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 editorandy.t@peimedia.com 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, Lancophilip.b@peimedia.comthe 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 otherdavid.s@peimedia.com change the face of the countrycountries and deliver efficient and cost-senior editor: effective infrastructure assetsandy thomson+44 20 7566 5435 6. Roundtableandy.t@peimedia.comBe 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 yearscezary.p@peimedia.comovercome its infrastructure bottlenecks of age and achieve a number of newsenior writer: while at the same time reconcilinglandmarksBruno alvescompeting interests+44 20 7566 5446bruno.a@peimedia.com 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 ofalexandra.a@peimedia.com 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 5474ram.k@peimedia.com 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 machinerytian.m@peimedia.comSadek 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 Financefran.h@peimedia.com+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 5456paul.m@peimedia.com 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 explaintim.m@peimedia.com 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