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India Report

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  • 1. Alternative Insight MAY 2011 | infrastructureinvestor.com FOR THE WORLD’S INFRASTRUCTURE MARKETS INDIA A Country Briefing13 15 18 24Opportunities in energy The advantage of being The challenge of Take-off for aviation global – and local urbanisation services
  • 2. ABout PEIPEI is the leading financial information group dedicated to the alternative assetclasses of infrastructure, private equity and real estate globally.Two things set PEI apart. The first is our global remit. The industries we cover areinherently international and resolutely cross-border, and can only be covered effectively by apublishing company that can connect with them in every market and in any time zone. That’swhy PEI has offices in London, New York and Singapore, with a dedicated team in each location– allowing us to identify and analyse the market’s big picture trends.The second and most important difference is the quality of our news, insight and intelligence.Our market-leading publications include Infrastructure Investor and www.infrastructureinvestor.com. Our agenda-setting conferences attract the industry’s top players from across theworld. Our library of books, directories and databases provide vital know-how and analysis onfundamental aspects of alternative assets.
  • 3. infrastructure investor india country briefing 2011 1 Eyes on the prize How to safeguard India’s position as one of the world’s leading emerging markets and ensure that its annual growth rate can continue to maintain its swift pace? Many fingers point at the nation’s infrastructure. Bring it up to the level that’s required and India will see a transformation not just of its economic fortunes but also the physical assets that its people use and pass through every day. the prize is a big one. the challenge that lies ahead is also sizeable. when reference is made to Indian infrastructure, it is almost always accompanied by some head-spinning figure such as the $1.5 trillion planned spend over the coming decade mentioned by Bruno alves in his introductory feature (p.3). It’s easy to read such a figure and assume that private investors have an opportunity to make hay. and, with the Indian government encouraging private investment into many of the most promising sectors, this opportunity should not be underestimated. But this is only one side of the coin. on the other are to be found some of the potential drawbacks discussed by those invited to Infrastructure Investor’s recent roundtable gathering in New delhi (p.6). all these drawbacks tend to relate to factors which make the wheels of infrastructure transactions turn slower than investors would like. they include, for example: the need to change legislation in areas where investment was once shunned but is now welcomed; the requirement for better definition of the law in certain sectors; and the need for greater human resource capacity on the public side to expedite India’s burgeoning public-private partnership (PPP) programme. In summary, it might be said that India’s political will to improve its infrastructure is well aligned with the stratospheric numbers – but the machinery needed to deliver on this impressive ambition is only just cranking into gear. some further patience will be required before the deal pipeline opens up to everyone’s satisfaction. In the meantime, there is plenty to play for - and great returns to be made by those with solid deal sourcing capabilities. In the pages that follow you will find reflections on the road, energy and aviation services sectors among others. You will find guest features, Q&as and a data section providing you with many of the key facts and figures (p.33). also, you will read about the asian development Bank’s plans to support infrastructure within developing asian markets (p.18), as well as in India specifically (p.30). enjoy our India country briefing. andy thomson senior editor andy.t@peimedia.com
  • 4. 2 contents may 2011 Special supplement: LoNdoN sycamore House INDIA sycamore street London eC1Y 0sg tel: +44 20 7566 5444 New YorK 3 east 28th street, 7th/flr New York NY10016 tel: +1 212 645 1919 sINgaPore 105 Cecil street unit 10-01 the octagon singapore 069534 tel: +65 6838 4563 A country briefing editorial director : Philip Borel +44 20 7566 5434 3. Introduction 21. Q&A: Sharad Jhingan, Lanco philip.b@peimedia.com the golden decade Infratech editor-at-Large: India’s pledge to spend $1.5trn over the we can ‘learn the world’s lessons’ david snow next 10 years on upgrading its infrastructure Sharad Jhingan says that, by creating +1 212 633 1455 offers investors the opportunity to help unique models, India can leapfrog other david.s@peimedia.com change the face of the country countries and deliver efficient and cost- senior editor: effective infrastructure assets andy thomson +44 20 7566 5435 6. Roundtable andy.t@peimedia.com Be bold – and cautious 22. Company profile: Lanco Key individuals in the Indian infrastructure Infratech associate editor: Cezary Podkul investment market gathered together in Breaking new ground +1 212 633 1456 New Delhi to discuss how India might 2011 has seen Lanco Group turn 25 years cezary.p@peimedia.com overcome its infrastructure bottlenecks of age and achieve a number of new senior writer: while at the same time reconciling landmarks Bruno alves competing interests +44 20 7566 5446 bruno.a@peimedia.com 24. Guest feature: Aviation 13. Sector focus: Energy services reporter: time to power up getting off the ground alexandra atiya +1 212 937 2830 The huge demand-supply gap in India’s Syed Ali Abbas and Shaurya Doval of alexandra.a@peimedia.com power sector speaks to large investment Zeus explain why India’s fledgling aviation special Projects Manager: opportunities. But what does the sector services sector offers investors the ram Kumar really have to offer? opportunity for private equity-type returns +44 20 7566 5474 ram.k@peimedia.com 15. Interview: Morgan Stanley 27. Q&A: Suneet Maheshwari, Head of design & Production: Infrastructure Partners L&T Infrastructure Finance tian Mullarkey +44 20 7566 5436 the advantages of being global – and local ‘a lack of judicial machinery’ tian.m@peimedia.com Sadek Wahba and Gautam Bhandari Suneet Maheshwari maintains that the describe how their firm has sought to bottleneck of outstanding compensation design & Production Manager: Joshua Chong combine a global approach with an intimate claims relating to land acquisition is an issue +44 20 7566 5433 understanding of local markets that needs to be addressed joshua.c@ peimedia.com subscriptions & reprints: 17. Case study: Morgan Stanley 28. Company profile: L&T fran Hobson Infrastructure Partners Infrastructure Finance fran.h@peimedia.com +44 20 7566 5444 roads paved with ambition ‘a fundamental financing role’ +1 212 645 1919 [americas] Why India’s huge road expansion L&T Infra has become a leading player +65 6838 4536 [asia] programme is far more than just hype in the financing of Indian infrastructure, sales and Marketing director: including through successful bond issues Paul McLean 18. Guest feature: Developing +44 20 7566 5456 paul.m@peimedia.com Asia 30. Q&A: Asian Development Coping with urbanisation Bank group Managing director: Bindu Lohani and S.H.Rahman of the ‘addressing the bottlenecks’ tim McLoughlin +44 20 7566 5276 Asian Development Bank discuss the Bindu Lohani and S.H.Rahman explain tim.m@peimedia.com infrastructure investment challenges in what the ADB is doing to assist the further Co-founders: developing Asia, including a rapid migration development of Indian infrastructure richard o’donohoe from rural to city locations david Hawkins 33. Key data Published by PeI Ltd tackling India’s infrastructure challenge Compelling statistics which chart the nuances of Indian infrasture investment in recent times www.InfrastructureInvestor.com
  • 5. infrastructure investor india country briefing 2011 introduction 3the golden decadeIndia’s pledge to spend $1.5trn over 10 years to upgrade its infrastructure offers investorsa once-in-a-lifetime opportunity to help change the face of the country. But it’s not anopportunity devoid of challenges, reports Bruno Alves only the most distracted of investors can have failed to notice the transformational economic impact of India’s development into an It outsourcing centre, with scores of multinational companies moving their It operations to the country to take advantage of India’s skilled – but comparatively cheap – workforce. this was partly the result of government policies that eliminated barriers to foreign investment and targeted the sector with special subsidies. But it was also the result of government “gradually moving out of the way” of doing business, “not graciously, but kicked and dragged into implementing economic reforms [in the early 1990s],” wrote gurchanan das, a former chief executive of Procter & gamble India, in a article for Foreign Affairs. Now that the government plans to give infrastructure a similar boost, with public-private partnerships (PPPs) at the centre of its strategy, it is no wonder that infrastructure investors across the globe are hungrily eyeing the Indian market. auspiciously, the man responsible for the economic reforms of the early 1990s – then finance minister Manmohan singh – is now India’s prime minister. still, there is a more pressing reason why the government has a vested interest in the success of its infrastructure programme: India cannot possibly sustainAs stAtements of intent go, you can’t get much more powerful the extraordinary growth rates it has beenthan former transport minister Kamal Nath’s oft-repeated phrase experiencing over the last decade without tackling its sizeableregarding the Indian government’s infrastructure plans: “If the infrastructure deficit.last decade was the decade of It in India, the new decade willbe the decade of infrastructure.” Leaping growth, Lagging infrastructure It is little wonder that Nath’s sparkling soundbite has beenquoted to exhaustion ever since he first uttered it more than two India’s gross domestic product (gdP) grew at an average ofyears ago. Like all good quotes, it elegantly compresses all the 7.08 percent from 2000 to 2010, according to data from the worldnecessary information into a punchy package. It also lends the Bank. Its gdP is expected to grow by 8.6 percent this year, theaura of success experienced in the Indian information technology government said recently. and despite the headline-grabbing(It) sector to the government’s infrastructure plans. growth recorded in the 2000s, the country has actually been growing
  • 6. 4 introduction may 2011 solidly for over two the $1.5 triLLion pLan “With high inflation decades, increasing comes high interest rates. its gdP by an fortunately, the government has recognised the scale of the average of 6 percent problem and, in India’s 11th five-Year Plan, which set targets for Over the course of 2010, a year from 1980 to the economy from 2007 to 2012, doubled infrastructure spending the RBI raised interest 2002, das wrote. to $500 billion. It also asked the private sector to fund 36 percent, s i g n i f i c a n t l y, or $185 billion, of that amount. rates seven times to fight India’s economic the plan set ambitious targets for all of India’s infrastructure rising prices” success displays sub-sectors. idiosyncrasies In the roads sector, the authorities pledged to speed up the which have insulated ongoing National Highways development Programme, running the country against from 2005 to 2012, which plans to widen over 53,000 kilometres global financial crises. as das neatly summarises: of road and develop 1,000 kilometres of expressways. former “rather than adopting the classic asian strategy – exporting transport minister Kamal Nath pledged to build 20 kilometres of labour-intensive, low-priced manufactured goods to the west road per day, or about 7,000 kilometres of road a year, to develop – India has relied on its domestic market more than exports, a world-class road network across India. consumption more than investment, services more than industry, the government also pledged to modernise four metropolitan and high-tech more than low-skilled manufacturing.” and 35 non-metropolitan airports during the five-year programme, However, “deplorably low levels of public investment have in addition to building 10 greenfield airports. It aims to have 8,132 rendered India’s physical infrastructure incompatible with large kilometres of new rail built and 78,577 megawatts added to the increases in the national product”, the reserve Bank of India power grid by 2012. (rBI), India’s central bank, stated in a study on infrastructure Looking forward, the authorities are again looking to double financing, published in summer 2010. their infrastructure spending for India’s 12th five-Year Plan, from In it, rBI paints a fairly bleak sector-by-sector picture of 2012 to 2017, to $1 trillion, in anticipation of breaking into double- India’s infrastructure deficit. take roads. rBI says India’s 65,590 digit gdP growth. this means India will have spent $1.5 trillion kilometres of highways comprise just 2 percent of the country’s in developing its infrastructure from 2007 to 2017. roads network – while carrying 40 percent of India’s traffic. only recognising the enormous sums required, Indian president 12 percent of India’s highways have four lanes, with 50 percent Pratibha Patil again called on the private sector to help shoulder having only two lanes and 38 percent being single-laned. the costs in a late february speech to Parliament. there is a 13.8 percent peaking deficit in the power sector; given repeated calls for this private sector participation, it’s a 9.6 percent energy shortage; 40 percent transmission and unsurprising that a veritable who’s-who of the infrastructure distribution losses; and, to top it all off, rBI says there is no industry has descended on the country. european developers competition in the sector. the central bank’s assessment of like Brisa, egis, Isolux-Corsan and VINCI are all present in India, India’s other infrastructure sub-sectors also highlight the country’s either alone or via local partnerships, particularly in the popular pressing needs. roads sector, where other international firms, such as Canada’s Ports have “inadequate berths and rail/road connectivity”; sNC Lavalin and egypt’s orascom, are also investing. railways rely on “old technology, saturated routes [and] slow Infrastructure fund activity is thriving, with many India-focused speeds”; airports have “inadequate runways, aircraft handling funds now operating or in the process of being raised, backed capacity, parking space and terminal buildings”; and in telecoms by international players like 3i, Macquarie, Brookfield, sMBC and It, “only 18 percent of the market [is being] accessed”, the and Nomura. hardware used is obsolete, and there are “acute human resources shortages”. funding diversity If you look at India’s logistics infrastructure – the freight corridors that will be all important to secure its economic growth – But despite all the interest in the Indian infrastructure market, you will find that “a large part of India’s future logistics network is the road ahead is not without bumps. some of the question marks still to be built”, McKinsey, a consultancy, wrote in a recent report. hanging on such a gargantuan programme are quite natural. as it stands, the consultancy estimates that India is losing $45 for example, can the government actually finance its massive billion, or 4.3 percent of its current $104 trillion gdP, in “waste infrastructure plans, even with the help of the private sector? caused by poor logistics”. the country’s current logistics network In a government report issued in June 2010, the authorities is also overly reliant on (highly congested) roads for its freight admitted there is a $50 billion debt gap to finance the infrastructure traffic. “India’s reliance on roads is more than three times that spending forecast in the 11th five-Year Plan. of China,” McKinsey noted, adding that it needs to develop its Banks are playing their part in financing many of these rail and waterways to establish a balanced multimodal network. projects, but they are constrained from lending long term to
