- 1. AlternativeInsightMAY 2011 | infrastructureinvestor.comFOR
THE WORLDS INFRASTRUCTURE MARKETSINDIAA Country Briefing131518
24Opportunities in energyThe 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. Thatswhy PEI has
offices in London, New York and Singapore, with a dedicated team in
each location allowing us to identify and analyse the markets 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 industrys 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 1Eyes on the
prizeHow to safeguard Indias position as one of the worlds leading
emerging marketsand ensure that its annual growth rate can continue
to maintain its swift pace? Manyfingers point at the nations
infrastructure. Bring it up to the level thats required andIndia
will see a transformation not just of its economic fortunes but
also the physicalassets 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 Indianinfrastructure, it is
almost always accompanied by some head-spinning figure suchas the
$1.5 trillion planned spend over the coming decade mentioned by
Bruno alvesin his introductory feature (p.3). Its easy to read such
a figure and assume that privateinvestors have an opportunity to
make hay. and, with the Indian government encouragingprivate
investment into many of the most promising sectors, this
opportunity shouldnot be underestimated.But this is only one side
of the coin. on the other are to be found some of the
potentialdrawbacks discussed by those invited to Infrastructure
Investors recent roundtablegathering in New delhi (p.6). all these
drawbacks tend to relate to factors which makethe wheels of
infrastructure transactions turn slower than investors would like.
theyinclude, for example: the need to change legislation in areas
where investment wasonce shunned but is now welcomed; the
requirement for better definition of the law incertain sectors; and
the need for greater human resource capacity on the public sideto
expedite Indias burgeoning public-private partnership (PPP)
programme.In summary, it might be said that Indias political will
to improve its infrastructure iswell aligned with the stratospheric
numbers but the machinery needed to deliver onthis impressive
ambition is only just cranking into gear. some further patience
will berequired before the deal pipeline opens up to everyones
satisfaction.In the meantime, there is plenty to play for - and
great returns to be made by those withsolid deal sourcing
capabilities. In the pages that follow you will find reflections on
theroad, 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 Banks plans to support
infrastructurewithin developing asian markets (p.18), as well as in
India specifically (p.30).enjoy our India country briefing.andy
thomsonsenior [email protected] 4. 2contentsmay 2011Special
supplement:LoNdoNsycamore HouseINDIAsycamore streetLondon eC1Y
0sgtel: +44 20 7566 5444New YorK3 east 28th street, 7th/flrNew York
NY10016tel: +1 212 645 1919sINgaPore105 Cecil streetunit 10-01 the
octagonsingapore 069534tel: +65 6838 4563 A country
briefingeditorial director :Philip Borel+44 20 7566 5434 3.
Introduction 21. Q&A: Sharad Jhingan,
[email protected] golden decade
Infratecheditor-at-Large: Indias pledge to spend $1.5trn over thewe
can learn the worlds lessonsdavid snow next 10 years on upgrading
its infrastructure Sharad Jhingan says that, by creating+1 212 633
1455offers investors the opportunity to helpunique models, India
can leapfrog [email protected] change the face of the
countrycountries and deliver efficient and cost-senior editor:
effective infrastructure assetsandy thomson+44 20 7566 5435 6.
[email protected] bold and cautious22. Company
profile: Lanco Key individuals in the Indian
infrastructureInfratechassociate editor:Cezary Podkulinvestment
market gathered together inBreaking new ground+1 212 633 1456New
Delhi to discuss how India might2011 has seen Lanco Group turn 25
[email protected] its infrastructure bottlenecks
of age and achieve a number of newsenior writer: while at the same
time reconcilinglandmarksBruno alvescompeting interests+44 20 7566
[email protected] 24. Guest feature: Aviation 13. Sector
focus: Energyservicesreporter:time to power upgetting off the
groundalexandra atiya+1 212 937 2830The huge demand-supply gap in
Indias Syed Ali Abbas and Shaurya Doval [email protected]
power sector speaks to large investment Zeus explain why Indias
fledgling aviationspecial Projects Manager: opportunities. But what
does the sector services sector offers investors theram Kumarreally
have to offer? opportunity for private equity-type returns+44 20
7566 [email protected] 15. Interview: Morgan Stanley 27.
Q&A: Suneet Maheshwari,Head of design & Production:
Infrastructure Partners L&T Infrastructure Financetian
Mullarkey+44 20 7566 5436 the advantages of being global and locala
lack of judicial [email protected] Wahba and Gautam
Bhandari Suneet Maheshwari maintains that the describe how their
firm has sought to bottleneck of outstanding compensationdesign
& Production Manager:Joshua Chong combine a global approach
with an intimateclaims relating to land acquisition is an issue+44
20 7566 5433 understanding of local marketsthat needs to be
addressedjoshua.c@ peimedia.comsubscriptions & reprints:17.
