17 January 2015 B S R and Associates Infrastructure – Growth and Opportunities Jayesh Kariya The Institute of Cost and Management Accountants

17 January 2015

B S R and Associates

Infrastructure – Growth and Opportunities

Jayesh Kariya

The Institute of Cost and Management Accountants

2© 2014 B S R and Associates, a firm of Chartered Accountants, duly registered under the Indian Partnership Act, 1932. All rights reserved.

Infrastructure a Necessity or Fantasy ?

Developing infrastructure is like

sawing trees of Green and Red

Rosses - the marvels of nature that

light up people’s lives and make

them joyfully proclaim

Its an art of fine balancing between

reaping economic benefits and

managing social needs/evils


Global Outlook


The global story around infrastructure…

Global Market

Economic

Booster

Infrastructure development is a must for economic development of the country

Ever Evolving Needs

Infrastructure is a part of Social Conscience – its needs are always evolving and ever changingInfrastructure market is a truly global market

Trade Enabler

It is a MUST for enabling global trade and connectivity

Funding Challeng

e

Joint Responsi

bility

Increased government focus and investment in infrastructure

Increased Focus

Sustainable and Green

Sustainable and Green development is the need of the day

Financing of infrastructure requires innovative solution and global funding

Its is joint responsibility of the Government and Private Players

Developing Specialist Skills and Talent is Imperative – Continuous Skill Development Holds the Key

© 2014 B S R and Associates, a firm of Chartered Accountants, duly registered under the Indian Partnership Act, 1932. All rights reserved.

…the global status of investment in Infrastructure ….

“Developing countries need new infrastructure, developed countries need rebuilt infrastructure and almost every country is struggling to finance the infrastructure it needs.”

-Prime Minister Tony Abbott, World Economic Forum, Davos, January 2014

BY 2030

$1-1.5

trillion

The World Bank indicates thatthe private sector accounts

for less than 15%

The OECD estimates US$70 trillion is needed to address the growing infrastructure gap and build the, ports, power and communications infrastructure necessary in the coming decades.

ROADS

The World Bank estimates that an additional US$1-1.5 trillion each year will be required through 2020 to meet growth targets in emerging and developing economies.

of total infrastructure investment in emerging market economies, putting signiicant pressure on already constrained government budgets. This is partly due to commercial banks withdrawing their investment in an effort to repair their own balance sheets since the global fiinancial crisis.

PORTS

POWER

COMMUNICATION

Sources: OECD, World Bank Group

The World Bank also indicate that in advanced economies, total investment from both public and private sources as a share of GDP is the lowest in 50 years.

THE NEED FOR MORE INVESTMENT IN INFRASTRUCTURE Infrastructure is critical for modern

economies. Businesses rely on roads and ports to access markets, on power stations for energy to operate, and on telecommunications to engage with their customers and remain competitive.

Accelerating urbanization in developing countries, particularly China, India, and Indonesia will require spending growth in water, power, telecommunications, and transportation infrastructure.

The OECD estimates that global air passenger traffic could double in 15 years, air freight could triple in 20 years, and port handling of maritime containers could quadruple by 2030.

For well-planned and delivered public infrastructure projects, the World Economic Forum estimates that every dollar invested will generate an economic return of between 5 and 25 per cent.


…the Pillars of Infrastructure development recognized globally

6Pillars for

Infrastructure Development

Political System and

Strong Leadership

Liberalized Policies and Regulatory Framework

Specialized Talent and Skilled work

force

Availability of funds at lower cost

and access to global capital

market

Availability of Natural

Resources

Government and Private Partnership

Development and maintaining of infrastructure is a continues process – so as the innovation around these Pillars is a Key to Success in developing quality and sustainable infrastructure


Indian Infrastructure sector


The 12th Five Year Plan envisages doubling up of investment as compared to investment planned during the 11th Five Year Plan…


… this is what is expected to happen in upcoming years

2020

$1.1

Trillion worth of investment will be attracted in India in next five years

2.5

Billion sq. mtrs. of roads will have to be paved, 20 times the capacity added in past decade

8 mn

Square feet of office space will be required to correspond the increased employment generated

90 mn

Jobs will be created across different sectors in next one decade

9Different road projects approved by Indian government worth $ 2 bn to be implemented under PPP model