  • 7. infrastructure investor india country briefing 2011 introduction 5 roads, power and railway sectors were experiencing costly delays, according to the finance ministry’s economic survey for 2010 to 2011. the survey highlighted that 293 of 559 central government projects costing $33 million or more were delayed by up to 36 months as at october 2010. It added there were 51 projects in the roads sector suffering delays of between one and 36 months, with 20 projects in the power sector falling behind schedule by between one and 18 months. former minister Nath’s target of 20 kilometres of road building a day seems to be running at roughly half that amount at press time. Land acquisition and, of late, tougher environmental permits are also delaying projects, with investors complaining of a slowdown in activity in the last six to eight months.Delhi Gurgaon Expressway: India needs more roads like this furthermore, inflation has remained stubbornly high, with the latest figures, at the time of writing, placing it at 8.31 percentinfrastructure because of asset-liability mismatches. as the rBI in february, up from 8.23 percent in January. with high inflationsuccinctly put it: “the issue is that the banks cannot be the sole comes high interest rates. over the course of 2010, the rBI raisedor even dominant providers of funds for these projects.” interest rates seven times to fight rising prices. the problem is that, at the moment, banks are the main It is hard to overstate how damaging the combination ofproviders of debt for infrastructure, since “insurance and pension high inflation and high interest rates can be for infrastructurefunds do not lend to project companies setting up greenfield investors. for limited partners such as pension funds, persistentprojects and the bond market has not matured sufficiently for high inflation can discourage their allocations to India-focusedaddressing the needs of such projects,” the government wrote vehicles. Private equity and infrastructure funds in exit modein its June 2010 report. might find their returns lower than expected, with consequences to be fair, the government is well aware of this and has been for future fundraising.working hard to create new sources of debt funding. the above- developers will have to deal with higher costs for raw materials.mentioned June 2010 paper proposed the creation of an $11 and while most will have almost certainly hedged against interestbillion infrastructure debt fund that would, essentially, look to rate fluctuation in the PPP deals they have closed, higher interestrefinance debt for operational PPP projects, providing sponsors rates will increase the costs of newer projects. Needless to say,with lower-cost, longer-term debt. a persistent combination of pricy raw materials and high interest the government has also allowed certain Infrastructure rates can make certain PPPs unviable for the private sector.finance Companies, such as the Infrastructure development the good news is that, to date, these obstacles do not appearfinance Company, to issue tax-free infrastructure bonds with to have dimmed investor interest in what is surely one of thea minimum maturity of 10 years. these could raise up to $6.5 world’s most promising infrastructure markets. when comparedbillion in the financial year 2010 to 2011 alone. with other attractive emerging infrastructure markets like Brazil or specialist institutions such as the India Infrastructure finance turkey, India’s infrastructure programme enjoys the advantages ofCompany (IIfC), incorporated in 2006, have been set up to help being better delineated and, more importantly, striving to createprovide long-term debt for the sector, although IIfC can only the optimal conditions for the private sector to play a leadingsupply up to 30 percent of a project’s total debt. role in it. But the road ahead is long and India’s infrastructure plansdeLays, permits and high infLation are extremely ambitious. the challenge for the government then, if it wants to guarantee that investors will stick around for the funding gaps are not the only worry, though. as 2011 dawned, ride, will be to make sure that some of the bumps encounteredthere were concerns that infrastructure projects across the on the road aren’t allowed to grow into potholes. n
  • 8. 6 roundtable may 2011 Be bold – and cautious the pressure is on. In order to keep fuelling its rapid economic growth, India has to overcome its infrastructure bottlenecks. But, as a democracy that needs to reconcile competing interests while at the same time honing fledgling regulatory frameworks, progress can be slower than many would like. Andy thomson visited new Delhi to elicit views from key individuals on opportunities and limitations In gloBAl terms, it’s the seventh-largest country by geography, to discuss what they see as the key themes in Indian infrastructure the second-most populous and the largest democracy. It has myriad investment today. cultures and hundreds of languages. a statement of the obvious: Jhingan commences a lively debate by referring to the country India defies simple characterisation. so too does its effort to create that seems destined to be considered the yardstick for India’s infrastructure worthy of one of today’s great emerging markets. progress now and well into the future. “China has a long-term vision we know that India wants to bring its infrastructure up to a level about where the country is and how it needs to position itself,” that will prevent its rapid growth rate from having to be throttled he maintains. “everything else revolves around how you execute back. But what are the key issues occupying the minds of those on that. It’s the national interest. we need to focus on the national on the frontline of Indian infrastructure investment? Infrastructure interest and we need a long-term policy on how to achieve it. we Investor has gathered together representatives from an Indian must service that goal.” developer, financing firms, an advisory firm and a government this goes to the heart of a crucial issue. Many Indian infrastructure ministry to get the inside story. professionals would no doubt echo Jhingan’s sentiments. there is the clock ticks over to 10am in a meeting room in the frustration that China has moved swiftly ahead of India with grand shangri-La eros hotel in New delhi. gautam Bhandari (Morgan infrastructure projects. some would lay the blame for this at least stanley Infrastructure Partners), sharad Jhingan (Lanco Infratech), partly at the door of government and, specifically, infrastructure suneet Maheshwari (L&t Infrastructure finance), Jai Mavani delivery mechanisms that they would argue are not - to use modern- (PricewaterhouseCoopers) and arvind Mayaram (Indian Ministry day parlance - fit for purpose. of rural development) have all greeted each other and are ready But there is another side to the issue. one roundtable participant
  • 9. infrastructure investor india country briefing 2011 roundtable 7arouNd the table: biographies iN brief Suneet Maheshwari is currently chief executive of L&T Infrastructure Finance. He has about 28 years Gautam Bhandari is a Managing Director at of experience in India in infrastructure financing, Morgan Stanley Infrastructure Partners and head corporate finance, infrastructure & energy sector of fund’s Asian operations. In this role, he has reform, investment banking and private equity. He has overseen a number of significant deals, including set up infrastructure advisory & financing operations the largest equity investment in the India power in several start-up and rapid growth situations and sector to date. Prior to joining the infrastructure has also been closely involved with various infrastructure sector team, Bhandari worked for Morgan Stanley’s reforms and PPP initiatives at the national and state level since 1991.investment banking division and the global capital marketsdivision, where he structured and executed plant financings,hedges and securitisations. Bhandari holds an MBA in Finance Jai Mavani is a partner and the tax leader for PwC’sfrom the Stern School of Business at New York University, and infrastructure and real estate practice in India. Hea PhD in Chemistry from the University of Delaware. He is a has varied experience within this field over a periodpublished author of several scientific papers and is the inventor of 18 years. Mavani specialises in providing tax andof 20 patents in the semiconductor industry. regulatory advisory services to infrastructure, real estate and private equity clients. Sharad Jhingan is a finance professional with more than 20 years experience and is the chief operating officer of Lanco Infratech Limited. Arvind Mayaram is currently the Additional Experienced in strategic planning, corporate Secretary and Financial Adviser, Ministry of Rural restructuring, M&A, fundraising and capital Development. He was Deputy Secretary of Foreign markets, he has successfully negotiated and Trade and Foreign Investment at the Department completed a number of private equity deals. He of Economic Affairs, Ministry of Finance from 1987has also managed international treasury operations, working as to 1991. He is also Joint Secretary, Department ofchief financial officer of Indian and international business houses Economic Affairs, Ministry of Finance, Governmentin previous roles. of India.refers to China’s Three Gorges Dam as the kind of project that could one party. The government has to be seen as an honest arbiter.never happen in India. Critics of the world’s largest hydropower The private side can’t say ’give it all to us’. Look at the example ofproject claimed that the social cost - an estimated one million developed countries - bipartisanship will work wonders.”people forcibly moved from their homes and 1,200 towns andvillages said to be under threat from rising waters - was too high Not all about urbaN areasa price to pay. And many in India would agree. Mayaram, the government representative, is one of these. It would perhaps be easy for Mayaram to use this as a defence“Democracy is a strength not a weakness. Certain countries that for any perceived delays in infrastructure execution and for theare not democracies may look solid - but, as we’ve seen from recent apparent lack of a grand, coherent vision referred to by Jhingan.events in the Middle East - they’re not, they’re unstable. That kind It’s all down to India’s democracy, he could feasibly maintain -of instability won’t happen in India because the governments are often described as both the country’s biggest strength and itsrepresentative of the popular will.” biggest weakness. But this is not Mayaram’s tack. He argues Others around the table refer to the government as an instead that the government is delivering - just not always in a“honest broker” between the investors who want to build India’s way that perfectly synergises with the agendas of each of his fellowinfrastructure and the people who are affected by their plans. roundtable attendees.Whether the government always gets it right is another matter, “Does India not have a long-term vision? In fact, the vision isbut there is acknowledgement that for India to move forward with quite clear but as each of us is only looking at a particular segment,infrastructure development it should not ride roughshod over the there may be a perception that India lacks a comprehensivemajority - it has to strike a balance between competing interests. vision. For example, a lot is discussed about urban development(Worth noting here the view held by some that independent in international discourse on India. Very little is known or spokenregulators should take this intermediary role away from government of about the transformation going on in the rural areas, such aswhere possible - more of which later). connectivity, rural telephony etc. There is a vision.” As Jhingan says: “The whole process cannot be seen to favour Mayaram goes on to list some of the things that serve to support
  • 10. 8 roundtable may 2011 this vision: solid better definition of the law in certain sectors (some progress has contract law that is already been made here, asserts Mayaram, including in private “We need to focus on the effectively enforced aviation); more capacity needed on the public side to manage national interest and we in court; the raising public-private partnership (PPP) agreements; a greater choice of need a long-term policy in the recent Budget of the amount that project developers needed; and better enforcement of the country’s well-defined environmental laws. on how to achieve it” – foreign institutional Jhingan investors can invest independent reguLators in India; and moves to deepen the capital this is a neat encapsulation of some of the factors that give markets, including investors room for optimism and others that are a cause of legislation that has frustration. But how does everyone else around the table view assisted the launch of a series of infrastructure bond issues, for these and other “big issues”? example. to refer back to the point about how infrastructure projects However, he also acknowledges some of the things that hinder may get bogged down, there is a view that the introduction of the implementation of the vision: the need to change legislation independent industry regulators would assist processes to be better in sectors where private capital has previously been unwanted expedited. “You need to focus on the mechanisms,” says suneet but is now encouraged (rail, for example); the requirement for Maheshwari. “an infrastructure project will often need three or four different government departments to talk to each other.” gautam Bhandari believes that introducing independent regulators would be helpful. “while the intentions of the government officials are constructive,” he says, “it takes longer to implement processes than in other markets, but then it’s a matter of consensus and achieving that is not easy, even in developed markets. the government should try to set up independent regulators because having them as the final judge would remove the ‘perception’ of government favouring or disfavouring a particular concessionaire.” with a smile, Mayaram thanks Bhandari for having “some faith” in bureaucracy. He acknowledges that government is under a lot of pressure, trying to understand processes for which there may be little by way of precedent given the fact that Indian infrastructure investment has only been prioritised relatively recently in the country’s history: “It’s a big learning curve and in some infrastructure sectors we make mistakes. But the system is merciless. when you’re in uncharted waters, you get very cautious and that slows things down. You’re trying to work out the road ahead.” furthermore, the government is still playing catch-up in terms of the level of human resource needed to make the wheels turn efficiently. “there is a challenge of capacity in terms of managing the process Mayaram: little known about rural transformation of a transaction from rfQ [request for
  • 11. infrastructure investor india country briefing 2011 roundtable 9Qualifications] stage onwards,” notes Mayaram. “But the finance that a lot of privateMinistry is currently putting in place a huge capacity building equity investment inprogramme to train public officials in PPP processes so they no India has been in the “Certain countries thatlonger have to learn on the job.” nature of structured are not democracies may Mayaram adds: “the problem with regulation is that it sets equity with a definedprocesses and systems in stone. But in an evolving situation, return and downside look solid - but, as we’vegovernment policy must change to address constantly changing protection. seen from recent events inreality. so we need to be careful in thinking of regulation as the essentially, thissolution for all problems. In some sectors early entry of regulation is nothing but the Middle East – they’reand regulators might be a problem waiting to happen. to align mezzanine he says. not, they’re unstable” –policies to changing realities and new learning one might have to He is encouraged by Mayaramgo back and change laws all the time. we don’t yet have enough the potential for newexperience to see what should be set in stone in most infrastructure debt and mezzaninesectors.” products to create “a Bhandari expands on why he believes having independent whole new fundingregulators would be useful. “the regulator could be merely an environment” but feels there are other gaps that also need to bearbitrator - there’s a place for that. and if you can speed things filled.up, it lowers the cost of capital. But you can also have regimes Mavani says there is a lack of “long-term annuity plays”where the regulator has a broader mandateto make rulings on the grounds of fairness.Not every eventuality can be envisaged overa 50 to 100 page contract that has to last30-plus years.”fixed investment He adds: “the private sector makes afixed investment on the day the contract issigned in the hope that a fair rate of returncan be made.You need someone to come inand look at things and balance the interestsof investors and citizens. It’s hard to putbureaucrats and politicians in that positiongiven the pressure of public office.” Bhandaricites the example of the uK airport regulator,the Civil aviation authority, which “reducedrates of return as it thought it was fair to doso, even though it upset the private sector”. at this point, Maheshwari and Jhinganboth raise the question “who regulates theregulator?” the point being, who wouldbe able to remove a regulator if they wereseen to be doing more harm than good?Bhandari suggests that one solution wouldbe to appoint regulators only for a fixed term.one thing’s for sure: the issue of regulatorsis a big talking point that attracts divergingviews. It will likely run for a while yet. while not exactly a source of frustration,something that exercises minds withinIndian infrastructure circles is how to widensources of finance and deepen the country’scapital markets. Jai Mavani makes the point Jhingan: ‘who regulates the regulator?’