Case study: Morgan Stanley28. Company profile: L&Tfran
HobsonInfrastructure Partners Infrastructure
[email protected]+44 20 7566 5444 roads paved with
ambition a fundamental financing role+1 212 645 1919 [americas] Why
Indias huge road expansion L&T Infra has become a leading
player+65 6838 4536 [asia] programme is far more than just hypein
the financing of Indian infrastructure,sales and Marketing
director:including through successful bond issuesPaul McLean18.
Guest feature: Developing+44 20 7566 [email protected]
Asia30. Q&A: Asian Development Coping with
urbanisationBankgroup Managing director: Bindu Lohani and
S.H.Rahman of theaddressing the bottleneckstim McLoughlin+44 20
7566 5276 Asian Development Bank discuss theBindu Lohani and
S.H.Rahman [email protected] infrastructure investment
challenges in what the ADB is doing to assist the
furtherCo-founders: developing Asia, including a rapid
migrationdevelopment of Indian infrastructurerichard odonohoefrom
rural to city locationsdavid Hawkins33. Key dataPublished by PeI
Ltd tackling Indias infrastructure challenge Compelling statistics
which chart the nuances of Indian infrasture investment in recent
timeswww.InfrastructureInvestor.com 5. infrastructure investor
india country briefing 2011 introduction3the golden decadeIndias
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 its not anopportunity devoid of
challenges, reports Bruno Alves only the most distracted of
investors can have failed to notice the transformational economic
impact of Indias development into an It outsourcing centre, with
scores of multinational companies moving their It operations to the
country to take advantage of Indias 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 Indias 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 cant
get much more powerful the extraordinary growth rates it has
beenthan former transport minister Kamal Naths oft-repeated phrase
experiencing over the last decade without tackling its
sizeableregarding the Indian governments 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 Naths
sparkling soundbite has beenquoted to exhaustion ever since he
first uttered it more than twoIndias 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 governments infrastructure
plans. growth recorded in the 2000s, the country has actually been
growing 6. 4 introduction may 2011solidly for over two the $1.5
triLLion pLan With high inflation decades, increasing comes high
interest rates. its gdP by anfortunately, the government has
recognised the scale of theaverage of 6 percent problem and, in
Indias 11th five-Year Plan, which set targets for Over the course
of 2010, a year from 1980 tothe economy from 2007 to 2012, doubled
infrastructure spending the RBI raised interest2002, 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 Indias economic the plan set ambitious targets
for all of Indias infrastructure rising prices success displays
sub-sectors.idiosyncrasies In the roads sector, the authorities
pledged to speed up thewhich have insulated ongoing National
Highways development Programme, runningthe country againstfrom 2005
to 2012, which plans to widen over 53,000 kilometresglobal
financial crises. as das neatly summarises: of road and develop
1,000 kilometres of expressways. formerrather than adopting the
classic asian strategy exporting transport minister Kamal Nath
pledged to build 20 kilometres oflabour-intensive, low-priced
manufactured goods to the westroad 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
metropolitanand high-tech more than low-skilled manufacturing.and
35 non-metropolitan airports during the five-year
programme,However, deplorably low levels of public investment
havein addition to building 10 greenfield airports. It aims to have
8,132rendered Indias physical infrastructure incompatible with
large kilometres of new rail built and 78,577 megawatts added to
theincreases in the national product, the reserve Bank of
Indiapower grid by 2012.(rBI), Indias central bank, stated in a
study on infrastructure Looking forward, the authorities are again
looking to doublefinancing, published in summer 2010. their
infrastructure spending for Indias 12th five-Year Plan, fromIn it,
rBI paints a fairly bleak sector-by-sector picture of 2012 to 2017,
to $1 trillion, in anticipation of breaking into double-Indias
infrastructure deficit. take roads. rBI says Indias 65,590digit gdP
growth. this means India will have spent $1.5 trillionkilometres of
highways comprise just 2 percent of the countrysin developing its
infrastructure from 2007 to 2017.roads network while carrying 40
percent of Indias traffic. only recognising the enormous sums
required, Indian president12 percent of Indias highways have four
lanes, with 50 percentPratibha Patil again called on the private
sector to help shoulderhaving 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,
itsa 9.6 percent energy shortage; 40 percent transmission and
unsurprising that a veritable whos-who of the
infrastructuredistribution losses; and, to top it all off, rBI says
there is noindustry has descended on the country. european
developerscompetition in the sector. the central banks assessment
oflike Brisa, egis, Isolux-Corsan and VINCI are all present in
India,Indias other infrastructure sub-sectors also highlight the