Indian Railway Vision projected by Government of India


…however the sector has gone through many challenges until recently

Slow government decision

making Challenges in land acquisition

Delay in obtaining environment

clearancesRestricted access to capital

market

Economic slow down

Decline in investor

confidence

GAP between policy roll out and

its effective implementation

High interest rates

The vision and rigour of new government is set to address all of the above at earliest and the much required boost to the sector


Government Initiatives

100% FDI permitted under auto route in the power sector Affordable

Housing – Infrastructure

Status and ECB

100% FDI permitted under auto route in

setting up new industrial park

100% FDI permitted under auto route in

petro products, natural gas pipeline and petro refining

SEZ Regime relaxations

Set up of Indian Cabinet Committee to ease bottlenecks

of Infra sector

Recent Initiatives:

Increased focus on infrastructure spending and allocation

Ra-hauling existing policies and announcing new policies

Announcing mega project in partnership with other counties

Focus on Innovation, Make in India, connectivity and urbanization

Focus on foreign investment and global participation

Public- Private Partnership

…Government initiatives for boosting infra sector

Viability gap funding allowed to sectors like

telecom, oil, gas storage and irrigation

REIT and InvIT Regime rolled

out


Energy sector (1/2)

•India is the fifth largest producer and consumer of electricity in the world after US, China, Japan and Russia with a production of 1,006 terawatt hours (TWh).*

•In FY14, electricity production stood at 967 TWh. Over FY07–14, electricity production expanded at a compound annual growth rate (CAGR) of 5.6%

•The Planning Commission’s 12th Plan projects that total domestic energy production would reach 669.6 million tonnes of oil equivalent (MTOE) by 2016–17 and 844 MTOE by 2021–22.

•The industry has attracted FDI worth US$ 9,269.45 million during the period April 2000 to August 2014.

•100% FDI permitted under automatic route in petroleum products, natural gas pipeline and petroleum refining

•The new government is working a number of initiatives to increase the supply of domestic coal, promoting renewables in much larger scale to put them at the center of the fuel basket and undertaking distribution reforms.

•Plans to invest Rs 2 trillion (US$ 32.61 billion) in solar and wind power projects in the deserts to compensate for India’s depleting fossil fuel reserves.

*Source – Indian Brand Equity Foundation (IBEF) sectorial report October 2014


Energy sector (2/2)

• Plans to accelerate wind energy generation by adding an ambitious 10,000 MW every year, or five times the total new capacity that came up in the last fiscal, in order to reduce India's dependence on costly energy imports

• The Ministry of Power has sent its proposal for the addition of 76,000 MW of power capacity in the 12th Five Year plan (2012-17), to the Planning Commission. The Ministry has set a target of adding 93,000 MW in the 13th Five Year Plan (2017-2022).

• It is also revisiting the Electricity Act, which needs changes to get private sector interest back into this key sector.

• Neyveli Lignite Corporation (NLC), as part of its entry into green energy generation, has lined up renewable energy projects worth Rs 500 crore (US$ 81.51 million) to set up wind and solar energy projects of 80 MW in India.



Civil Aviation sector

• India has a vision of becoming the third largest aviation market by 2020 and is expected to be the largest by 2030.*

• The Indian civil aviation industry is among the top 10 in the world with the an estimated value of USD 16 billion.

• The next generation of aviation growth in India will be triggered by regional airports

• The Government of India has approved the construction of five budget airports to improve regional connectivity and work on them will start from FY 2015 -16.

• Plans to start development of the five no-frills airports and award management contracts of four airports to private operators in FY 2015.

• Plans to upgrade the Jaipur and Jodhpur airports. It plans to extend the runway of Jaipur airport with Cat-II approach lighting system and allocate land to the Jodhpur airport for the upgradation.

• There are going to be interesting PPP opportunities for investors in the new greenfield airports at Navi Mumbai and Goa (MOPA) that are going to come to the market shortly.



Railway sector

• Monopolistic sector with the least private sector participation

• The new Government considers railways as the ‘growth engine’ of the country.*

• Process of transformation of railway sector with increased private sector participation and more liberal FDI in railway projects started

• Upto 100% FDI allowed under automatic route in some railway operations like freight corridor, high speed train, port and mining connectivity projects.