  • 12. 10 roundtable may 2011 points to India’s National Housing Bank – which was launched in the country’s seventh five-year plan (1985-90) to address a near absence of long-term finance for households – as a successful existing template. following the launch of the bank, the housing market took off. “You need a bank to refinance the commercial banks,” insists Jhingan. “a National Infrastructure Bank could be run by the reserve Bank of India, for example.” on the issue of enticing pension and insurance companies into the space, Mayaram points to an obstacle. “the problem is that most infrastructure projects in India are implemented through special purpose vehicles (sPVs). Because sPVs have no balance sheet, they’re never rated higher than mere investment grade, so the pension funds can’t invest. the credit rating system needs to be developed to include this reality.” He adds: “we did work in the finance Ministry to develop a project grading system in collaboration with the major credit rating agencies based on the strength of projects and their promoters. that product was developed but somehow it did not take off.” tax pain another issue that animates those around the table is taxation. Controversy surrounds the Minimum alternate tax (Mat), Maheshwari: a forward pipeline of deals needed a tax system designed to prevent high- earning corporations and individuals from that deliver returns in the 8 to 12 percent bracket and calls for reducing their taxes to a level that the government considers too low. the development of reIt (real estate Investment trust)-type Complaints are not centred on the overall level of the tax so much products that enable “stable cash-flow generating assets to list as regular tinkering with the system combined with poor drafting on exchanges” as well as a mortgage-backed securities market and confusion over “where you have active trading and hence liquidity”. this would the legislation’s also help the circulation of capital where risk capital invested at applicability and the time of construction and development gets refinanced and intent. “You need to focus on replaced by long-term fixed income investors. “what you need the mechanisms. An there is concern – not unique to the Indian market – regarding is consistency and infrastructure projects’ over-reliance on bank debt and the need for predictability,” says infrastructure project will longer and cheaper sources of long-term financing. as elsewhere Mavani. “those are often need three or four in the world, there is hope that the bond market will play a greater the two key themes. different government role and that pension and insurance companies can step in as But we’ve had long-term debt holders so that – in the words of Bhandari – “we’re shifting goalposts departments to talk to not totally dependent on the bank market”. when it comes to each other” – Maheshwari also as in other markets, there are those in India who would things like Mat support the creation of a National Infrastructure Bank. Jhingan for seZs (special
  • 13. infrastructure investor india country briefing 2011 roundtable 11 economic Zones). You go ahead with a Joshi in a cabinet reshuffle in January, but project and, after financial closure, you see the legacy remains. “The government changes in regulations and tax laws. that “there has been a change in minister, doesn’t send the right message. In the oil which means there has been a pause, but should try to set up and gas sector, in a PsC (Production sharing the roads programme is expected to roll out independent regulators Contract) if you’ve agreed a tax basis, it will quickly from now on,” says Maheshwari. because having them as apply independent of what the subsequent “My key worry is that lots of new developers amendment in law says, i.e., it’s a carve-out have come in and, in the absence of a the final judge would ring-fenced regime. It’s worth considering timetable saying what will happen when, remove the ‘perception’ of similar provisions in long-term high capital early projects had a lot of competition and cost concessions in other infrastructure were more aggressively structured than they government favouring or projects so that necessary comfort is needed to be. You need to have a forward disfavouring a particular available to investors.” pipeline of maybe 50 or 60 roads.” talk now turns to deal flow: where are Bhandari cites roads as “the biggest concessionaire” – deals happening (and not happening), which opportunity to attract investors”. He Bhandari are the up-and-coming sectors, what are explains: “It’s reasonably mature. I’m not the obstacles that stand in the way, and is saying challenges don’t exist, but at least there a future for private investment in social on the regulatory side there is a framework infrastructure? and a process for bids that has gone through unsurprisingly, roads quickly come to years of trial and refinement. It will stand the fore as a subject for discussion. former as a litmus test over the next two to three roads minister Kamal Nath last year made years. Can the government deliver? If they the famous pronouncement that India would can, it will be a clear articulation of success.” build 20 kilometres of road per day and that alongside roads, power – where there $48 billion of private capital was needed for has been a high level of private equity road development over a five-year period. investment for quite some time – is the other Nath was replaced as roads minister by CP sector that has reached a level of maturity inMavani: changes in tax laws can send a bad message
  • 14. 12 roundtable may 2011 India. “the power sector has been a good example,” says Mavani. certainly yes. the private sector will, of course, look at a profit “Mega projects have been delayed a little but we’ve at least seen model. that’s ok if you also do a good social job and quality aspects things happening in a systematic way. regulation has evolved are not compromised.” and everyone has adjusted. of course, challenges remain around He points out that this is one area of infrastructure where allocation of coal blocks, environment approvals etc, but by and having a independent regulator would be very useful in ensuring large we have seen reasonable clarity on the policy front.” transparency. Maheshwari agrees: “with social infrastructure, there is a problem of regulation. education, for example, needs regulating next big thing with respect to fees. If that’s appropriately handled, there’s a big demand as incomes rise.” what of the sectors that are just appearing on investors’ radars? enforcing standards is the crucial issue, says Mayaram. “with what should we be looking out for? one is hospitals, in particular, there is the problem literally coming down the track. “one area of standards. How do you ensure that the that’s interesting is rail – there’s a lot to be achieved there,” says Mavani. “the delhi- “One area that’s level of service for the poor is the same as for the rich and that patients are not Mumbai Industrial Corridor [an infrastructure interesting is rail – there’s over-charged? In the past, we’ve seen the mega project that aims to develop an a lot to be achieved there” poor given short shrift. the laying out and industrial zone across six Indian states], if enforcing of standards is critical.” well managed, has the potential to usher in – Mavani Bhandari’s view is that social the next round of the industrial revolution infrastructure is both “very interesting” and in India.” a new railway freight corridor is also “very difficult and complex” for private at the heart of the project. investors, even in those areas where a regulatory framework exists. Bhandari says “more work is needed on rail” but “that will However, he notes: “You may find that the delivery of education is happen over the next three to five years as new policies are cheaper and better within the private sector.” announced”. By now, the clock has ticked around to noon. Because there one intriguing suggestion from Mayaram is that logistics will are so many interesting talking points in this exciting and nuanced be a “great” area for investment in the future. Intriguing because market, it’s with regret that a halt to proceedings must be called. an improved outlook for logistics would flow naturally from But watches are now being anxiously checked, with meetings improvements to the country’s infrastructure – to be an optimist scheduled for everyone and flights for some. farewells are said about logistics you would also presumably have to be an optimist and the room rapidly empties. It’s time to get on with that task of about India’s ability to deliver its infrastructure plans. “at the momentbuilding the nation. n a lot of food doesn’t make it to market due to poor logistics,” says Mayaram. “But many investors are likely to foray into this sector why Land owners really feeL cheated and it will be a huge opportunity that will deliver attractive returns.” there is a common misunderstanding, says arvind Mayaram of the Indian Ministry as private capital begins to demonstrate of rural development, when it comes to the controversial issue of land acquisition. the role that it can play in the development India’s Land acquisition act of 1894 allows the government to purchase land from of India’s economic infrastructure, the its owner for a “public purpose” in exchange for the payment of compensation. Critics question arises as to whether it can also help have accused the government of trampling over the wishes of landowners. But Mayaram improve the country’s social infrastructure insists there is a nuance that frequently goes unrecognised. “Land owners often demand in areas such as schools and hospitals? that roads go through their land because it enhances the land’s value,” he says. “when the response from those at the table is a there are no roads, the value of land is very low.” qualified yes, but with the important proviso It’s not the process of land acquisition per se that is the problem, according to that a workable business model needs to be Mayaram. He believes owners are animated by the particular issue of land purportedly found within what should be tight regulatory being bought for an industrial purpose but then leased to developers who will instead parameters that will hold investors to high exploit the land for commercial activities. “You’re seeing people taking on 99-year standards. leases based on the land’s expected real estate value at some point in the future. this “demand [for social infrastructure] is a is when the farmer feels cheated because money is being made from the land itself, no-brainer,” says Mavani. “But do we have not from industrial activity,” says Mayaram. the ability to deliver at affordable price “Can we limit the lease period, at the end of which it reverts to the farmer or the points? If we take telecommunications original owner?” he ponders. “we’ve not seen this yet and it needs to be looked at. as an example, or our recent innovations also, you need to look at profit sharing on top of compensation. we need a more around frugal engineering, [the answer is] sophisticated land buying process.”
  • 15. infrastructure investor india country briefing 2011 sector focus: energy 13time to power upthe huge demand-supply gap in India’s power sector speaks to large investmentopportunities. But what does the sector really have to offer? Hsiang-ching tseng reports capacity in the 12th Plan (2012-2017). at the end of November last year, India had an installed capacity of 167,077 megawatts, according to the country’s Ministry of Power. given the demand-supply gap, the figures speak to a major investment opportunity. according to anil ahuja, 3i’s head of asia, the firm expects about half of its first Indian infrastructure fund, which closed on $1.2 billion in 2007, to go into the power sector. the firm is also mulling a second infrastructure fund in the country, which could be larger than its predecessor, given the firm’s chief executive Michael Queen’s comments during a trip to India. at the time, he told the local media that 3i was planning to have between $2 billion and $3 billion invested in Indian infrastructure over the next two years. “the total scale of the [power] requirement is very large. there’s room for private capital as well as government capital,” says ahuja. But exactly how big is the capacity for private capital? “It’s a question of finding theJourney BAck In the archives of PE Asia to read our infrastructure- right projects because there’s more than enough capacity to absorbfocused coverage in the second half of 2010, and you’ll note the highthe capital,” says ahuja. “Because in the 12th five-year plan you’reproportion of private equity deals occurring in India’s power sector.building 100,000 megawatts, then that should require $100 billion during that period, the sector attracted global fund managers of total investment. so we’re talking large numbers, much largersuch as the Blackstone group, Kohlberg Kravis roberts, actis, than the size of all the private equity funds put together,” he says.3i and private investors like the International finance Corporation Manish agarwal, executive director at KPMg advisory services(IfC) and singapore sovereign wealth fund gIC. in India, predicts that “over the next five years, 50 percent of In its 11th five-year plan (2007-2012), India anticipated adding generation capacity added will come from private capital”.78,700 megawatts of power generation capacity. However, the attractive as it may be, however, the power sector is beset withcountry has barely managed to achieve half of the capacity addition challenges for private investors. Land acquisition, as for many otherthat was planned during the last three five-year plans and has infrastructure plays in India, poses a challenge. equally importantalready seen slippages on the current one. according to Indian is the ability of developers to execute projects on time.newspaper Daily News & Analysis, the country has so far addedjust 34,000 megawatts of power generation capacity in the first four security issuesyears of the 11th Plan, with another 20,000 megawatts expectedto be delivered over the remaining period of the Plan. fuel security is also foremost in private investors’ minds. of the 167,077 megawatts of installed capacity, coal is used for 53.3the 100k pLan percent of power generated and accounts for 82.8 percent of total fuel used for power generation, according to the Ministry of Power. In January, India’s union Minister of Power sushilkumar shinde In fact, while gas might be catching up, coal will continue to be thewas reported to have said at an event in Mumbai that the government dominant fuel source for power generation in the country, accordingplans to add around 100,000 megawatts of power generation to sanjiv aggarwal, a partner at fund manager actis who heads the
  • 16. 14 sector focus: energy may 2011 infrastructure team for south asia. climate-friendly alternatives depending upon However, although India has large coal “With economies of scale the location,” says tandon. reserves, the “production is unlikely to reach and further evolution of “More efficient coal-based generation levels that would meet the total projected technologies like super-critical and ultra- fuel requirement of all the power plants,” solar technologies, solar- super-critical need to be adopted wherever he says. based generation will come feasible in order to reduce greenhouse gas Consequently, importing coal from closer to grid parity in the emissions,” he adds. countries like Indonesia has been used as still, some excitement about renewable a means to bridge the gap. according to next few years” energy is evident given the huge demand- KPMg’s agarwal, about 30 to 50 percent supply gap which cannot be easily filled. of needed coal will be provided by imports. while it’s difficult to make a judgment over with fuel security posing a big challenge the extent of the private sector’s interest in for Indian power generation, renewable energy comes into play. the renewable energy space, since opportunities and regulatory Currently renewable energy, including hydro, accounts for 32.4 frameworks have only improved over the last few years, tandon percent of total installed capacity. shalabh tandon, head of believes many private investors are making moves. investments in power and renewables across asia for the IfC, “It is too early to say that [the power generation sector will believes that there are good business opportunities in the renewable be] dominated only by traditional power generation because it energy sector in India. takes time for the market to evolve, it takes time for people to get “we believe that commercially viable opportunities exist in the comfortable with regulatory processes,” he says. non-solar renewables space,” tandon says. whether talking about renewable energy or traditional forms although the solar sector is still not perceived as cost- of power generation, private investors remain bullish on India’s competitive, tandon says he thinks that “with economies of scale power sector. and further evolution of solar technologies, solar-based generation “the outlook for the power sector in India is positive, there will come closer to grid parity in the next few years”. is a demand-supply gap supported by a good regulatory regime In addition, “there’s room for all the various sources of power in which is encouraging private equity investment to come in,” says India. If [India’s gdP is] going to grow 8 to 9 percent over the next actis’ aggarwal. n 10 years, it cannot rely on a single source of power, it has to tap into almost every alternative source,” adds tandon. tracking transmission cost competitiveness with the focus on increasing power generation capacity in India’s five-year plans, a corresponding investment in the transmission sector is also expected. However, regardless of how promising at the end of october last year, the aggregate inter-regional transmission capacity investment in renewable energy seems to in the country was more than 20,750 megawatts, but an ambitious goal of 37,700 be, whether it proves to be cost competitive megawatts was targeted to be achieved by 2012, according to India’s Ministry of Power. remains the core issue and the main reason several steps have been taken in India’s 11th five year plan (2007-2012) to encourage why most private investments in India’s private investment in the transmission space, including the formation of a committee power generation have gone to ‘traditional’ comprised of relevant government bodies to identify inter-state transmission projects plays. for private sector participation. “[renewable energy] is dependent on “the extent of private sector involvement in transmission right now is limited. there some form of subsidy from the government are a few states that are opening up the sector and a few projects that have come out and I think as long as it doesn’t become in the public-private partnership arena. In terms of market need, there’s a huge market cost competitive, we will continue to see the potential,” says shalabh tandon, head of investments in power and renewables across limited growth of renewable,” says ahuja. asia for the IfC. while investment in renewable energy “I would like to see more private investment in transmission, because a multifold cannot be ignored, the addition of tens of increase in project delivery is required, which will be difficult to meet by the state thousands of megawatts in the country will government-owned transmission companies alone,” says Manish agarwal, executive mainly happen through large coal projects, director at KPMg advisory services in India. KPMg’s agarwal predicts. the country’s power transmission sector looks set to offer decent opportunities “Let’s get it clear, we’re not saying for private equity investors for the next couple of years. renewable energy is here to solve all of India’s “we are looking at some of these transactions. I think transmission will offer some power problems. You do need coal-based opportunities,” says sanjiv aggarwal, a partner at fund manager actis who heads the generation in the absence of other viable infrastructure team for south asia.