countryseither alone or via local partnerships, particularly in the
popularpressing needs.roads sector, where other international
firms, such as CanadasPorts have inadequate berths and rail/road
connectivity; sNC Lavalin and egypts orascom, are also
investing.railways rely on old technology, saturated routes [and]
slowInfrastructure fund activity is thriving, with many
India-focusedspeeds; airports have inadequate runways, aircraft
handlingfunds now operating or in the process of being raised,
backedcapacity, parking space and terminal buildings; and in
telecoms by international players like 3i, Macquarie, Brookfield,
sMBCand It, only 18 percent of the market [is being] accessed, the
and Nomura.hardware used is obsolete, and there are acute human
resourcesshortages.funding diversityIf you look at Indias logistics
infrastructure the freightcorridors 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
Indias future logistics network isthe road ahead is not without
bumps. some of the question marksstill 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 massivebillion, or 4.3 percent of its current $104
trillion gdP, in wasteinfrastructure plans, even with the help of
the private sector?caused by poor logistics. the countrys current
logistics network In a government report issued in June 2010, the
authoritiesis also overly reliant on (highly congested) roads for
its freight admitted there is a $50 billion debt gap to finance the
infrastructuretraffic. Indias reliance on roads is more than three
times thatspending 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 theserail 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
ministrys 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 Naths 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 rBIin february, up from 8.23
percent in January. with high inflationsuccinctly put it: the issue
is that the banks cannot be the solecomes 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 mainIt is
hard to overstate how damaging the combination ofproviders of debt
for infrastructure, since insurance and pensionhigh inflation and
high interest rates can be for infrastructurefunds do not lend to
project companies setting up greenfieldinvestors. 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 wrotevehicles. 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 beenfor 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 developmentthe good news is that, to date, these
obstacles do not appearfinance Company, to issue tax-free
infrastructure bonds withto have dimmed investor interest in what
is surely one of thea minimum maturity of 10 years. these could
raise up to $6.5worlds 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, Indias infrastructure programme enjoys the advantages
ofCompany (IIfC), incorporated in 2006, have been set up to
helpbeing 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 projects total debt.role in it.
But the road ahead is long and Indias infrastructure plansdeLays,
permits and high infLationare 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 arent allowed to grow into potholes. n 8. 6
roundtablemay 2011Be bold and cautiousthe pressure is on. In order
to keep fuelling its rapid economic growth, India has to
overcomeits infrastructure bottlenecks. But, as a democracy that
needs to reconcile competing interestswhile at the same time honing
fledgling regulatory frameworks, progress can be slower thanmany
would like. Andy thomson visited new Delhi to elicit views from key
individuals onopportunities and limitationsIn gloBAl terms, its the
seventh-largest country by geography,to discuss what they see as
the key themes in Indian infrastructurethe second-most populous and
the largest democracy. It has myriadinvestment today.cultures and
hundreds of languages. a statement of the obvious:Jhingan commences
a lively debate by referring to the countryIndia defies simple
characterisation. so too does its effort to create that seems
destined to be considered the yardstick for Indiasinfrastructure
worthy of one of todays great emerging markets.progress now and
well into the future. China has a long-term visionwe 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 throttledhe
maintains. everything else revolves around how you executeback. But
what are the key issues occupying the minds of those on that. Its
the national interest. we need to focus on the nationalon the
frontline of Indian infrastructure investment? Infrastructure
interest and we need a long-term policy on how to achieve it.
weInvestor has gathered together representatives from an Indianmust
service that goal.developer, financing firms, an advisory firm and
a governmentthis goes to the heart of a crucial issue. Many Indian
infrastructureministry to get the inside story.professionals would
no doubt echo Jhingans sentiments. there isthe clock ticks over to
10am in a meeting room in thefrustration that China has moved
swiftly ahead of India with grandshangri-La eros hotel in New
delhi. gautam Bhandari (Morganinfrastructure projects. some would
lay the blame for this at leaststanley Infrastructure Partners),
sharad Jhingan (Lanco Infratech),partly at the door of government
and, specifically, infrastructuresuneet 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 readyBut
there is another side to the issue. one roundtable participant 9.
