Injecting finance into infrastructure: Key to a shining India

Saturday, January 03, 2009 | Posted by: Grant Thornton
Categories: | Tags: India, finance, investment, India Watch, Glenn Stone, infrastructure, South Asia Group, deals

India’s infrastructure problems have been widely reported. Airports are congested, railways are crowded, ports are clogged. Electricity shortages are common and a public healthcare system is practically non existent.

India’s challenge is not only to improve its existing infrastructure, but also to build new infrastructure to keep up with its US$1 trillion economy, which is growing at 8.8 percent pa (2003-2007), and its population of more than 1 billion which is growing at 1.6 percent pa or 16 million people every year. 
 
Recognising that good infrastructure is a vital pre-requisite to keep up with the demands of India’s growing economy and population, India’s government is working to meet the challenge at great effort and cost.  According to official estimates from the Indian Finance Ministry (IFM), the country’s GDP growth could be 2 percentage points higher but for the shortcomings in infrastructure. Hence, infrastructure development has been awarded key priority in the 11th Five-Year-Plan for the years 2007-2012.

The Prime Minister’s Committee on Infrastructure, states that the projected investment requirement for infrastructure development during the eleventh plan period (2007-2012) is $500 billion, of which 30% is expected to come from the private sector. By 2012 the Government expects Infrastructure investment to equal 9% of GDP, compared with 5% in 2007.  The overall investment requirement is anticipated to go up to $1.5 trillion in the twelfth plan period (2012-2017).

The credit crunch and the Infrastructure Industry

The infrastructure industry is expected to play an important counter cyclical role in the current economic situation. The development of India’s infrastructure is seen as key to the containment of the country’s GDP growth rate as it is the main beneficiary of government spending according to the 2008 budget.

While the Indian government has plans to set up a substantial push in infrastructure over the next 5 years, the current economic climate is playing an important role. There are now a number of key issues impacting current and future projects, such as: execution delays caused by increased costs in key commodities, higher borrowing costs, delayed or postponed payments due cost overruns and land acquisition payments.

There has also been a slowdown in new order flow, for 3 main reasons. Firstly, the general elections scheduled for May has stopped the government making promises in terms of infrastructure developments. Secondly, the costs of financing being higher than the returns expected have delayed financial closures. Thirdly, due to high inflation, the government’s resources are diverted towards inflation control, leading to a curtailment in infrastructure investments in the medium term.

Overcoming the issues

The key players in the infrastructure industry have thus adopted various strategies to minimize the effect of the turmoil on their earnings and profitability.

Bridging portfolio gaps: Companies are diversifying into sub-segments and building capabilities across a wide spectrum of activities to capitalize on opportunities in the entire universe of the infrastructure industry.

Restructuring: It has been observed that companies are restructuring their business organization, to sharpen operational focus on each business line.

Conclusion

Thus ‘Cautiousness & Consciousness’ have become the catchwords for both investors as well as developers. Such events are expected to increase the risk perception of the investors who might now put prospective future investments on hold/back foot.

From the infrastructure perspective, the next few quarters are expected to be difficult for fund raising and the system may not be able to cope with big ticket debt deals due to the liquidity crunch and the consequent inability of banks and institutions to take long term positions.

However, lenders who actively lend to infrastructure projects recognize that this is a long term business which generally gets an impetus from the Indian Government in times of recession in the economy. This may be in the form of increased government spending, introduction of new projects, fiscal incentives and increased liquidity in the banking system for such projects.

In addition the Ministry of Finance is also providing support in the form of viability gap funding and funding to project development costs including initial feasibility studies. 

This should see India’s burgeoning infrastructure sector power along and continue the remarkable growth story.

Glenn Stone
Partner and Head of South Asia Group Government and Infrastructure Advisory Services
For Grant Thornton UK LLP