  • 17. infrastructure investor india country briefing 2011 interview: morgan stanley infrastructure partners 15the advantage of being global –and localmorgan stanley Infrastructure Partners has sought to combine a global approach with anintimate understanding of local markets. In India, where the firm has had an office since2008, the combination is bearing fruit. Andy thomson talks to sadek Wahba and gautamBhandarifrom tHe outset, Morgan stanley the scale of this required investmentInfrastructure Partners (MsIP) had a global means MsIP believes reference to anapproach to infrastructure investing that over-crowded market in India is looseincluded markets like India. as sadek talk. “when one does the simple math ofwahba, chief investment officer and totaling all the infrastructure and privateglobal head of MsIP, says: “when we equity funds in India, one does not evenstarted the [$4 billion] fund [closed in get anywhere close to the private capitalMay 2008], greenfield was part of the required,” says Bhandari. “as you’d expect,strategy, and a core competence of the there is competition around quality deals.strategy was to invest in non-oeCd or we focus on assets of $50 million or moreemerging markets. we recognised that because south of that attracts competitionstrong growth economies needed to from smaller private equity and hedgeinvest in infrastructure assets in order for funds. returns for us in our segment havethat strong growth to continue.” Indeed, been very healthy.”over the past few years India has made afocused effort to catch up and rapidly build emerging markets aLways on theits infrastructure to sustain its gdP growth. radar “the building of a nation in ten years” is Bhandari: ‘building of a nation in a decade’how gautam Bhandari, managing director MsIP recognised that China and Indiaat MsIP and head of the fund’s asian were both characterised by “double-digitoperations, describes the challenge ahead in India. It may be a growth rates fuelled by a massive investment in areas like roadsdaunting task, given that - as Bhandari points out - the equivalent and airports,” according to wahba. although China was quickerinfrastructure in the us and europe was built over many decades. off the mark, the firm noted that India was catching up. as partNonetheless, this intense bout of activity means that, for firms of its global investment strategy, MsIP conscientiously “beganlike MsIP, opportunity abounds. investing in emerging markets and building a diversified portfolio”. “the numbers talked about [in association with India’s It was in august 2008 that MsIP established an office in Indiainfrastructure needs] are very big and, unlike China and the gulf headed up by Bhandari. He currently leads a team of ten in Newregion, India runs a current account deficit, which means public- delhi and Hong Kong, which has been steadily growing in size.private partnerships (PPPs) are welcomed,” says Bhandari. “as Prior to having an office in the country, the fund had been unablea result, there is a role for investors. In roads, for example, there to understand the pricing of certain opportunities it was seeing.is now a standardised PPP process. when “emerging markets are characterised byyou look at the opportunity over the next inefficient information flow,” says Bhandari,five years, the numbers are quite mind- “When you look at the “and you need to compensate for thatboggling.” In fact, the Indian government opportunity over the next with very thorough due diligence. Nothinghas called for $1 trillion in debt and equity replaces a team on the ground to reallyto be invested in infrastructure during that five years, the numbers are understand different sectors by doing someperiod - with around half of it expected to quite mind-boggling” serious homework.”come from private sources. the firm believes that one example of
  • 18. 16 interview: morgan stanley infrastructure partners may 2011 “It is important to note that the entire this homework paying off was the $425 spectrum of risk-return in do carry construction and development million financing in March 2010 of asian infrastructure investments risk. for these the risk premium is justifiably genco, the largest equity investment in exists. Therefore, there large,” he says. “However, there are sectors the Indian power sector. MsIP led the deal in the infrastructure space such as the road which also included the likes of general is an opportunity for sector, where the PPP framework is well atlantic, goldman sachs Investment investors to earn very tested. Here the risk premium is not as Management, Norwest Venture Partners large. It is important to note that the entire and everstone Capital. “this is a landmark good risk-weighted returns spectrum of risk-return in infrastructure transaction impacting the power sector on investments that are investments exists. therefore, there is an in India and this financing addresses opportunity for investors to earn very good the immense infrastructure needs of the carefully selected” risk-adjusted returns on investments that country,” said Bhandari at the time. are carefully selected. some infrastructure the due diligence undertaken for the asian genco transaction projects/sectors are more mature and provide investors a niche also helps to illustrate MsIP’s global approach, because the of 15 to 20 percent Irr returns. these are oftentimes too low findings were transplanted to an investment the firm made in for private equity and can provide investors with very interesting a collection of hydro plants in China. this knowledge transfer risk-adjusted out-performance in returns (or alpha).” was pertinent because among asian genco’s assets is teesta III, India’s largest hydro project in the private sector. Having gLobaL and LocaL partners already done the asian genco due diligence and having a better appreciation of the risks involved meant that, in the context of wahba believes that Morgan stanley’s extensive global the Chinese deal, MsIP was able to quickly identify the best network enables it to source a high proportion of exclusive deals global experts in the sector to work with as well as thoroughly and also makes MsIP a valued partner for leading global and understand the risk and returns. this deep understanding of local partners. “we are a global fund and we have the ability the sector helped the fund to utilise the best negotiating and to respond to investment opportunities because of our global structuring approaches for the Chinese transaction. presence. we often invest alongside leading global and local this kind of cross-fertilisation typifies MsIP’s global approach. partners, with whom we have a good dialogue, providing input, “gautam’s focus is 100 percent on India but also 100 percent analysis and execution skills. we are a partner of choice for them.” on all the other activities we undertake,” says wahba. “everyone Crucially, for an international rather than domestic investor, in the fund actively participates in all the transactions we do Bhandari believes that India does not discriminate according elsewhere. for example, the us team will to where investors are based. “Post- spend several months in India, the India global financial crisis and the real estate team will often be in China. It provides a crisis in the Middle east, almost all major richer analysis.” engineering, Procurement, Construction Key to the MsIP philosophy is the (ePC) contractors and infrastructure belief that markets such as India play a companies have some presence in India. vital portfolio diversification role. “we want sometimes, partnerships with local to capture assets that are experiencing developers are called for and sometimes different growth cycles from those in not. on the investing side, the playing field the industrialised nations,” says wahba. is very level with many of the international “In emerging markets there is a massive investors having successfully invested in demand and an immediate need to build. India for a long time. It’s all in how the local there is somewhat of a decoupling from talent is staffed and fused with international the industrialised world which enables us talent to deploy the best international to create uncorrelated aspects within the practices.” portfolio.” Best international practice in India that said, Bhandari adds, India offers is precisely what MsIP is aiming for, opportunities across a broad risk-reward and deals like asian genco will help to spectrum which means that the opportunity persuade onlookers that the objective is set is multi-faceted. “Many projects in India Wahba: India vital for portfolio diversification achievable. n
  • 19. infrastructure investor india country briefing 2011 case study: morgan stanley infrastructure partners 17roads paved with ambitionGautam Bhandari of Morgan stanley Infrastructure Partners explains why India’s hugeroad expansion programme is far more than just hypeThe sheer scale of ambition that characterises India’s India has to be ambitious to meet the demands of an economyinfrastructure plans can draw a weary sigh from cynics. How can with such a rapid growth rate and where affluence is rising fast. “Anthe country possibly undertake the vast improvements needed in 8 percent growth rate means more affluence and people spendingthe tight timeframes that are talked about? When it comes to the more money on more things. When you look at the sales of newroads sector – where reference is frequently made to former roads vehicles in India, in terms of new cars you’re seeing a compoundminister Kamal Nath’s forecast of 20 new kilometres of road to be annual growth rate (CAGR) of 20 percent-plus and, for new trucks,built per day – this scepticism is natural. it’s around 8 to 9 percent, which is very healthy. In the US, UK and And yet: what the naysayers may be overlooking is the progress some other parts of the developed world, by way of comparison,that India has already made. Gautam Bhandari, Managing Director new car sales are flat to negative.”at Morgan Stanley Infrastructure Partners and head of fund’s Asian Encouragingly for investors in toll roads, Bhandari says thatoperations, reflects back to a time not so very long ago in its history users of Indian roads tend to be accepting of toll payments inwhen India’s “National Highways” were largely single lane, poorly exchange for road upgrades. The largely tolled National Highwayspaved roads. Now, it is the second-largest road network in the world, account for just two percent of total road length in India, but 40and successive upgrades have seen modern highways built with percent of the country’s total traffic.two lanes, four lanes and even six or eight lanes in some cases. That To top it all off, India now has one of the largest road PPPthe country can make impressive progress in a short time is already programmes in the world and a template for concessions that haswell evidenced. Much of this has been achieved by undertaking been around for almost a decade – enough to give investors apublic-private partnerships (PPPs) in a large, systematic way. considerable degree of comfort. “It’s been modified here and there but it’s basically the same concession, so it’s stood the test ofGaininG market share time,” says Bhandari. Concessions typically last for 20 to 30 years and are inflation Further, Bhandari points out that 20 years ago, around 60 linked, long term, with non-compete clauses and extension basedpercent of India’s goods were transported by rail and 40 percent on traffic volume – all terms that serious infrastructure investorsby road. Today, that ratio is reversed – and the gap between the like to see in assets. Bhandari acknowledges that India’s currenttwo is only likely to grow further. “Rail networks have been running rate of growth has eventual limits. “Current growth rates cannotwith chronic over-utilisation,” says Bhandari. “Tracks often converge be sustained forever, but they have been healthy for the last fiveas they pass through cities, and you have serious bottlenecks. In years and, importantly, through the global financial crisis. We thinkaddition, distribution of goods to secondary cities, where a lot of there are more years to go before they slow down meaningfully.”growth is happening, is better achieved with roads.” No wonder, At the time of going to press with this issue, MSIP hadtherefore, that roads have gained market share for goods and just anounced a $200 million commitment to invest in a roadpassenger traffic, over the last 40 years. platform alongside Isolux-Corsan, an international partner. It Returning to the point about ambition, the simple retort is that is a transaction that typifies MSI’s ‘global-local’ strategy. The joint platform is upgrading strategic parts ofNew Passenger Vehicle Registrations the so-called “Golden Quadrilateral” highway network under a NHAI concession. The Golden 5-year and 10-Year CAGRs Quadilateral connects India’s four largest cities of % Growth Delhi, Mumbai, Chennai and Kolkata. “The deal shows that international companies in India do get funding and they do have a role to play in building out India’s infrastructure,” says Bhandari. It also indicates that roads will remain a focus for MSI and other infrastructure fund managers in the years ahead. For them, generic cynicism provides an opportunity to carefully select and invest in opportunities that provide very good risk-adjusted returns. nSource: Euromonitor
  • 20. 18 guest feature: developing asia may 2011 coping with urbanisation Bindu lohani and s.H. rahman of the Asian Development Bank discuss the infrastructure investment challenges in developing Asia. these include rapid migration from rural areas to cities urban deveLopment rapid urbanisation will mean rising demand for infrastructure services in developing asia. urban areas contribute about 80 percent of gdP in asia. Cities are engines of national and sub-national economic growth. In almost all countries, cities are making significant contributions to national economic productivity. asia’s level of urbanisation is expected to grow by 3 percent every year and rural-urban migration will account for 40 percent of this urbanisation trend. according to the Cities like Mumbai are under pressure from fast-growing populations uN, the world will have 22 mega cities by 2015 – half of which will be in asia. some DeveloPIng AsIA HAs recovered from the global crisis with 1.1 billion people will move to cities in the next 20 years. impressive speed and vigour. the sustained effects of stimulus the 2005 Human Development Report indicates a strong policies, strong export recovery and robust private demand have correlation between the level of urbanisation (defined as urban made this possible. developing asia posted a robust 9 percent population as a percentage of total population) and per capita growth in 2010. to help maintain growth and to support the income of asian countries. urban activities generate close to 80 adjustment of global payment imbalances, asia needs to promote percent of all carbon dioxide (Co2) as well as significant amounts a shift towards more domestic and regional demand (or what we of other greenhouse gases which contribute to climate change. By call a rebalancing of growth). asia will consume more and it will 2030, 40 percent of global greenhouse gas emissions will come produce more – and must do so in a sustainable manner. from asia. for long-term sustainable growth, asia needs structural the result has been burgeoning city growth that is largely policies to promote productive capacity through six areas – one unplanned and uncontrolled. the consequence is that most cities of which is infrastructure (the others are trade, human capital, today suffer from inadequate water supply and sanitation systems, financial development, green growth and regional cooperation). severe traffic congestion, a proliferation of low-grade housing, from a development viewpoint, infrastructure raises productivity inappropriate land management and environmental degradation of and reduces the costs of access to markets. It improves returns air, land and water. Quite simply, asia needs to create more livable on existing assets, hastens human capital accumulation, and cities, with multimodal transport systems and high quality urban facilitates the dissemination of knowledge. although infrastructure mass transit systems, including metro rail systems and bus rapid levels in the region have been growing fast, the infrastructure gap transit. similarly, experience shows that a one-size-fits-all approach continues to be quite pronounced. one of our recent studies, – addressing urbanisation issues across and within countries as Infrastructure for a Seamless Asia, estimates that developing asia if urban centres were all the same – does not work. Clearly, the will have to invest around $8 trillion, or an average $750 billion urgent challenges facing asia’s rapid urbanisation will require new a year, in infrastructure over the next decade to support growth. thinking from all of us to solve the urban infrastructure challenge. developing asia’s infrastructure remains well below world-class at the adB, our Sustainable Transport Initiative will draw standards in both quantity and quality. upon new sources of ideas and expertise to strengthen the we would like to share some views on specific areas: (i) urban sustainability of asia’s cities. we expect to provide support of up development; (ii) green infrastructure challenges; (iii) regional to $3.4 billion a year for transport for the period 2010 to 2012, cooperation in infrastructure; (iv) some lessons in infrastructure with a good portion of this going to urban transport and railways. development in the People’s republic of China and India; and (v) this includes support for urban public transport systems which mobilising private capital. are safe, secure, accessible, rapid, efficient and user-friendly with
