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India Report

  1. 1. Alternative Insight MAY 2011 | 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. 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 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. 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
  4. 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 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 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 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 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 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 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 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’ 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@ subscriptions & reprints: 17. Case study: Morgan Stanley 28. Company profile: L&T fran Hobson Infrastructure Partners Infrastructure Finance +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 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 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
  5. 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. 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. 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 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. 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. 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 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. 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. 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 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. 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. 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. 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. 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. 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. 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 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. 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