• Upto 100% FDI allowed under automatic route in most of the rail projects like gauge conversion, construction and doubling of new lines and maintenance under PPP project.

• Recently, it signed MoUs with Japan and China, for obtaining technical know-how, designs, components for high speed railway lines and bullet trains.

• Indian Railways is currently working on a target to attract Rs 6,050 crore in rail PPP projects in the FY 2014-15.#

• Ambitious rail projects include – High speed rail lines between Mumbai and Ahmedabad and from Delhi to Patna

* KPMG Infrastructure 100 – World Markets Report# Source – Indian Brand Equity Foundation (IBEF) sectorial report October 2014


Roads and highway sector

• The budget has set aside US$ 7 billion for building 8,000 kilometers of new roads.

• NHAI plans to award road project on an EPC basis to start with and at the same time address issues to kick start the stalled projects.

• As part of India–Japan Strategic and Global Partnership, the two sides launched a Special Economic Partnership Initiative (SEPI), including the Delhi–Mumbai Industrial Corridor (DMIC) project.

• Plans to set up a finance corporation with an amount of Rs 1 trillion (US$ 16.34 billion), in collaboration with Japanese investors, to fund projects in the roads segment. The Japanese partners are expected to have a 26 per cent stake with assured returns of nine per cent, according to an official source.

• Government approved road projects worth about Rs 40K crore (US$ 6.53 billion), including Rs 20K crore (US$ 3.26 billion) highway projects in J&K

• Plans to develop a total of 66,117 km of roads under different programmes


Social Infrastructure sector

Health•It has become India's one of the largest sector with significant investment in recent years

•Largely dominated by private sector and its share to grow from 66% in 2005 to 81% by 2015

•Major investments witnessed form overseas private equity and sovereign funds

•FDI in Insurance sector increased – poised to provide more boost to private health insurance industry

•National Health Assurance Mission - Provide all citizens with free drugs and diagnostic treatment, as well as insurance cover to treat serious ailments

Education

•Identified as the MOST critical area for development

•Education is a “Sun Rise” sector and will witness major growth by 2020

•Government introduces new education system of “credit transfer scheme”

•International collaboration for higher education and setting up new technology institutes


Smart cities…….

Several definitions of smart cities exist which include: o “Instrumented, interconnected and intelligent cities”o Cities using smart computing technologies to make the critical

infrastructure components and services which include city administration, real estate, education, transportation etc.• Ministry of Urban Development recently met the World Bank and the National

Institute of Urban Affairs to discuss the proposal regarding development of 100 new towns and smart cities

• 3 smart cities already being developed as model cities through private sector participation - Kochi Smart City, Gujarat International Finance Tec-City and Lavasa in Maharashtra

• 7 smart cities are under development by states with foreign aid as part of the Delhi-Mumbai Industrial Corridor (DMIC). Work on two of these is expected to start in soon

• 24 new cities to be developed under the DMIC till 2040

• 3 new smart cities to be developed in the Chennai-Bengaluru Industrial Corridor region, viz., Ponneri in Tamil Nadu, Krishnapatnam in Andhra Pradesh and Tumkur in Karnataka proposed to be completed (FM’s budget speech)

• Government keen to seek support from other countries (Singapore, France etc) to achieve this.


• Affordable housing as defined by (i) Ministry of Housing and Urban Poverty Alleviation, (ii) National Housing Bank (‘NHB’) and under (iii) Income-Tax Act is mainly dependent on

a)income of dwellers being Economically Weaker Sections (EWS) and Low Income Group (LIG) and

b)carpet area of dwelling unit (upto 300 sq ft for EWS and upto 600 sq ft for LIG).

• Shift of focus on Affordable Housing sector:

• The Finance Bill with the objective of ‘Housing For All by 2022’ has taken several measures to promote affordable housing:

- Relaxations in FDI conditions for investment in projects catering to affordable housing

- Allocations towards Rural Housing Fund INR 8,000 crore administered by NHB

- Mission on Low Cost Affordable Housing to be set-up under anchorage of NHB with an allocation of INR 4,000 crore.

Affordable housing……..

*Source: NHB Report on Trend & Progress of Housing in India (2012)


Industrial corridors…….