  • 21. infrastructure investor india country briefing 2011 guest feature: developing asia 19the aim of reducing pollution, congestion combined cycle (IgCC) coal power plantand accidents. in tianjin, China, is the first to use IgCC also, we will not lose sight of the technology in a developing country. whenimportance of rural and provincial roads. completed, it will have facilities to enablerural roads play an important role in carbon capture and storage at someinclusive economic growth by making point in the future. the adB is also intransport accessible and affordable. we partnership with the global Carbon Capturehave begun to establish partnerships and storage (CCs) Institute of australiawith development partners and centres through a trust fund of about $17 millionof excellence such as the Korea transport for promoting CCs in developing countries.Institute, the Inter-american development Bindu Lohani the adB also has the asia-Pacific CarbonBank, the Clean air Initiative for asian Cities fund and the future Carbon fund with totalCenter, the global road safety Partnership, resources of $350 million and is involvedand the Partnership on sustainable Low Carbon transport. with other multilaterals like the world Bank in the $6.1 billion Climate Investment funds.green infrastructure chaLLenges regionaL cooperation in infrastructure It is equally important that policy makers ensure long-term productive capacity through environmentally sustainable similarly, regional cooperation in infrastructure is critical asinfrastructure systems. for example, financing the development economic growth happens within regional clusters. regionalof renewable energy technologies; better insulating homes and cooperation in developing cross-border infrastructure is criticaloffices; and building a new cadre of engineers, technicians for enhancing physical connectivity and sharing scarce resourcesand scientists who are sensitive to environmental needs are all such as energy, capital knowledge and services. we would like tocritical. Certainly, the environmental and safeguards dimension of see an asia with seamless world-class infrastructure networks.infrastructure development, or the impact of infrastructure on the this involves developing “hard” infrastructure or physical assets,environment - including air quality, availability of clean water and as well as the “soft” infrastructure, i.e., the policies, regulationssanitation, and protection of the eco-system - will require that we and institutions that enable the development and operation oftake action now. If not properly planned, infrastructure will have physical infrastructure. By adB estimates, some $287 billion ofcostly implications in the future. the “let’s grow first and clean investments in regional infrastructure will be needed from 2010later” attitude is no longer an option in asia. to 2020. environmentally sustainable growth is a key development regional cooperation and integration is one of the adB’sagenda of the adB’s strategy 2020 and environment and climate three strategic agendas, along with inclusive economic growthchange is one of five core areas of operations. we are increasing and environmentally sustainable growth. under our strategyour current $1 billion annual assistance target for clean energy 2020, we are significantly expanding support for regional roadto $2 billion by 2013. on the renewable energy side, the adB networks, competitive regional railway networks and capacitylaunched the asian solar energy Initiative in May 2010, which building to streamline cross-border rules and procedures. throughwill provide a comprehensive approach to institutional capacity, adB’s project assistance, we have seen how enhanced regionalpolicy, technology, and financing for solar energy adoption. the infrastructure complemented country-level efforts towardsinitiative aims to catalyze 3,000 megawatts of solar power by 2013. economic growth.through our Quantum Leap in wind Initiative, we seek to catalyze for example, the Phnom Penh to Ho Chi Minh City Highwayinvestments and to deploy an additional 1 gigawatt of wind power Project supported an increase in bilateral trade in Cambodia and thein four priority countries (Mongolia, the Philippines, sri Lanka and southern region of Vietnam, and more broadly, regional cooperationVietnam). the adB will encourage the adoption of available cleaner among greater Mekong sub-region countries. the project reducedtechnologies, such as fluidized bed combustion, supercritical and the average time required to reach local healthcare services byultra-supercritical boilers, and flue gas desulfurization. around 30 percent while travel times to schools and markets fell one of our demonstration projects, the integrated gasification by around 40 percent. similarly, the east-west Corridor Project
  • 22. 20 guest feature: developing asia may 2011 linking the landlocked areas of northeast it accounted for 10 percent. thailand with the coast of Vietnam across “Effective user charges when compared to the PrC, India’s the Lao People’s democratic republic of infrastructure services experience in infrastructure development reduced travel time from border to border has been somewhat different. first, from around 12 hours in 2001 to less than are much lower in India effective user charges of infrastructure 3 hours in 2007. than they are in the PRC. services are much lower in India than they Hence, the subsidy element are in the PrC. Hence, the subsidy element some Lessons in infrastructure to users of infrastructure services in India deveLopment from the peopLe’s to users of infrastructure is significantly higher. second, there is no repubLic of china and india services in India is equivalent in India of the funding source that is local governments’ extra-budgetary the adB’s recent publication Resurging significantly higher” revenues deployed as equity in PrC Asian Giants highlights some lessons from infrastructure projects. this makes the the experience of the People’s republic of equity portion of the financing structure China (PrC) and India, which may be useful for other developing much larger (relative to the grant and debt portion) in the PrC countries in asia. than in India. third, in India, neither public sector corporations nor specifically, in PrC, five lessons can be drawn from its municipal governments have been able to monetise landholdings remarkable infrastructure development. first, it does appear for infrastructure development. that heavy investment in infrastructure has contributed to the PrC economy’s superior growth performance over the past mobiLising private capitaL decade. second, despite heavy investment in the sector, the government has managed to maintain fiscal discipline. It focused at a time when public sector financing is stretched, policy on increasing tax revenues. the bulk of growth in infrastructure makers are increasingly looking towards other instruments and spending has come from corporatised state-owned enterprises sources of financing. one such partnership, which in asia is (soes) and/or sub-national government agencies that have being increasingly talked about, is Public-Private Partnerships funded these through off-budgetary means. the state budget (PPPs) in financing infrastructure needs. on a global scale, private finances only about 10 percent of infrastructure investments. sector investments in infrastructure were significant prior to the domestic debt financing accounts for less than one-third of 2008/2009 global financial crisis, amounting to $1.1 trillion from infrastructure funding. 1984 to 2006. the asia and Pacific region attracted 31 percent of third, the PrC’s infrastructure development experience these investment flows – more than $343 billion. of this amount, has a strong urban bias. the shift in investment in urban fixed nearly $128 billion was in the energy sector alone. assets increased from 77 percent in 1997 to 89 percent in 2008. PPPs are being increasingly seen as attractive modalities to However, over recent years, the government has become highly support infrastructure development. the benefit of PPPs is that sensitised to the need to develop infrastructure in the poorer many different risks inherent in infrastructure projects are borne by western and central regions. fourth, there parties who are best suited to handle those is a high degree of local participation in risks. PPPs allow for more competition and infrastructure development. sub-national are conducive to innovations in design, governments are gaining more autonomy construction, facilities management and in the decision-making process. an financing. overwhelming proportion of resources for But to attract the private sector investment come from such “self-raised to risk private capital, governments and other funds” of local governments will need to provide the right policy or enterprises owned or controlled by environments, including: enabling legal sub-national units. self-raised funds and regulatory frameworks (with strong accounted for more than half of total contract enforcements); transparent investment financing. fifth, a notable and competitive procurement policies characteristic in the PrC’s infrastructure and processes; good governance in experience is the limited extent of private governments; and better tariff policies, or foreign participation in the sector. In among others. n infrastructure, soes dominate. foreign Bindu Lohani is vice president (finance direct investment only accounted for and administration) and S.H. Rahman is 2 percent of infrastructure financing in director general (South Asia department) 2006, while at its peak in the mid-1990s, S.H. Rahman at the Asian Development Bank
  • 23. infrastructure investor india country briefing 2011 Keynote sharad jhingan, lanco infratech q&a / interview: minister of economy 21We can ‘learn the world’s lessons’sharad Jhingan of lanco Infratech says that, by creating unique models, India can leapfrogother countries and deliver efficient and cost-effective infrastructure assetscoulD you ProvIDe BrIef exAmPles WHAt Are tHe keys to executIng ProJectsof lAnco’s ActIvItIes AnD recent Well, AnD WHAt Are tHe PotentIAlHIgHlIgHts? mInefIelDs? sJ: Lanco Infratech is an integrated sJ: Planning, planning and still better planning.infrastructure company, whose activities overconfidence, complacency, taking things forencompass project development, ePC & granted and hubris are major minefields.construction, operations and maintenance(o&M) etc. HoW Do you see tHe InDIAn mArket Lanco’s ePC team is amongst the most DeveloPIng In future, AnD HoW Is lAncoexperienced power sector ePC/construction BeIng PosItIoneD to tAke ADvAntAge ofteams, capable of handling both renewable tHAt?and non-renewable multiple fuel-based sJ: the only close comparison would be China.power projects. It has global procurement However, unlike China we have a more chaotic,and supply chain management capabilities democratic process of consensus building. speaking Jhingan: India needs to avoid social tensionswith an order book in excess of $6 billion. broadly, in order to eradicate poverty and improve the one of the largest IPP players in the standard of living of its people, India needs to growcountry, Lanco presently owns and operates fast and sustain the growth momentum over the nextmore than 2,100-megawatt (Mw) power generating plants. this 15 to 20 years. Huge investment in infrastructure will be needed tocapacity is likely to double within the next 8 to 12 months. Moreover, sustain the growth momentum and service an economy of its size.it has an ambitious expansion plan to achieve installed capacity of we are nowhere near that. we believe that large infrastructure players15,000 Mw by 2015. like Lanco will always have a very important role to play in creating as part of its efforts to ensure fuel security for its power plants, and managing these infrastructure assets. Lanco is positioned wellLanco recently acquired griffin coal mine in australia. It has also to take advantage of this growth.undertaken a major international initiative in the solar energy sector.the group is also keen to establish its presence across the globe WHAt Do you see As A) tHe BIggest oPPortunIty AnDas a power developer/ePC player and is in the process of building B) tHe BIggest tHreAt to InDIAn InfrAstructurean international team to effectively operate internationally. goIng forWArD? sJ: the biggest opportunity is to draw lessons from otherWHAt lessons HAve you leArnt ABout tHe Best WAy countries of the world and create unique models, which will enableto ADDress tHe mArket oPPortunIty? India to leapfrog them and deliver efficient and cost-effective sJ: opportunities do not wait. therefore one should be quick infrastructure assets by drawing upon their experience, technologyin responding. that said, one should also be cautious and carefully and knowledge. as [Harvard Business school professor] Michaelevaluate all the pros and cons of a project before committing Porter said, there are two inherent advantages that any businessresources. Infrastructure projects are long gestation, capital- can exploit – cost or monopolistic positioning. the same is also trueintensive projects and even a small mistake may turn out to be of countries. If India can develop and operate infrastructure assetsfatal. there is no room for complacency while evaluating, planning more competitively than other countries, it can maintain effectiveor implementing even small infrastructure projects. In the Indian cost advantage over other economies. this could be a long-termcontext we also need to be prepared for unexpected events. Hence game changer for India.it is useful to keep a close watch on the environment and make Most of the infrastructure projects require large tracts ofnecessary adjustments to the course from time to time in response land. Being one of the most densely populated countries into any such events. the world, we have one of the largest populations dependent directly on land for survival and sustenance. fair r & r [reliefIs tHere A tyPIcAlly lAnco WAy of APProAcHIng A and rehabilitation] processes, which are also perceived as fairProJect? coulD you DescrIBe It for us? by the masses, will prevent a spillover of social tensions, which sJ: In one word: entrepreneurship. may derail the growth story. n
