India’s all-inclusive infrastructure rollout

What makes the Subcontinent unusual, however, is the categorical aim, in the words of Prime Minister Manmohan Singh, to promote “inclusive growth.”

That’s not just political rhetoric, as MK Sinha, President and CEO of IDFC Project Equity Co. Ltd., points out. “India is a democracy, and that means consensus has to be built from the ground up. Therefore it takes time.”

It is also increasingly clear that the country’s remarkable growth in recent years is running into a bottleneck situation due to its still vast, and even crippling, infrastructure deficit. “Though India’s GDP grew at 7.2% in 2009-10, it would have been at least 2% higher without infrastructure constraints,” Akhil Awasthi, MD with Tata Capital, tells AVCJ.

“The share of private investment in infrastructure has significantly increased from 18% in 2002 to 35% in 2009,” he adds. “This is most notable in telecommunications (82%), ports (80%), airports (64%) and electricity (44%). But it’s expected to overtake overall public investment in the sector by 2015.” By 2020, it is estimated that India’s GDP will triple, significantly increasing the purchasing power of the average Indian consumer.

The bigger picture

According to Dr Archana Hingorani, CEO and Executive Director of IL&FS Investment Managers, this will be a natural outgrowth of the nature of India’s infrastructure opportunity. “In this country, we are building infrastructure to meet basic, unfulfilled needs; not replacing infrastructure or upgrading it. So this will fundamentally amount to a positive contribution to the larger society, and not just to the direct stakeholders of a project.

Inclusive growth requires equity of opportunity, she explains, “which necessitates providing an enabling framework for growth. And this encompasses all infrastructure sub-sectors, however seemingly unconnected. For instance, improved roads coupled with reliable power supply for cold storage and an efficient logistics chain translates into lowering the shocking agricultural waste we have today.” (An incredible 20% of produce rots due to the lack of infrastructure.) “This would put more money in to the hands of farmers,” she concludes.

Spawning sizeable companies

The development of the telecommunications sector has proven to be a huge enabler of the lowest and smallest businesses, from fishermen to food shops to taxi drivers. And further up the food chain, efforts to address the infrastructure gap are also creating compelling new opportunities, for local investors at least. This is building a new wave of sizeable businesses engaged in building, owning and operating the swathe of new infrastructure assets.

“You’ve got road companies being built up over time, power companies too,” IDFC’s Sinha explains. “The same is true with a variety of airport-linked businesses, and their counterparts that aim to build or operate ports. This is the crux of a new wealth creation phase, and it’s evidenced by the emergence of companies like Mundra Ports Company, the largest private sector port in India, located in a special economic zone; GMR Infrastructure; and GVK Power & Infrastructure Ltd. These are companies that didn’t exist five years ago.”

Still, it’s not all full steam ahead, he adds candidly. “Land acquisition remains an issue in India. So are environmental clearances, and getting the necessary bureaucratic concessions to the private sector done and approved. All of these things slow the pace considerably, and to me that is the big challenge.”

Investment targeting

Tata Capital’s Awasthi sees issues with the current deployment of capital. “Due to the poor state of (most) existing infrastructure in India, investments in all areas are welcome. However some mismatch is evident: for example, with $177 billion being invested in power generation, while commensurate investment in the transmission and distribution sector lags. Similarly, privatization of higher education is leading to setting up too many technical degree colleges, and not enough vocational training institutes.”

IL&FS’ Hingorani adds, “Targeting is not only a function of the need or opportunity. The need in the urban infrastructure space is huge, with subsectors like water supply and waste water treatment requiring urgent attention. However, sector targeting by private players only happens when opportunity size is layered with the clarity of the concession, ease of payment recovery, and comfort with local municipalities.”

Telecommunications has – and continues to – attract significant investment, largely because the area is time tested and because private players have the clarity and freedom to operate. Urban infrastructure, on the other hand, presents opportunities, “but there is no model concession agreement which private players are comfortable with, and the willingness of users to pay is suspect,” she says. “These more challenging areas need to open up for private investment by way of innovative structures. And these have yet to pan out.” 

Further reading

Inside India’s infra riddle

• South Asia
• 05 Oct 2010

ICICI Venture's infra fund to be buoyed by overseas investors

• Fundraising
• 21 Oct 2010

India to set up $11 billion energy infrastructure investment fund

• Infrastructure
• 10 Sep 2010

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• Topics
• South Asia
• Infrastructure
• Infrastructure
• Infrastructure
• IL&FS Investment Managers
• Archana Hingorani
• IDFC Private Equity
• IDFC Project Equity
• M. K. Sinha