• Government to set up National Industrial Corridor Authority (NICA) in Pune, Maharashtra with an allocations of INR 100 crore

• Amongst others, the Delhi-Mumbai Industrial Corridor has been the focus of government since long with its approval being granted in 2007

• Industrial Corridors will pave way for industrial cities viz “smart cities”

• Expected to create employment for majority of local population directly or indirectly.

IMPACT OF INDUSTRIAL CORRIDORS

Various factors such as new smart cities, growing commercial complexes, employment, and migration and infrastructure development around these industrial corridors will result into improved standard of living.

IMPACT OF INDUSTRIAL CORRIDORS

Various factors such as new smart cities, growing commercial complexes, employment, and migration and infrastructure development around these industrial corridors will result into improved standard of living.

Industrial Corridors in India

Objectives of Industrial Corridors


Indian REIT/InvIT – a game changer for commercial /Infra assets….

InvestmentManagement agreement

SponsorSponsor

Investors

REIT

Investment Manager

Investment Manager

Sponsor Contribution

units

Real Estate Assets

Real Estate Assets

Principal Valuer

Principal Valuer

Property valuation

Trustee

Real Estate Assets

Real Estate Assets

SPV

Broad Framework:

• Sponsor to set-up a Trust and appoint Trustee – 3 co-sponsors permissible

• Trust to be registered as REIT/InvIT with SEBI

• Trustee to appoint Manager

• Manager to appoint Principal Valuer

• REIT/InvIT to hold assets worth INR 500 crore

• REIT to undertake IPO within 18 months of registration with SEBI, and list all its units

• REIT/InvIT to make investment in real estate assets/infra assets to the extent of 80% - investment in minimum 2 projects – 60% cap per project

• Governance, Audit, valuation, disclosures, etc. prescribed

• REIT/InvIT to generate and distribute 90% net distributable cash flow to its unit holders

• Unit holders can transfer units of REIT/InvIT

• Provisions relating to delisting of REIT/InvIT


…..with the initiatives of new Government, positive environment set for Infra sector…..

Positive hopes of attracting huge Foreign Direct Investments

from across the globe

New government armed with decisive mandate, has initiated

number of measures to kick start investments

Positive market sentiments reflected

in the increasing market value of the

infrastructure companies

Significant number of M&A transactions

have been and are being envisaged by

strategic and financial investors, domestic and international

Brought significant improvement in the investor sentimentImproved ratings to the Indian sovereign

internationally as a jurisdiction for doing

business and making strategic investments


…the landscape of opportunities has expanded beyond imagination….

Increased global activities and trade Inclusive wide spread growth of the economy Increased infrastructure development Increase in job opportunities and purchasing power Increased urbanisation Impact on social and economic environment

Overall Impact on the economy

• Increased employment opportunities

• Increased certification opportunities

• Consulting opportunities for newer projects

• Consultancy Services Opportunities

• Inputs on Project viability

• Engagement during feasibility

• Engagement in valuation assignments

• Engagement in process efficiency assignments

• Cost optimisation assignments

• Involvement in increased M & A activities

New Business Opportunities for

Consulting professionals


…the landscape of opportunities has expanded beyond imagination….

• Governance, Risk and Compliances

• Sustainability Advisory

• Involvement in Project monitoring

• Governance and

• Increased involvement at Bidding Stage

• Independent Directors Role

• Involvement in Contractual Litigation and Arbitration

• Become a global player

• Tie-ups, networking and outsourcing arrangement

New Business Opportunities for

Consulting professionals


Time to rejuvenate and act with fresh energy

Gauge new opportunities and

areas requiring services

Expand the practice by

offerings multiple services under one

roof

Become a trusted and reputed brand name in consulting

profession

0 5 10Continuing the

journey

Continuous

Evolution

Continuously evolve strategiesChallenge yourself

Innovate and improve

1

2 3

Developing Fresh VisionRejuvenating the Practice

Design the Path Ahead

Implement action plans Act with fresh thinking and

energy

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Jayesh Kariya

Partner - Global International Corporate TaxTel: +91 22 3090 2080e-Mail: [email protected]

Documents

17 January 2015 B S R and Associates Infrastructure – Growth and Opportunities Jayesh Kariya The Institute of Cost and Management Accountants