  • 24. 22 company profile / lanco infratech may 2011 Breaking new ground 2011 has been an exciting year for lanco group so far. It turned 25, became India’s largest independent power producer, acquired a one billion-ton coal resources mine in Australia, was consistently the largest private trader in power, successfully initiated a global solar and power development business, and won several accolades for its good corporate governance and corporate social responsibility initiatives led by the lanco foundation, a member of the un global compact PosItIve events foster confIDence: Lanco is one of BoP segments. the company has recently won a power BoP India’s leading business conglomerates and among the fastest order from Mahagenco (3 x 660 Mw) which exhibits the group’s growing. It has subsidiaries and divisions across a synergistic span capability for power ePC. of verticals - construction, power, ePC, infrastructure, resources and renewable. It has become the largest independent power producer roAD Bot…smAll & steADy footIng: Lanco has three road in the country by attaining 3,292 megawatts (Mw) generation projects (won on positive grants) which will be operational in fY11. capacity. It has set a target of 20,000 Mw by 2015. cArBon creDIt story: Lanco has recently forayed into the lAnco APPeArs more DefensIve: Lanco has a perfect blend global solar power business as an integrated player with a presence of revenues in terms of merchant upsides and PPa annuities, in manufacturing, ePC and energy generation. It plans to develop which are biased towards long-term contracts. the company has solar ePC and manufacturing capabilities for both captive and expertise in conventional as well as non-conventional sources of third-party projects. the firm recently signed 25-year PPas for 41 energy such as gas, coal, biomass, hydro and wind. the capacity Mw using solar photovoltaic technology and also commissioned addition, unlike other players, is at regular intervals and not back- its first 5 Mw unit in gujarat and expects to commission the rest ended. thus, the company has projects of nearly 9 gigawatts (gw) in CY2011. It is also setting up a 100 Mw solar plant in rajasthan under construction and development, financially closed. based on solar thermal technology and aims to commission the plant in May 2013. globally Lanco has set up offices in the uK, All-rounD constructIon cAPABIlIty, roBust singapore, Italy, spain, france, germany and the us to expand its suPPort: the construction segment offers integrated engineering, portfolio going forward organically as well as inorganically, targeting procurement and construction services for civil construction and 1 gw by 2015. the company has already started putting up an infrastructure sector projects. It specialises in civil construction integrated manufacturing seZ in Chattisgarh, which would have projects, which include structures such as commercial and capacity to manufacture 250 Mw solar power modules. residential buildings, mass housing projects and townships, industrial structures, information technology parks, corporate Well-DeveloPeD fuel strAtegy: Power utilities account offices, transportation networks and hospitals. for 55 to 60 percent of the coal requirement/ consumption from the domestic production of coal in India. thus, Lanco acquired ePc BusIness…strong suPPort: Lanco initially started with australia’s griffin Coal for a$730 million in order to engage in a the execution of third-party projects in the areas of power, irrigation, resources play, hedging itself against cyclicality. the company will roads and civil structures. However, with a foray into the utilities require 40 to 50 million tonnes of coal over the next four years to business, the company pioneered the setting up of an in-house fuel its power projects in India. griffin’s mines are expected to give ePC division and later scaled it up to new highs, with the ongoing Lanco access to 4 million tonnes of thermal coal, which will be execution of 9,000 Mw plus capacities. the company takes the increased to more than 17 million tonnes in the next three years. whole ePC contract of power projects and outsources the Btg Lanco is also looking to acquire coal properties in Indonesia, south component to Chinese players. Being in-house, the cash flows africa and australia. from this division helps in cost saving and are an indirect way of funding equity in power projects, thus making it a more self-funding gloBAl PlAtform: the company has partnered with an model. Lanco has recently placed a huge order for supply of only Indonesian coal mining company called Bukit asam to bid for Btg sets which leaves room for BoP execution in-house. apart a 600 Mw power project in southern sumatra, Indonesia. the from power projects, Lanco also has close to 10 percent of the company is also actively looking at setting up power projects in order book from external clients in the buildings, water, and power Bangladesh, Vietnam, Cambodia, the Philippines and africa. n
  • 25. 24 guest feature: aviation services may 2011 getting off the ground the fledgling nature of India’s aviation infrastructure sector offers investors the opportunity for private equity-type returns. syed Ali Abbas and shaurya Doval of Zeus outline what makes the space an attractive proposition – and also discuss some of the pitfalls tHe ProsPects for India’s economy continue to look strong. the infrastructure space in India is far from a stranger to Most forecasts support more than 8 percent real gdP growth in large private equity transactions. Historically the power sector, the near future. according to the world Bank and PwC, by 2050, roads and ports have been the most popular destinations of China and India will be the two largest economies in the world. private equity investment. while these three sectors have taken at the core of this growth story is the infrastructure sector. the limelight, opportunities in the aviation sector have gone Indian infrastructure spend lags even its BrIC rivals of Brazil, largely unnoticed. this is particularly true of aviation-related russia and China. for example: the number of people without infrastructure, i.e. excluding airlines, where we have seen some power is 403 million in India and 8.1 million in China; total private equity-related activity in the past. expressway length is 200 kilometres in India and 65,000 our definition of aviation infrastructure includes airport kilometres in China; and cargo handling capacity is 1 billion operations, ground handling, retail and parking space tonnes in India and 8 billion tonnes in China. management. this is typically characterised by a concession the government of India (goI) has initiated an aggressive from a goI-related agency with a profile of steady operating cash policy for the sector to encourage infrastructure investment. a flows. a goldman sachs study highlighted the poor state of the general estimate is that by 2018, India will spend more than $1 sector in India. for example: the number of passengers handled trillion on infrastructure. It is little surprise that almost all global at airports per 1,000 people is 71 in India compared with 151 infrastructure investors are active in the country. the overall in China; and the penetration of air travel in India is one-quarter buoyancy in Indian stock prices (especially for infrastructure- that of Brazil and one-fifth that of China. related companies) means that trading multiples are at a premium recognising this, the goI announced plans to modernise to even the oeCd markets. this valuation expectation gap 35 non-metro airports in the 11th National Plan (2007-2012). By has been the catalyst to a slew of infrastructure private equity 2010, around 26 of these had been completed. transactions in the recent past. In addition, there has been broad liberalisation of various
  • 26. infrastructure investor india country briefing 2011 guest feature: aviation services 25sub-sectors with the highlights being: privatise the operations and management of the airport (either • Increasing the level of fdI (foreign direct Investment) as a single concession or several sub-sets).allowance – up to 100% in some cases. • PPP-style privatisations of metro airports (delhi, Hyderabad, airport ground handLing poLicyBengaluru and Mumbai being the high-profile awards). • award of ground handling concessions on a regional basis goI’s aviation policy, announced in late 2007, limited ground(six metro and 14 international airports). handling services to selected operators, a decision made mainly • (Nearly) open skies policy. to contain security risks. the policy awarded (after competitive bidding) 15-year concessions to operate as ground handlingpressures on the current set-up and the market agent (to airlines). the rights are exclusive with the exceptionopportunity of the ground handling service of the national carrier, air India (a joint venture with sats of singapore). these policies bolstered by overall economic progress have to date, awards have been announced for 20 airports (sixresulted in rapid growth in the sector. since 2004, the Compound metro plus 14 non-metro airports). the award for non-metroannual growth rate (Cagr) of passenger traffic has been an airports has been given for a cluster of regional airports to oneastounding 17.5 percent (cargo traffic 14 percent). there has operator. again, there was significant involvement of internationalbeen a plethora of low-cost carriers along with a growth in flight players (in partnership with a local promoter) with names suchvolume that has stretched airport structure beyond its capacity. as Menzies (uK), worldwide (france), Novia (denmark) and Nasthis has led to slow flight turnaround times, delays, shortage of (Kuwait).qualified manpower and additional pressure on airport security. further awards are expected in the coming months. according to a study by deloitte - backed by the airportauthority of India (aaI) the goI regulator - the next five years opportunities for private equity in the sectorwill see a growth in aircraft movements of 11 percent and 10percent per annum for the international and domestic aviation airport infrastructure has some fundamental advantages thatsectors respectively; in passenger volumes of 16 percent and 13 are unavailable to most other sectors in a market like India.percent per annum (international versus domestic); and in cargo the fact that much of the growth in this sector is yet to playtonnage of 13 percent and 8 percent per annum (international itself out stacks up well from a risk-return perspective, i.e. itversus domestic). still has the capability to provide private equity returns within with such an aggressive growth profile, we have seen a the infrastructure asset class. there are certain unique featureswide range of international players – ranging from operators to that make this return arbitrage possible:investors - take a close look at this space. we will highlight a a) Limited development risk: Most infrastructure assets incouple of high-growth areas: India have significant greenfield risk attached to them. this risk manifests itself in the form of time and cost overruns and hasairport privatisation serious return implications from a private equity perspective. In this sector, most of the development risk has gone (i.e. all a full PPP privatisation process has been successfully the major airports, like Mumbai or delhi, have been built) orconducted for the following airports – which attracted the development is being carried out by the government itself,considerable international attention: as is the case in Chennai and Calcutta. therefore, most of the concessions are to do with additional assets or services around Location Lead local Key international Project these core assets and have substantially lower build-out risk. partners partners size there is both greater clarity and a shorter gestation to operating delhi airport gMr fraport (germany) $1.5bn cash flows, thereby insulating returns and allowing investors to model investment risk with greater accuracy. the importance of Mumbai gVK airports Company $2.0-3.0bn this cannot be overstated as most private equity firms in India airport south africa (aCsa) have shied away from infrastructure assets, despite attractive Hyderabad gMr Malaysia airports $0.5-0.7bn returns, because of the large degree of binary risk associated Holdings Berhad with long development cycles. b) strong demand fundamentals: unlike developed Bangalore L&t Zurich airport, $2.2bn markets, where infrastructure assets are a defensive asset class siemens with nearly saturated utilisation levels, in India low penetration levels and un-met demand for basic utilities offer growth and It is expected that going forward the major renovation capital returns in the range that private equity firms typically seek. airexpenditure will be borne by aaI, which then will choose to travel in India is the most practical and efficient mode of transport
  • 27. 26 guest feature: aviation services may 2011 “With such an aggressive growth profile, we have seen a wide range of international players – ranging from operators for the growing urban middle class. airport infrastructure has a high etc - last only to investors – take a close degree of elasticity to gdP growth. generally, it has been observed for a few years look at this space” that air transport grows at twice the rate of gdP growth. In India, and enable large given the macro growth prospects discussed earlier combined national players with the advantage of limited suppliers in a concession-based to emerge. PPP model, there is an attractive opportunity for private equity while the private equity opportunity is large, challenges for players to back companies requiring growth capital to meet the the sector remain. these challenges require the private equity demand. community to mitigate risks in tandem with promoters: c) operating advantages: Infrastructure assets in India a) airports are highly vulnerable targets: India is still prone are high-profile public assets. abnormal returns, if made on to terrorist violence more than many other parts of the world. these assets by their operators or the concessionaires, are not these assets are likely targets for terrorist violence and any such acceptable to the government, regulators and public at large. the incidents could seriously impair the return prospects of the assets. state often finds a way to tax these returns but they also become also, the ultimate costs of securing the assets are often borne by a subject of public protest. Many successful infrastructure assets concessionaires, which, even with increased threat perception, have suffered from this malaise in one form or the other i.e. either could have an adverse impact on returns. through reduced earnings or through capital destruction. as the b) Creditworthiness of airlines: the severe pricing wars airport assets are used primarily by the upwardly mobile middle between private operators to capture market share coupled with class they are often seen as non-core by the larger population and a high tax regime in India has severely impacted the financial health hence are not natural targets for public protest. further, as these of all major airlines. the state carrier has always been in the red. In assets are very well physically secured on account of security such circumstances, the poor creditworthiness of the counterparty reasons they provide much improved operating conditions to has significant margin and return implications for these assets. the concessionaires to focus on executing their core business It also leads to higher financing costs as the creditworthiness of rather than spending time, effort and resources in managing the receivables is often poor. as long as the airlines are more focused environment. on market share growth rather than profitability, this risk will remain d) Increased services: the amount of services that can be with limited ability of the concessionaire to influence outcomes. offered at these airports is ever-expanding as the experience of c) Policy challenges: while the sector has come a long developed markets demonstrates. with the airports becoming way in the last 10 years of privatisation, a certain degree of policy mini cities in themselves and passengers spending an increasing confusion continues to plague the sector. there is still ambiguity amount of time in them, there is both a push and pull to make greater in the process of awarding and structuring concessions, leading amounts of goods and services available. the concessionaries to both litigation and financing issues. this was evident when the can use their strategic location at the airports to attractively ground handling policy, whose implementation is already delayed price their assets to the retail community as the location benefits by 24 months, was taken to supreme Court by the domestic are unique and not replicable. this unique advantage of a high airlines who are challenging its implementation. Issues such as correlation to retail growth is exceedingly attractive to the private this impact both the financing and cost of debt (as banks are not equity community as few infrastructure sub-sectors provide the able to draw up their own lending norms for the sector) but also security of an infrastructure asset with the growth advantages of impair the equity returns by leading to a delay in the execution of retail. projects. e) early mover advantages: there are few public companies as the price of Indian infrastructure assets will eventually in this sector as it is largely dominated by small- to medium-sized equalise with the rest of the world, thereby reducing opportunities enterprises that are experiencing unprecedented growth as these to make higher than normal returns, this sector is still one of the assets come into the private domain but are still very regional. few in which such an opportunity remains. n there is therefore a large opportunity for private equity to provide growth capital in this sector and allow these companies to achieve Ali Syed and Shaurya Doval are partners at Zeus Capital both scale and size and build a pan-India presence. these inflexion (www.zeuscaps.com), an India-focused infrastructure advisory points for a sector - as has been demonstrated in power, roads and investment boutique
