this, this, this, this, and this (with numerous links to mainstream papers and research institutions) on UK's controversial experience with the likes of Macquarie.

In fact, independence is not confined to the relationship between NHAI and the InVit, but is even more relevant to the interactions between the various intermediaries of the InVit as well as their interaction with the broader market. Unfortunately, it is here, as evidence from infrastructure funds in particular and finance in general shows, we cannot but be pessimistic. 

The issue is simple. The government wants to monetise its road assets. This has to be done in the most incentive compatible and commercially attractive manner. The former requires clarity in contractual terms of reference. The latter requires returns that are consistent with the expectations of particular categories of investors. I do not understand how an InVit can address either problem. It surely does not entail limiting NHAI's responsibilities and handing over assets to some InvIT. 

In light of the above, I am not sure about the claim of "landmark systemic changes in road sector" in India from the introduction of InVit. If anything, the only landmark change likely from a headlong plunge into InVits is a pile of scams and controversies after a few years which would bring disrepute to the useful institutional idea of infrastructure funds to finance projects in the sector.

Prudence, and not irrational exuberance, should dictate the embrace of any such financing mechanism.