India watch issue 5 - India invests in Infrastructure

Monday, July 13, 2009 | Posted by: Grant Thornton
Categories: | Tags: India, global, India's Infrastructure, Government and Advisory Services, PFI, Vikesh Mehta, Amit Jain, PPP, infrastructure, Grant Thornton India, deals, aim, GDP, Indian Economy

Vikesh Mehta, Partner & Amit Jain, Director - members of Grant Thornton India’s Government & Infrastructure Advisory team, discuss how India is working towards improving its infrastructure repertoire.

How do you see the public and private sector working together to deal with the Indian infrastructure repertoire?

The Planning Commission of the Government of India has estimated a requirement of USD 500 billion investment in infrastructure in India during the current Five-Year Plan period (2008-2013). Given the fiscal situation, it is impossible for the Government to make that kind of investment all by itself. It is then obvious that the Government wants to encourage private investments in to everything including roads & highways, ports, airports, water, power, health, education, railways, urban transportation and so on.

The private sector in India, though quite strong, is not robust enough to absorb all the risks associated with long-gestation investments in infrastructure. The financing remains an issue, with most banks not providing finance for more than 6-8 years. The Government of India has, from time to time, come up with several policy measures, to help the private sector in this regard. These have included:

• Easing up norms for raising capital abroad;
• Setting up funding institutions such as the India Infrastructure Finance Corporation Limited (IIFCL);
• Making to easier for the developers to import high technology construction equipment;
• Progressively lowering interest rates, encouraging the banking sector to increase the credit off-take, while simultaneously insulating the Indian banking system from the global financial crisis;
• Improving regulation in various sectors, including formulating Model Concession Agreements.

In a nutshell, we see very close cooperation and financial arrangements between the public and private sectors through PPP for developing the much needed infrastructure in the country.

How does the strong mandate for Congress-led government affect infrastructure policy from the government?

A strong mandate for the Congress-led government has undoubtedly been a major catalyst in spurring investments into infrastructure. It is expected that the government, with its renewed confidence, will remove the huge backlog of construction contracts for roads and highways, railways, health and education, significantly increase investment into urban infrastructure, etc.  The Union Budget recently announced by the Finance Minister, however, does not contain any focused policy initiatives for infrastructure development perhaps because what is really needed is greater political will to remove the red tape and other bottlenecks in project implementation rather than further policy support.

What do you see as key drivers for meeting India’s huge infrastructure requirements?

• A complete revamp of the Indian education system: this will in the medium to long term, will have a cascading effect on the increase in demand for goods and services; thankfully, the latest overtures from the government, including the increase in the education budget, suggest that this long overdue reform is finally going to take shape.
• Investments into healthcare: after the National Rural Health Mission (NRHM), the government is currently preparing the National Urban Health Mission (NUHM).
• Public investments into managing water resources/irrigation and agriculture, given that more than half of the Indian population still subsists on agriculture;
• A wider recognition amongst the policy makers, and more recently amongst the politicians, that creation of better infrastructure can perhaps get them more votes that other measures.
• Demand from the citizens and tax payers for improvement in existing infrastructure and creation of new infrastructure to global standards – which is a very powerful driver because India is a democracy and the common man has a say in the Government’s priorities.

What are the roles and opportunities for UK companies in the Indian infrastructure space?

British companies have an advantage over their counterparts from other countries as the legal framework in India and the UK is quite similar for historical reasons. Given UK’s long experience in building infrastructure using private capital, India could do with a lot of help in obtaining technical assistance in structuring deals and in financing them. Other opportunities include direct investment into the projects by UK-based developers or their participation as operators of specific infrastructure facilities by joining the consortia of the Indian developers.

How has the world’s banking crisis affected this sector?

India, though not completely insulated from the global slump, still managed to retain its growth path. The GDP growth rate fell from around 9% to 6% per annum. This was mainly due to a huge fall in the stock markets resulting in a crash of the real estate market. Banks witnessed a sharp increase in their Non-Performing Assets (NPAs) and hence saw a significant fall in the confidence, wherein they went into a wait and watch mode and reduced lending. Though none of the banks, except one, was directly affected by the financial crisis. The main impact has been the slow down in private equity investments as well as IPOs of infrastructure companies which has impacted the ability of these companies to raise equity capital, which in turn has seen several projects struggle to find developers/ investors, particularly in those projects where real estate was a major component.

What are your views on future availability of equity and debt capital?

As far as equity is concerned, we are seeing the return of IPOs with the significant increase in the activity levels in the stock markets. Visibility on the IPO front is also helping enhance the flow of private equity into infrastructure companies as the investors are again beginning to see the capital market route as a feasible means of getting an exit. This process is further aided by lower valuation expectations of the promoters. As far as debt is concerned, the liquidity crunch seems to be over and the banking system seems to be flush with funds again and that too at a lower cost. While the banks are using tighter appraisal processes to evaluate the projects and the borrowers, debt is available for good projects. With the overall improvement in global markets, the political stability in India and the general market perception that the worst is over, the future is looking good once again.

Some economists claim that if India improved its physical infrastructure the country’s entrepreneurial drive would comfortably propel it to double-digit economic growth to rival China.  Do you have any thoughts on this?

We completely agree with this observation. The movement of people and goods which is dependent upon physical infrastructure has been impaired by the lack of physical infrastructure, given the fact that the Indian economy is largely dependent upon domestic demand. Similarly, with the median Indian age being about 25 years for a population of more than a billion, access to good quality social infrastructure, such as health and education, is critical for personal development. Indians are recognized for their entrepreneurial energy and undying spirit – we have achieved a lot despite the lack of basic amenities which led to a large part of the population struggling to make ends meet. If most of the population had access to basic social and physical infrastructure, at an affordable price or as a matter of right, people would channelise their energies into more productive activities and the complexion of the country would change. A significant increase in the economic growth at the country level would be a natural outcome of this process.

Vikesh Mehta, Partner, Specialist
Advisory Services, Grant Thornton
India
Tel +91 11 4278 7037
vikesh.metha@wcgt.in

Amit Jain,  Director – Government &
Infrastructure Services, Grant Thornton
India
Tel +91 11 4278 7097
amit.jain@wcgt.in