  • 28. infrastructure investor india country briefing 2011 q&a / suneetKeynote interviewinfrastructure conomy maheshwari, l&t : minister of e finance 27‘A lack of judicial machinery’the bottleneck of outstanding compensation claims relating to land acquisition is an issue thatneeds to be addressed, according to suneet maheshwari of l&t Infrastructure finance WHAt WIll AssIst InDIA In WIll most of tHe focus for tHe foreseeABle future reAlIsIng Its InfrAstructure Be on economIc InfrAstructure? WHAt ABout AmBItIons, AnD WHAt Are tHe ProsPects for socIAl InfrAstructure? fActors tHAt mIgHt frustrAte sM: development of economic infrastructure will definitely tHem? boost spending on social infrastructure as well. the private sector sM: supporting factors are: political has already entered several fields in social infrastructure such as consensus; sectoral cross-learning; education and healthcare. the development of social infrastructure overseas financing; long-term financing; will take time, but the government is keen on promoting social tax holidays; robust demand. frustrating inclusion. factors are: bureaucracy; skilled labourMaheshwari: opportunities non-availability; fuel availability issues;WHAt Do you tHInk Are tHe ADvAntAges/‘in all sub-segments’ land availability issues. DIsADvAntAges of BeIng eItHer A locAl or A gloBAl PlAyer? HoW “oPen” Is tHe InDIAn mArket lIkely toIs tHe “ecosystem” InvolvIng All tHe vArIous Become?PArtIcIPAnts – PuBlIc offIcIAls, DeveloPers, BAnks, sM: the Indian infrastructure market is already “open” throughfunDs etc – one tHAt Works effectIvely? or Does public-private partnerships (PPPs). also, foreign direct InvestmentAnytHIng funDAmentAl neeD to cHAnge? (fdI) is allowed in most infrastructure sectors to a great extent sM: It needs more transparency and faster execution. including 100 percent in power and some parts of the aviation sector.lookIng At sectors, WHIcH Do you fInD mostAttrActIve At tHe current tIme? WHIcH AreAs Are WHAt ABout fInAncIng? Is InDIA lIkely to AcHIeveyou keen to Invest In, AnD WHIcH Do you AvoID? tHe levels of lIquIDIty tHAt Are requIreD? Does sM: the infrastructure sector in India requires $1 trillion of Any furtHer ActIon neeD to Be tAken to stImulAteinvestment during the next five years. this will provide opportunities Investment?to invest in all sub-segments of infrastructure. the key to successful sM: More than liquidity, the infrastructure sector demands long-investment in India is identifying the right partners rather than the term investment. the government has committed to the followingsectors. measures in this context: Liberalization of the fdI policy; enhancing the clarity and predictability of the fdI policy to foreign investors;In roADs sPecIfIcAlly, A very AmBItIous ProgrAmme raising the foreign Institutional Investor (fII) limit for investment inIs unDerWAy - WIll tHIs contInue to DelIver In tHe corporate bonds - with a residual maturity of over five years issuedmAnner envIsAgeD? by companies in the infrastructure sector - by an additional limit sM: only time will tell. of $20 billion, taking the limit to $25 billion.HoW mucH of An Issue WIll lAnD AcquIsItIon Are tHere Any PlAns to Involve tHe cAPItAl mArketscontInue to Be goIng forWArD? In InDIAn InfrAstructure fInAncIng? sM: Currently, the lack of adequate judicial machinery to resolve sM: Bank lending for infrastructure in India is definitely notpending litigations regarding assessment of compensation poses contracting, however, banks are facing sectoral exposure issuesa problem. as per the regulations, private developers are required largely in the power sector. also, the ‘Infrastructure financeto acquire the land and also the land being acquired is generally Companies’ with their exclusive lending ability (higher exposureowned by an uneducated population, complicating the matter. limits) to the sector are playing a critical role in the infrastructure the Land acquisition (amendment) Bill is intended to make financing needs of the economy.India’s laws on ‘eminent domain’ more practical and fair amidcontinuing controversy about the forceful acquisition of large Are tHe government’s PlAns to rAIse InfrAstructureswathes of farm land for industrial projects and real estate DeBt funDs lIkely to succeeD?developments. sM: we are yet to see the fine print of the plans. n
  • 29. 28 company profile / l&t infrastructure finance may 2011 ‘A fundamental financing role’ l&t Infra has become a leading player in the financing of Indian infrastructure, including through successful bond issues l&t InfrAstructure fInAnce Company mezzanine debt, debentures and securitised debt. Limited (L&t Infra) is promoted by the engineering L&t Infra functions with high corporate and construction conglomerate Larsen & toubro governance standards with independent directors Limited (L&t) and L&t finance Holdings Limited (a constituting 50 percent of its board and key subsidiary of L&t). committees. as a testimony to its strong credentials L&t Infra, incorporated in 2006, is registered as a and sound operating performance, L&t Infra enjoys Non Banking financial Company (NBfC) under the aa+ credit ratings by both Care and ICra [credit reserve Bank of India (rBI) act 1934, and is among rating agencies]. the select few financial institutions classified as an L&t Infra operates from its Mumbai, delhi, Infrastructure finance Company (IfC). It was set up Chennai and Hyderabad centres - and is managed by with an initial capital of 500 crore ($111 million) and a team of experienced banking professionals under has expanded at a rapid rate since inception. the guidance of an eminent board drawn from both L&t Infrastructure finance Company Ltd L&t and the banking industry. provides financial products and services for our customers engaged in infrastructure development infrastructure bonds and construction with a focus on the power, roads, telecommunications, oil and gas and ports sectors L&t Infra successfully closed its second long- in India. L&t Infra has played a fundamental role term infrastructure bond issue in March 2011. in financing projects funded through long-term this tax-saving bond issue was oversubscribed. investment instruments like non-convertible the revenue generated from investors is invested debentures and tax-saving infrastructure bonds indirectly on a long-term basis in infrastructure (under 80CCf) etc. L&t Infra also provides projects across the country. customised financial solutions such as term loans, as per section 80CCf of the Income tax act, investors get tax relief of up to rs.20,000 over our cLients and above rs.1,00,000 under 80C by investing in these bonds. the 2010a & 2011a bond • atC India Pvt. Ltd series provided investors an annual interest rate • unity Infraprojects Ltd • global rural Netco • essar group of 7.5 percent to 7.75 percent and 8.2 percent • deepmala Infrastructure • emass • Itd Cementation India to 8.3 percent respectively and the flexibility of • gammon Infrastructure • tikona Limited investing for 5 years or 10 years with a buy- • doshion Veolia water • Mapex expressway Ltd • Hanjer Biotech Ltd back option of 7 years on a cumulative or solutions Pvt. Ltd • Kamat Hotels (India) Ltd • Visa Power annual basis of returns. In addition to this, the • Nagaur water supply Ltd • Neesa Leisure Ltd • aBg Infralogistics Ltd 2010a & 2011a bond series provided investors • gannon dunkerley & • Medica synergy Ltd • great offshore Ltd with the option of retaining the bond in physical Company Limited • Valdel Corporation • Bharati shipyard Limited or demat form. • rohan rajdeep tollways • dB Power • sKs Ispat L&t Infra plans to launch its tax-saving Ltd • adani Power • gupta energy Pvt. Ltd infrastructure bond issue year on year to • eastern Mineral & trading • PLg Photovoltaic • supreme Industries allow investors to reap the benefits and agency • MeP tollways • Lavasa Corporation Ltd contribute towards the country’s infrastructural • Jsw energy Limited - II development. n disclaimer L&tfH, of which the Company is a wholly-owned subsidiary, is proposing, subject to receipt of requisite approvals, market conditions and other considerations, a public issue of its equity shares and has filed a draft red herring prospectus dated March 29, 2011 with the securities and exchange Board of India (“seBI”) on March 30, 2011, which is available on the website of seBI at www.sebi.gov.in and the websites of the Book running Lead Managers. any potential investor should note that an investment in equity shares involves a high degree of risk and should refer to the section “risk factors” in the red herring prospectus that may be filed with the registrar of Companies.
  • 30. 30 q&a / bindu lohani and s.h. rahman, asian development banK may 2011 ‘Addressing the bottlenecks’ Bindu lohani and s.H.rahman of the Asian Development Bank explain what the organisation is doing to assist the further development of Indian infrastructure safety. this has helped transform NHaI into an efficient highway management organisation with strong managerial and financial autonomy, extensive private sector involvement, and capacity to deal with social and environmental issues. since 2002, adB has provided two loans amounting to $1.15 billion under the National rural roads Programs for strengthening the rural roads network of five states - assam, Chhattisgarh, Madhya Pradesh, orissa and west Bengal. adB has supported strengthening of the state roads networks in Bihar (2008 and 2010, $720 million in all), Chhattisgarh (2003, $180 million), Jharkhand (2009, $200 million), Madhya Pradesh (2002 and 2007, $500 million in all), uttarakhand (2006, $550 million), and west Bengal (2001, $210 million). this assistance has helped in establishing and developing strong institutions, preparing road master-plans, modernising business processes, strengthening road planning and asset management systems, enhancing coulD you exPlAIn tHe role of efforts towards improving infrastructure road safety and facilitating PPPs. tHe AsIAn DeveloPment BAnk In facilities at both the national and state InDIAn InfrAstructure? levels. adB’s assistance has combined energy sector: the creation of good quality infrastructure BL: under adB’s most recent India with long-term institutional development, at the national level, adB has been Country Partnership strategy (CPs) capacity building, transfer of best practices, assisting Power grid Corporation of 2009-2012, we are providing support to and setting of quality benchmarks. India Limited (PgCIL) in expanding India’s 11th five-Year Plan 2007-2012 as and modernising the national electric the country aims to reduce poverty and transport sector: transmission system to reduce transmission promote social development. specifically, system losses and to increase inter- adB is strengthening its support as the adB assistance for the road sector connectivity in order to even out supply- Indian government addresses infrastructure including national highways, state roads, and demand mismatches across states and bottlenecks amidst the lack of long-term rural roads has expanded rapidly since 2000. regions. since 1995, adB has provided four funding for infrastructure investment. the Between 2000 and 2004, adB provided loans amounting to $1.52 billion to PgCIL. major infrastructure sectors supported four loans amounting to $2 billion for four- adB has also been supporting policy through adB assistance include transport laning about 2,500 kilometers of national reforms and funding investments for and communications, energy, water supply highways. It has been working closely with transmission and distribution in states such and sanitation, and urban development. the National Highway authority of India as gujarat (2000, $350 million), Madhya since adB began operations in India (NHaI) over the years by providing technical Pradesh (2001, $350 million) and assam in 1986, more than 75 percent of all loans assistance for institutional development, (2003, $250 million). the policy components approved (or approximately $17 billion) have commercialisation of operations and of these loans have supported the states in focused on supporting the government’s maintenance, and improvement of road implementing power sector reforms such
  • 31. infrastructure investor india country briefing 2011 q&a / bindu lohani and s.h. rahman, asian development banK 31as establishment and operationalisation of independent state resources management with a focus on climate change adaptationelectricity regulatory commissions, un-bundling state electricity (including support for irrigation, coastal zone management, andboards into separate companies for generation, transmission, flood control); agribusiness infrastructure development; andand distribution, and improving overall sector governance. the development of tourism infrastructure.investment component of these loans has been used to strengthen adB lending to India will be scaled up from $2.12 billion (actualtransmission and distribution, and provide increased consumer approval) in 2010 to $2.4 billion each in 2011 and 2012 andmetering. adB has also been increasing funding for renewable further to $2.5 billion in 2013. Looking ahead over the next threeenergy development (including solar power) and improving energy years, adB’s engagement with states with weak capacity such asefficiency to help India move along a low-carbon growth path. assam, Bihar, Chhattisgarh, Himachal Pradesh, Madhya Pradesh, adB’s private sector infrastructure projects range from a and rajasthan in the transport, energy, and urban sectors will beliquefied natural gas terminal and compressed and piped natural strengthened further. adB’s third loan for the critical national ruralgas distribution network to wind power generation. recently, we roads development Program will help to expand and strengthenhave moved towards clean energy and renewable energy sectors the rural roads network in assam, Chhattisgarh, Madhya Pradesh,such as wind energy projects, private equity funds and the setting orissa, and west Bengal. assistance for promoting financialup of a renewable energy joint venture to support smaller scale inclusion has also been included in the program.renewable energy projects. Climate change mitigation and adaptation will be further mainstreamed into adB operations. energy operations are focusedurban sector: on the generation and transmission of clean and renewable energy to reduce greenhouse gas emissions and increase energy adB has been assisting many states such as Karnataka, Kerala, efficiency. for example, adB is in discussion with states such asrajasthan, west Bengal, uttarakhand, and several in the north gujarat to explore ways of increasing generation and transmissioneastern region, in upgrading their urban facilities such as water of solar power. Climate change adaptation concerns are alreadytreatment plants, underground drains, sewage treatment plants, being incorporated into the design of proposed water operations inbus stops, rail over-bridges and fire stations so that delivery of sub-basin development (Cauvery, Chambal, and satluj); integratedbasic services improves and solid and liquid waste is disposed of water resources management (IwrM) in Karnataka; and coastalin a safe and environmentally friendly manner. urban sector loans zone management (various states).have supported institutional strengthening, municipal reforms (e.g., on its assistance to private sector enterprises, the focus,computerisation of basic municipal functions, introduction of fund- moving forward, will be on renewable energy. adB will supportbased double entry accrual accounting systems, and capacity renewable technologies that are consistent with the government’sbuilding for improving transparency and accountability), and priorities, but thus far have limited penetration in the country. In thistransfer of best practices such as incorporating PPP modalities area, we are supporting the government’s National solar Missionfor improving service delivery, and mitigating greenhouse gas by providing inputs to develop bankable solar projects and toemissions by generating electricity from the methane that is bring down the cost of the technology in the near to medium term.released from sewage treatment plants etc. we are looking at PPPs specifically in the area of water/waste management (for example, helping the government of gujaratWHAt Are your PrIorItIes In InDIA At tHe current in designing and implementing PPPs for water management)tIme? and transport (urban transport and bus rapid-transit systems). sHr: adB’s current India Country strategy aims at supporting In the area of traditional infrastructure, we are looking to supportthe government’s efforts towards inclusive and sustainable growth. selective transactions in the poorer under-served states (e.g.,adB has therefore been focusing its assistance on states such improving connectivity to energy by supporting transmission lines).as assam, Bihar, Chhattisgarh, Jammu and Kashmir, Jharkand, the government of India has expressed a clear preferenceorissa, uttarakhand, and several in the north eastern region for adB’s private sector operations to focus on housing finance(tripura, Mizoram, Nagaland, sikkim, and Meghalaya), which suffer projects. over the next few years, adB will explore support to smallfrom one or more of the following constraints: high poverty, low and medium infrastructure projects through private equity funds.levels of social development, weak capacity, and inadequate adB will also be establishing India’s first mortgage guaranteeinfrastructure. company, along with the International finance Corporation and adB has also expanded operations beyond the power, the National Housing Bank, among others. the company istransport and urban sectors to sectors focusing on financial expected to be launched in 2011. going forward, adB will alsoinclusion and generation of sustainable livelihoods (e.g., support identify possible support to the education sector which is a corefor the reform of the rural cooperatives sector; khadi and village sector for adB. while progressive reforms have taken place inindustries; micro-small and medium enterprises; innovative the sector to attract private investors, significant work is requiredfinancing of infrastructure projects (e.g., support for the India to scale up investments from the private sector, especially inInfrastructure finance Company Limited); integrated water primary education and vocational training.