infrastructure investor india country briefing2011roundtable
7arouNd the table: biographies iN brief Suneet Maheshwari is
currently chief executive of L&T Infrastructure Finance. He has
about 28 yearsGautam Bhandari is a Managing Director atof
experience in India in infrastructure financing,Morgan Stanley
Infrastructure Partners and headcorporate finance, infrastructure
& energy sectorof funds Asian operations. In this role, he has
reform, investment banking and private equity. He hasoverseen a
number of significant deals, includingset up infrastructure
advisory & financing operationsthe largest equity investment in
the India power in several start-up and rapid growth situations
andsector to date. Prior to joining the infrastructurehas also been
closely involved with various infrastructure sectorteam, Bhandari
worked for Morgan Stanleys 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 PwCsfrom the Stern School of Business at New York University,
andinfrastructure and real estate practice in India. Hea PhD in
Chemistry from the University of Delaware. He is ahas varied
experience within this field over a periodpublished author of
several scientific papers and is the inventorof 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 withmore than 20 years experience and is the
chiefoperating officer of Lanco Infratech Limited.Arvind Mayaram is
currently the AdditionalExperienced in strategic planning,
corporate Secretary and Financial Adviser, Ministry of
Ruralrestructuring, M&A, fundraising and capitalDevelopment. He
was Deputy Secretary of Foreignmarkets, he has successfully
negotiated andTrade and Foreign Investment at the
Departmentcompleted 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 housesEconomic Affairs, Ministry of Finance,
Governmentin previous roles. of India.refers to Chinas 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 worlds largest hydropower The private side cant say give it all
to us. Look at the example ofproject claimed that the social cost -
an estimated one milliondeveloped 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
defenceDemocracy is a strength not a weakness. Certain countries
thatfor any perceived delays in infrastructure execution and for
theare not democracies may look solid - but, as weve seen from
recentapparent lack of a grand, coherent vision referred to by
Jhingan.events in the Middle East - theyre not, theyre unstable.
That kind Its all down to Indias democracy, he could feasibly
maintain -of instability wont happen in India because the
governments are often described as both the countrys biggest
strength and itsrepresentative of the popular will. biggest
weakness. But this is not Mayarams tack. He argues Others around
the table refer to the government as an instead that the government
is delivering - just not always in ahonest broker between the
investors who want to build Indiasway 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
independentin 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 2011this
vision: solidbetter definition of the law in certain sectors (some
progress hascontract law that isalready been made here, asserts
Mayaram, including in private We need to focus on the effectively
enforcedaviation); 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 policyin the recent Budgetof the amount
thatproject developers needed; and better enforcement of the
countryswell-defined environmental laws. on how to achieve it
foreign institutional Jhinganinvestors can investindependent
reguLatorsin India; and movesto deepen the capital this is a neat
encapsulation of some of the factors that givemarkets,
includinginvestors room for optimism and others that are a cause
oflegislation that hasfrustration. But how does everyone else
around the table viewassisted the launch of a series of
infrastructure bond issues, forthese and other big
issues?example.to refer back to the point about how infrastructure
projectsHowever, he also acknowledges some of the things that
hindermay get bogged down, there is a view that the introduction
ofthe implementation of the vision: the need to change
legislationindependent industry regulators would assist processes
to be betterin sectors where private capital has previously been
unwanted expedited. You need to focus on the mechanisms, says
suneetbut is now encouraged (rail, for example); the requirement
forMaheshwari. 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 its 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 countrys history:
Its a big learning curve and in some infrastructure sectors we make
mistakes. But the system is merciless. when youre in uncharted
waters, you get very cautious and that slows things down. Youre
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 processMayaram: little known
about rural transformation of a transaction from rfQ [request for
11. infrastructure investor india country briefing2011 roundtable
9Qualifications] stage onwards, notes Mayaram. But the financethat
a lot of privateMinistry is currently putting in place a huge
capacity buildingequity investment inprogramme to train public
officials in PPP processes so they noIndia has been in the Certain
countries thatlonger have to learn on the job.nature of
structuredare not democracies mayMayaram 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 wevegovernment 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 theyreand
regulators might be a problem waiting to happen. to alignmezzanine
he says.not, theyre unstable policies to changing realities and new
learning one might have toHe is encouraged by Mayaramgo back and
change laws all the time. we dont yet have enough the potential for
newexperience to see what should be set in stone in most
infrastructure debt and mezzaninesectors.products to create
aBhandari expands on why he believes having independent whole new
fundingregulators would be useful. the regulator could be merely
anenvironment but feels there are other gaps that also need to
bearbitrator - theres a place for that. and if you can speed things
filled.up, it lowers the cost of capital. But you can also have
regimesMavani says there is a lack of long-term annuity playswhere
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 investmentHe
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. Its 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 things 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 countryscapital markets. Jai
Mavani makes the point Jhingan: who regulates the regulator? 12. 10
roundtable may 2011points to Indias National Housing Bank which was
launched in the countrysseventh five-year plan (1985-90) to
addressa near absence of long-term finance forhouseholds as a
successful existingtemplate. following the launch of the bank,the
housing market took off. You need abank to refinance the commercial
banks,insists Jhingan. a National InfrastructureBank could be run
by the reserve Bank ofIndia, for example.on the issue of enticing
pension andinsurance companies into the space,Mayaram points to an
obstacle. theproblem is that most infrastructure projectsin India
are implemented through specialpurpose vehicles (sPVs). Because
sPVshave no balance sheet, theyre never ratedhigher than mere
investment grade, so thepension funds cant invest. the credit
ratingsystem needs to be developed to includethis reality.He adds:
we did work in the financeMinistry to develop a project grading
systemin collaboration with the major credit ratingagencies based
on the strength of projectsand their promoters. that product
wasdeveloped 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 neededa tax system designed to prevent high-
earning corporations and individuals from that deliver returns in
the 8 to 12 percent bracket and calls forreducing their taxes to a
level that the government considers too low. the development of
reIt (real estate Investment trust)-typeComplaints 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 wouldthe legislations also
help the circulation of capital where risk capital invested
atapplicability 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 needthe mechanisms. Anthere is
concern not unique to the Indian market regardingis consistency and
infrastructure projects over-reliance on bank debt and the need for
predictability, saysinfrastructure project will longer and cheaper
sources of long-term financing. as elsewhereMavani. those areoften
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 weve
had long-term debt holders so that in the words of Bhandari were
shifting goalpostsdepartments to talk to not totally dependent on
the bank market. when it comes toeach other Maheshwarialso as in
other markets, there are those in India who wouldthings like Mat
support the creation of a National Infrastructure Bank. Jhinganfor
seZs (special 13. infrastructure investor india country
briefing2011 roundtable11 economic Zones). You go ahead with aJoshi
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,
doesnt send the right message. In the oilwhich means there has been
a pause, but should try to set upand gas sector, in a PsC
(Production sharingthe roads programme is expected to roll out
independent regulatorsContract) if youve agreed a tax basis, it
will quickly from now on, says Maheshwari. because having them
asapply independent of what the subsequentMy key worry is that lots
of new developers amendment in law says, i.e., its a carve-out have
come in and, in the absence of a the final judge would ring-fenced
regime. Its worth consideringtimetable saying what will happen
when, remove the perception ofsimilar provisions in long-term high
capitalearly projects had a lot of competition and cost concessions
in other infrastructurewere 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 areBhandari cites roads as the biggest
concessionaire deals happening (and not happening),
whichopportunity to attract investors. He Bhandariare the
up-and-coming sectors, what are explains: Its reasonably mature. Im
not the obstacles that stand in the way, and is saying challenges
dont 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. formeras a litmus test over the
next two to three roads minister Kamal Nath last year madeyears.
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 thatalongside 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 weve at least seenmodel. thats 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 aroundHe 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, thereis a problem of
regulation. education, for example, needs regulating next big thing
with respect to fees. If thats appropriately handled, theres a
bigdemand 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
ishospitals, in particular, there is the problem literally coming
down the track. one area of standards. How do you ensure that the
thats interesting is rail theres a lot to be achieved there, says
Mavani. the delhi-One area thatslevel of service for the poor is
the sameas for the rich and that patients are not Mumbai Industrial
Corridor [an infrastructureinteresting is rail theres over-charged?
In the past, weve 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], ifenforcing of
standards is critical. well managed, has the potential to usher in
MavaniBhandaris view is that social the next round of the
industrial revolutioninfrastructure 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 willHowever, 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 thereone 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, its with regret that a halt to
proceedings must be called. an improved outlook for logistics would
flow naturally fromBut watches are now being anxiously checked,
with meetings improvements to the countrys 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. Its time to get on with that
task of about Indias ability to deliver its infrastructure plans.
at the momentbuilding the nation. n a lot of food doesnt 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 Ministryas private capital begins to
demonstrateof rural development, when it comes to the controversial
issue of land acquisition. the role that it can play in the
developmentIndias Land acquisition act of 1894 allows the
government to purchase land from of Indias economic infrastructure,
theits 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 countrys social
infrastructureinsists 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
lands value, he says. when the response from those at the table is
athere are no roads, the value of land is very low. qualified yes,
but with the important proviso Its 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 highexploit the land for commercial
activities. Youre seeing people taking on 99-year standards. leases
based on the lands expected real estate value at some point in the
future. thisdemand [for social infrastructure] is ais when the
farmer feels cheated because money is being made from the land
itself, no-brainer, says Mavani. But do we havenot from industrial
activity, says Mayaram. the ability to deliver at affordable
priceCan we limit the lease period, at the end of which it reverts
to the farmer or the points? If we take telecommunicationsoriginal
owner? he ponders. weve 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 briefing2011
sector focus: energy 13time to power upthe huge demand-supply gap
in Indias power sector speaks to large investmentopportunities. But
what does the sector really have to offer? Hsiang-ching tseng
reportscapacity in the 12th Plan (2012-2017). atthe end of November
last year, India hadan installed capacity of 167,077
megawatts,according to the countrys Ministry of Power. given the
demand-supply gap, thefigures speak to a major
investmentopportunity. according to anil ahuja, 3ishead of asia,
the firm expects about halfof its first Indian infrastructure fund,
whichclosed on $1.2 billion in 2007, to go intothe power sector.