  • 32. 32 q&a / bindu lohani and s.h. rahman, asian development banK may 2011 HoW Does WHAt tHe ADB Is DoIng In InDIA comPAre Do you tHInk tHe InfrAstructure AIms of WItH WHAt It Is DoIng In otHer mArkets? tHe InDIAn government Are AcHIevABle? WHAt oBstAcles remAIn? BL: adB’s recent study Infrastructure for a Seamless Asia indicates that almost $8 trillion of infrastructure investments for sHr: the government rightly views infrastructure developing asia will be required in the next decade (2011-2020). development as a pre-requisite for facilitating faster and more this is truly a significant investment and adB is helping as much as inclusive growth. Programs such as Bharat Nirman, the National it can in this regard. adB has the sustainable transport Initiative and Highway development Program, the Prime Minister’s rural roads several ongoing transport projects in its other developing member Program, Power for all, the rajeev gandhi rural electrification countries, such as the highway expansion projects in the six asia Program, and the Jawaharlal National urban renewal Mission and Pacific countries that make up the greater Mekong sub-region. underscore the importance that the government has been giving Creating sustainable and livable cities is imperative as asia to infrastructure development since 2000. continues its economic growth. adB is helping set up financing the government is well aware of the challenges that it faces, facilities aimed at improving water supply, sanitation and solid not just in terms of mobilising adequate long-term resources for waste management such as a loan approved in 2009 for the five funding infrastructure projects without putting undue pressure state capital cities in North east India. adB processed a loan for on the government budget, but also in terms of implementing the Bangalore Metro rail Line project. support for several other them in a timely, efficient, and cost-effective manner.[1] It has urban transport projects in other developing member countries therefore, been trying various approaches to catalyse / draw is also proposed such as in Vietnam where adB is financing two in private sector funding and management expertise into this large metro rail projects. sector. under adB’s energy Policy, we are going to support at least while the obstacles and challenges that lie ahead are daunting, $2 billion a year for clean energy and energy efficiency projects the various measures taken by the government - establishment by 2013. adB is promoting innovative clean energy investments of the India Infrastructure finance Company Limited (IIfCL) to such as wind and solar power projects in India. In 2010, adB mobilise long-term funds for PPP projects; formation of the high investments in India represented 15 percent of adB’s total clean powered Public-Private Partnership appraisal Committee (PPaC) energy investments. the People’s republic of China and Pakistan to streamline and simplify the appraisal and approval process received significant investments as well, representing 27 percent for PPP projects; support through the Viability gap fund; and and 15 percent respectively of total clean energy investments preparation of standardised model concession agreements during that same year. across sectors and model bidding documents and manuals adB, through the energy for all partnership and with the etc. – are all showing results. support of terI, recently launched the Lighting for all Initiative. the mid-term appraisal of the 11th five Year Plan notes that this regional lighting platform aims to take off-grid lighting markets total investment in infrastructure will rise from 5.08 percent of to the next step and bring modern lighting to 50 million people by gdP in the 10th Plan (public investment = 3.82 percent; private 2015, meeting half of the partnership’s overall target. Lighting for all investment = 1.26 percent) to 8.37 percent by 2012 which is focuses on fostering entrepreneurship, quality assurance of lighting the last year of the 11th Plan (public investment = 5.07 percent; products, policy advocacy, consumer awareness and unlocking private investment = 3.3 percent), notwithstanding the slowdown financing for enterprises and end users to create a viable off-grid caused by the global crisis. this is a positive trend, especially lighting market. It will initially focus on Bangladesh, Cambodia, because the share of the private sector in total investment will India, Indonesia, the Philippines and Vietnam. rise from around 24 percent (actual achieved during the 10th over the last few years adB’s private sector operations have Plan) to 39 percent by the final year of the 11th Plan. increasingly focused on challenging environments and under- the government has to create an enabling environment served markets. adB, through its private sector operations, to attract more private sector funds in the desired sectors. continues to help developing member countries (dMCs) with regulatory reforms, transparency and contract enforcement is innovative, efficient and optimised methods of providing public required to mobilise competitive investments. the role of PPPs, services with limited recourse to their governments. Certain sectors especially in challenging sectors like water and urban transport, is in India, like conventional power generation, have developed well very important and requires strong public support with innovative and therefore, adB has a limited role to play in these sectors, and commercially viable bankable structures. at the same time whereas these sectors continue to benefit from adB support in these PPP initiatives should not over-burden the government other countries. with large long-term support commitments. n [1] the huge investment required for funding India’s infrastructure deficit is estimated at around $515 billion over the 11th five Year Plan (2007-2012) and $1 trillion over the 12th five Year Plan (2013-2018). while the 11th fYP seeks to raise the share of the private sector in infrastructure investment from around 24% (actual in the 10th Plan) to 36%; the 12th fYP aims to raise it further to 50%.
  • 33. infrastructure investor india country briefing 2011 india: Key data 33tackling India’s infrastructurechallengemuch attention from both public officials and private investors has been dedicated to India’sinfrastructure, which has frequently been described as one of the largest impediments tothe country’s economic growth. over the past 20 years, private sector investment in India’sinfrastructure has continued to grow dramaticallyI n D I A’ s PlAnnIngcommIssIon estimated an Infrastructure is hindering Indiainvestment of $500 billion in India’s resPonDents to A world economic forum survey ranked lack of adequateinfrastructure was required from infrastructure as the largest obstacle to conducting business in India, ahead of corruption,2007 to 2012 in order to achieve political risk, tax regulations, and inefficient bureaucracy.the country’s desired rate of growthin gross domestic product. this The most problematic factors for doing businessneed to build has been matchedby interest from the privatesector—the world Bank estimatesthat private investment in India’sinfrastructure has increased morethan 200-fold since 1991. Many of the government’senvisioned infrastructure projectsare highly ambitious. Kamal Nath,former minister for road transportand highways, aimed to build 20kilometres of highway a day. and particular initiatives,like the National Highways Source: World Economic Forum Global Competitiveness Report 2010-2011development Project, whichaims to build or reconstructnearly 50,000 kilometres ofhighways, have rapidly extended gDP growth strong but laggingdevelopments across regions, rapid population growth in India over the past 20 years has been met by increases ineven though interstate public- gdP growth, but India has still lagged behind other asian countries.private partnerships accountfor fairly few of the 450 projects Key GDP Indicators; GDP per capitalisted in India’s public-privatepartnership (PPP) database. on this and the followingpages are some key facts aboutIndia’s PPPs and logisticsinfrastructure, as measured bythe Indian government PlanningCommission, the world Bank,the world economic forum and Source: World Economic Forum Global Competitiveness Report 2010-2011others.
  • 34. 34 india: Key data may 2011 Here come the private funds PrIvAte Investment In India’s infrastructure has grown enormously in the past 20 years, with yearly levels of private investment more than tripling between 2005 and 2009. energy is the leading sector by value. the total private investment, according to the world Bank Private Investment in Infrastructure database, amounts to around $159 billion. Private investment in infrastructure, 1990 – 2009 Source: World Bank Private Investment in Infrastructure Database greenfield dominates greenfIelD ProJects In energy and telecom account for the largest share of private infrastructure investment, while the concession model is favoured for transportation projects. Private infrastructure investment, 1990-2009 sector Concession divestiture greenfield project Management and lease contract total energy 22 4,515 63,579 0 68,115 telecom 0 3,236 58,030 0 61,266 transport 19,136 0 9,525 0 28,661 water and sewerage 108 0 245 2 355 total 19,266 7,751 131,379 2 158,397 figures in usd millions Source: World Bank Private Investment in Infrastructure Database Disparate PPPs PPPs by Sector 16 roADs AnD Ports account for a 14 large share of Indian infrastructure 12 projects built as PPPs, with social $billion 10 infrastructure still relatively new 8 as a public-private model. of the 6 450 projects listed in the PPP 4 2 India database, only one focused 0 on the education sector, at the comparatively small cost of about $20 million. Source: World Bank Private Investment in Infrastructure Database
  • 35. infrastructure investor india country briefing 2011 india: Key data 35state by statekArnAtAkA, AnDHrA PrADesH, and rajasthan, as well as the National Highway development Project, have initiatedsome of the largest numbers of public-private partnerships in the country.PPPs by region 10 300 9 A andhra Pradesh B Bihar C Chandigarh 250 8 D Chhattisgarh E delhi F goa G gujarat H Haryana 7 I Jharkhand J Karnataka 200 K Kerala Value of contents (usd billion) Number of Projects L Madhya Pradesh 6 M Maharashtra N orissa O Pudducherry P Punjab 5 Q rajasthan 150 R sikkim S tamil Nadu T uttar Pradesh 4 U west Bengal V Inter-state 100 3 2 50 1 0 0 A B C D E F G H I J K L M N O P Q R S T U V Name of region Note: USD figures converted from Rupees Crore Source: PPP India Databasefinancing gap Likely sources of debttHe centrAlgovernment’s PlanningCommission anticipates thatit will face a sizeable gapbetween debt required anddebt available to finance thenext stage of infrastructuredevelopment. Source: Planning Commission
  • 36. 36 india: Key data may 2011 Public and private tHe InDIAn PlAnnIng Commission projected that the central government would bear most of the weight in financing infrastructure projects, though both the state governments and the private sector were expected to have a significant role. Projected infrastructure investment for 11th Five-year plan Source: Planning Commission unfinished business room to grow one mAJor InItIAtIve in India is the National Highways tHe government estImAteD that it would finance the development Project, which is responsible for constructing massive National Highway development Project largely with tens of thousands of kilometres of roads in India at an gas taxes, debt and external assistance, with less than 10 estimated cost of $13.2 billion. as of the end of february, percent of the costs coming from the private sector. approximately half of the programme had been completed. Amount completed from the National Highway NHDP financing Development Project total Cost rs.54,000 Crores us$ 13.2 Billion Likely sources rs.Cr. us$ Billions (on 1999 prices) (on 1999 prices ) gas taxes 20,000 4.90 external assistance 20,000 4.90 Market borrowings 10,000 2.40 Private sector 4,000 1.00 Participation Source: National Highways Authority of India figures are in kilometres Source: National Highways Authority of India
  • 37. infrastructure investor india country briefing 2011 key contacts 37Gautam Bhandari dr arvind mayaram, i.a.SManaging Director Additional Secretary & FAMorgan Stanley Infrastructure Government of India, Ministry of Rural DevelopmentHT House, 18-20, KG Marg, Connaught Department of Rural Development,Place New Delhi, 110 001, India Room No. 177, Krishi Bhawan, New Delhi 11 0001, IndiaPhone: +91 11 6624-9100 Phone: +91 11 23383880Email: gautam.bhandari@morganstanley.com Email: arvind.mayaram1@gmail.comarun Sen Jai mavaniCEO Executive DirectorLANCO Enterprise Pte Ltd PricewaterhouseCoopers Pvt. Ltd8 Shenton Way, # 32-03, PwC House, Plot 18 / A, Guru Nanak Road (Station Road),Singapore 068811 Bandra (West), Mumbai 400050, IndiaPhone: +65 6603 4108 Phone: + 9122 66891133Email: arun.sen@leplsingapore.com.sg Email: jai.mavani@in.pwc.comSuneet maheShwari Bindu n. LohaniCEO Vice-PresidentL&T Infrastructure Finance Company Limited (Finance and Administration)3B, Laxmi Tower, 2nd Floor, Asian Development Bank ,6 ADB Avenue,Bandra Kurla Complex, Bandra (E), Mumbai -400 051, India Metro Manila, 1115 , PhilippinesPhone: +91 22 40605300 Phone: +632 632-5025Email: skm@ltinfra.com Email: bnlohani@adb.org
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