the firm is also mullinga second infrastructure fund in the
country,which could be larger than its predecessor,given the firms
chief executive MichaelQueens comments during a trip to India.
atthe time, he told the local media that 3i wasplanning to have
between $2 billion and $3billion invested in Indian infrastructure
overthe next two years. the total scale of the [power]
requirementis very large. theres room for private capitalas well as
government capital, says ahuja. But exactly how big is the capacity
forprivate capital? Its a question of finding theJourney BAck In
the archives of PE Asia to read our infrastructure-right projects
because theres more than enough capacity to absorbfocused coverage
in the second half of 2010, and youll note the highthe capital,
says ahuja. Because in the 12th five-year plan youreproportion of
private equity deals occurring in Indias power sector.building
100,000 megawatts, then that should require $100 billionduring that
period, the sector attracted global fund managersof total
investment. so were 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 ofIn 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 additionchallenges 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. ofthe 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 totalfuel used for power generation,
according to the Ministry of Power.In January, Indias 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 uponHowever, although India has large
coalWith 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
projectedtechnologies 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
gasConsequently, 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 tonext few yearsenergy is evident given the huge demand-
KPMgs agarwal, about 30 to 50 percentsupply gap which cannot be
easily filled. of needed coal will be provided by imports. while
its difficult to make a judgment overwith fuel security posing a
big challengethe extent of the private sectors 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
getwe 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 formsalthough the solar sector is still not
perceived as cost- of power generation, private investors remain
bullish on Indias 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 regimeIn addition, theres room for all the various
sources of power in which is encouraging private equity investment
to come in, says India. If [Indias 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
competitivenesswith the focus on increasing power generation
capacity in Indias five-year plans,a corresponding investment in
the transmission sector is also expected. However, regardless of
how promisingat the end of october last year, the aggregate
inter-regional transmission capacity investment in renewable energy
seems toin 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 Indias Ministry of Power. remains the core issue and
the main reasonseveral steps have been taken in Indias 11th five
year plan (2007-2012) to encourage why most private investments in
Indiasprivate investment in the transmission space, including the
formation of a committee power generation have gone to
traditionalcomprised 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 doesnt become in the public-private
partnership arena. In terms of market need, theres a huge market
cost competitive, we will continue to see thepotential, 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 energyI 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. KPMgs
agarwal predicts.the countrys power transmission sector looks set
to offer decent opportunities Lets get it clear, were not sayingfor
private equity investors for the next couple of years. renewable
energy is here to solve all of Indiaswe 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 viableinfrastructure team for south asia.
17. infrastructure investor india country briefing2011interview:
morgan stanley infrastructure partners15the 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 stanleythe scale of this
required investmentInfrastructure Partners (MsIP) had a globalmeans
MsIP believes reference to anapproach to infrastructure investing
thatover-crowded market in India is looseincluded markets like
India. as sadektalk. when one does the simple math ofwahba, chief
investment officer andtotaling all the infrastructure and
privateglobal head of MsIP, says: when weequity 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
therequired, says Bhandari. as youd expect,strategy, and a core
competence of the there is competition around quality
deals.strategy was to invest in non-oeCd orwe focus on assets of
$50 million or moreemerging markets. we recognised that because
south of that attracts competitionstrong growth economies needed
tofrom 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 decadehow gautam Bhandari,
managing director MsIP recognised that China and Indiaat MsIP and
head of the funds 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 Indias 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. whenemerging markets are
characterised byyou look at the opportunity over the
nextinefficient 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
governmentopportunity over the next with very thorough due
diligence. Nothinghas called for $1 trillion in debt and
equityreplaces 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 toquite mind-bogglingserious homework.come from private
sources. the firm believes that one example of 18. 16 interview:
morgan stanley infrastructure partnersmay 2011 It is important to
note that the entire this homework paying off was the $425 spectrum
of risk-return indo carry construction and development million
financing in March 2010 of asianinfrastructure investmentsrisk. for
these the risk premium is justifiably genco, the largest equity
investment in exists. Therefore, therelarge, he says. However,
there are sectors the Indian power sector. MsIP led the dealin the
infrastructure space such as the road which also included the likes
of generalis an opportunity for sector, where the PPP framework is
well atlantic, goldman sachs Investmentinvestors to earn
verytested. Here the risk premium is not as Management, Norwest
Venture Partnerslarge. It is important to note that the entire and
everstone Capital. this is a landmark good risk-weighted
returnsspectrum of risk-return in infrastructure transaction
impacting the power sectoron 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 infrastructurethe due diligence undertaken
for the asian genco transaction projects/sectors are more mature
and provide investors a niche also helps to illustrate MsIPs 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 gencos assets is teesta III, Indias
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 ofwahba believes that Morgan stanleys 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 localthis kind of cross-fertilisation typifies MsIPs
global approach. partners, with whom we have a good dialogue,
providing input, gautams 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.
everyoneCrucially, 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 willto where investors are
based. Post- spend several months in India, the Indiaglobal
financial crisis and the real estate team will often be in China.
It provides acrisis in the Middle east, almost all major richer
analysis. engineering, Procurement, ConstructionKey to the MsIP
philosophy is the(ePC) contractors and infrastructure belief that
markets such as India play acompanies have some presence in India.
vital portfolio diversification role. we wantsometimes,
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. Its all in how the local there is
somewhat of a decoupling fromtalent 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 Indiathat
said, Bhandari adds, India offers is precisely what MsIP is aiming
for, opportunities across a broad risk-rewardand 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
diversificationachievable. n 19. infrastructure investor india
country briefing2011case study: morgan stanley infrastructure
partners17roads paved with ambitionGautam Bhandari of Morgan
stanley Infrastructure Partners explains why Indias hugeroad
expansion programme is far more than just hypeThe sheer scale of
ambition that characterises IndiasIndia 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 in8 percent growth rate means more affluence
and people spendingthe tight timeframes that are talked about? When
it comes to themore 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 youre seeing a
compoundminister Kamal Naths 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. its around 8 to 9
percent, which is very healthy. In the US, UK andAnd yet: what the
naysayers may be overlooking is the progresssome 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
funds 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 Indias 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 withpercent of the countrys total traffic.two lanes, four
lanes and even six or eight lanes in some cases. ThatTo 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. Its been
modified here and therebut its basically the same concession, so
its stood the test ofGaininG market sharetime, says Bhandari.
Concessions typically last for 20 to 30 years and are
inflationFurther, Bhandari points out that 20 years ago, around 60
linked, long term, with non-compete clauses and extension
basedpercent of Indias goods were transported by rail and 40
percenton traffic volume all terms that serious infrastructure
investorsby road. Today, that ratio is reversed and the gap between
thelike to see in assets. Bhandari acknowledges that Indias
currenttwo is only likely to grow further. Rail networks have been
runningrate 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 andjust anounced a $200 million commitment to invest in a
roadpassenger traffic, over the last 40 years.platform alongside
Isolux-Corsan, an international partner. ItReturning to the point
about ambition, the simple retort is thatis a transaction that
typifies MSIs global-local strategy. Thejoint platform is upgrading
strategic parts ofNew Passenger Vehicle Registrations the so-called
Golden Quadrilateral highwaynetwork under a NHAI concession. The
Golden 5-year and 10-Year CAGRs Quadilateral connects Indias four
largest cities of % Growth Delhi, Mumbai, Chennai and Kolkata. The
deal shows that international companiesin India do get funding and
they do have a role toplay in building out Indias infrastructure,
saysBhandari. It also indicates that roads will remaina focus for
MSI and other infrastructure fundmanagers in the years ahead. For
them, genericcynicism provides an opportunity to carefully
selectand invest in opportunities that provide very
goodrisk-adjusted returns. nSource: Euromonitor 20. 18 guest
feature: developing asiamay 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 citiesurban deveLopment
rapid urbanisation will mean risingdemand for infrastructure
services indeveloping asia. urban areas contributeabout 80 percent
of gdP in asia. Citiesare engines of national and
sub-nationaleconomic growth. In almost all countries,cities are
making significant contributionsto national economic productivity.
asiaslevel of urbanisation is expected to growby 3 percent every
year and rural-urbanmigration will account for 40 percent ofthis
urbanisation trend. according to the Cities like Mumbai are under
pressure from fast-growing populationsuN, the world will have 22
mega cities by2015 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 stimulusthe 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 theincome of asian countries. urban activities
generate close to 80 adjustment of global payment imbalances, asia
needs to promotepercent 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
structuralthe 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 productivityinappropriate 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 asiaif urban centres were all the same does not
work. Clearly, the will have to invest around $8 trillion, or an
average $750 billionurgent challenges facing asias 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 asias 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
thewe would like to share some views on specific areas: (i) urban
sustainability of asias 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
infrastructurewith a good portion of this going to urban transport
and railways. development in the Peoples 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 briefing2011 guest feature:
developing asia19the aim of reducing pollution, congestioncombined
cycle (IgCC) coal power plantand accidents. in tianjin, China, is
the first to use IgCCalso, we will not lose sight of thetechnology
in a developing country. whenimportance of rural and provincial
roads.completed, it will have facilities to enablerural roads play
an important role incarbon capture and storage at someinclusive
economic growth by makingpoint in the future. the adB is also
intransport accessible and affordable. wepartnership with the
global Carbon Capturehave begun to establish partnerships and
storage (CCs) Institute of australiawith development partners and
centresthrough a trust fund of about $17 millionof excellence such
as the Korea transportfor 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 Citiesfund 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 andcooperation in developing cross-border
infrastructure is criticaloffices; and building a new cadre of
engineers, techniciansfor enhancing physical connectivity and
sharing scarce resourcesand scientists who are sensitive to
environmental needs are allsuch 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 weand 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 lets 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
adBsagenda of the adBs strategy 2020 and environment and
climatethree strategic agendas, along with inclusive economic
growthchange is one of five core areas of operations. we are
increasingand 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,
whichbuilding to streamline cross-border rules and procedures.
throughwill provide a comprehensive approach to institutional
capacity, adBs 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 andthe 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 gasificationby around 40 percent. similarly, the
east-west Corridor Project 22. 20 guest feature: developing asiamay
2011 linking the landlocked areas of northeastit accounted for 10
percent. thailand with the coast of Vietnam across Effective user
chargeswhen compared to the PrC, Indias the Lao Peoples democratic
republicof infrastructure services experience in infrastructure
development reduced travel time from border to borderhas been
somewhat different. first, from around 12 hours in 2001 to less
than are much lower in Indiaeffective 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
peopLes 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 sourcethat is local governments
extra-budgetary the adBs recent publication Resurging significantly
higherrevenues deployed as equity in PrC Asian Giants highlights
some lessons frominfrastructure projects. this makes the the
experience of the Peoples republic of equity portion of the
financing structure China (PrC) and India, which may be useful for
other developingmuch 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
economys 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 focusedat 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 PrCs 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 autonomyconstruction, facilities management and in
the decision-making process. an financing. overwhelming proportion
of resources forBut to attract the private sector investment come
from such self-raised to risk private capital, governments and
other funds of local governmentswill need to provide the right
policy or enterprises owned or controlled byenvironments,
including: enabling legal sub-national units. self-raised fundsand
regulatory frameworks (with strong accounted for more than half of
totalcontract enforcements); transparent investment financing.
fifth, a notable and competitive procurement policies
characteristic in the PrCs infrastructure and processes; good
governance in experience is the limited extent of
privategovernments; and better tariff policies, or foreign
participation in the sector. In among others. n infrastructure,
soes dominate. foreignBindu 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. Rahmanat the Asian Development Bank 23. infrastructure
investor india country briefing 2011 Keynote sharad jhingan, lanco
infratechq&a / interview: minister of economy 21We can learn
the worlds lessonssharad 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 exAmPlesWHAt Are tHe keys to executIng ProJectsof
lAncos ActIvItIes AnD recentWell, AnD WHAt Are tHe
PotentIAlHIgHlIgHts? mInefIelDs? sJ: Lanco Infratech is an
integrated sJ: Planning, planning and still better
planning.infrastructure company, whose activitiesoverconfidence,
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 Lancos 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 capabilitiesdemocratic 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 thestandard of living of its people, India needs to
growcountry, Lanco presently owns and operatesfast 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 responseland. 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 Aand
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
Indias 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 Indias leading
business conglomerates and among the fastest order from Mahagenco
(3 x 660 Mw) which exhibits the groups 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
producerroAD BotsmAll & steADy footIng: Lanco has three road in
the country by attaining 3,292 megawatts (Mw) generationprojects
(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 blendglobal 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 hassolar 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 capacityMw 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 theplant in May 2013. globally Lanco has set up offices
in the uK, All-rounD constructIon cAPABIlIty, roBustsingapore,
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 andcapacity 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
fromthe domestic production of coal in India. thus, Lanco acquired
ePc BusInessstrong suPPort: Lanco initially started with australias
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 p