india business frontier september 2008

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Infrastructure Development: Indias Achilles heel?Zanele Hlatshwayo, Business Analyst at Frontier Advisory

India Business Frontier

September 2008

The Indian Infrastructure Investment

Conference takes place from the 6th

to the 8th of October 2008 in Mumbai.

The Indian government has committed

to spend around US$ 500 billion in

the next ve years on infrastructure

development domestically. In this

Infrastructure Special we take a

look at Indian Infrastructure and the

opportunities for companies wanting

to enter this sector.

Assertions that India is open for

business have come as a contrast to

wide-spread investor frustrations at

the slow pace of improvements to its

infrastructure.

Years of underinvestment in

infrastructure networks has impacted

signicantly on Indias economic and

social growth. According to ofcial

statistics from the Indian Finance

Ministry, the countrys GDP growth could

be several percentage points higher.

The Indian economy is currently

expanding rapidly, with a growth rate

of 8.5% in 2007. This has in turn

boosted growth in domestic disposable

income, allowing consumers to demand

good infrastructure services such as

an efcient public transport system,

adequate power and water supply and a

good road network.

Analysts have warned that Indias

steady economic growth may widen its

infrastructure gap particularly in light

of the countrys signicant increase in

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Contents:

Poor Infrastructure: Indias Achilles heel?

..................................................................1-4

India Inc in Africa........................................5

A look at Indias Infrastructure

Sector.....................................................6-10

Frontier Advisory Prole..........................11

2008 Copyright Frontier Advisory (Pty) Ltd. All Rights Reserved

Research & Strategy in and beyond emerging markets

India Frontier Advisory


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2008 Copyright Frontier Advisory (Pty) Ltd. All Rights Reserved2


September 2008

urbanisation. The IMF estimates that Indias three largest cities are all expected to

grow at 20% per annum until 2015.

Indias Real GDP growth, percentage (2000-2008)

Source: International Monetary Fund

In response to Indias rapid economic growth, the government is increasingly

engaging the private sector in the provision of infrastructure construction and

services.The countrys immaturity in private-sector involvement can in part be

attributed to its historical issues with concession commitments and poor governance

practices. As a consequence, this limited the degree of interest from international

investors.

However, the government has now made signicant reforms in the regulatory

framework for infrastructure, by lifting caps on foreign investment and reforms

in the approval processes. As a result of these and other government initiatives,

investments in infrastructure have increased and the sector is now attracting attention

from the international investor community.

As such, Indian infrastructure funds are being established at a rapid pace. In 2007

these funds were responsible for approximately 80 deals, totalling around US$ 1.6

billion across key infrastructure sectors.

To date, foreign players are primarily investing in the transport (airports and ports) and

telecoms sectors.For example,in 2006 the Indian government awarded South African

airports company ACSA (in partnership with Bidvest International Group and GVK)

a 30-year contract for the modernisation and maintenance of Mumbai International

Airport.

Given Indias complex bureaucratic structure, local partnerships are important and

international investors are generally either buying stakes in local companies that own

infrastructure or setting up partnerships with local developers and investors.

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2000 2001 2002 2003 2004 2005 2006 2007 2008 (f)


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September 2008

Bottlenecks in Infrastructure Development

The bottlenecks in transport and energy infrastructure and the sluggish pace of

investment in these sectors over the past few decades has impacted the transport-

intensive industrial sectors and impeded the development of an industrial base.

India has a desperate need for the latter as a strong industrial base will help curb itsunemployment rate.Similarly the building of infrastructure has the potential to create

positive employment effects in the construction industry.

Indias principal advantage as a developing economy a large, low-cost labour

force is being undermined by a combination of inexible labour laws and low-

quality physical and social infrastructure. Indian manufacturing, despite pockets of

excellence, is on the whole struggling to become competitive.

Annual Inbound FDI Flows China vs India (USD bn)

Source: Deutsche Bank 2008

The countrys export trade currently amounts to 1.5% of global trade, and is expected

to grow to 1.9% in 2011. This contrasts with Chinas 7.7% of global trade, which is

projected to grow to 10.8% by 2011.

To meet the economic growth target of 9% laid down by the government in its 11th

ve-year plan (FYP) effective from 2007, signicant investments will be needed to

ease these and many other infrastructure bottlenecks. The government has estimated

the required expenditure at around US$ 320 billion by 2012 and hopes that about

40% of this will come from the private sector.

Nevertheless economists argue that the shallow long-term corporate debt market, the

perceived lack of bankable infrastructure projects and ideological/political opposition

to privatisation will leave the government shouldering far more than 60% of the

nancial burden.

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USDbn

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September 2008

Planned investment in infrastructure in India until 2012 (11th FYP)

Source: Government of India, Department of Commerce 2008

A further constraint to a more rapid development of Indias infrastructure is the fact

that in terms of infrastructure planning, the balance of power is gradually changing

from the dominance of the central government to the 28 states and seven territories.

The impact of this is that there has been a trend in decentralisation that has resulted

in complex regional bureaucratic systems which has slowed down the process of

infrastructure development. Until recently, the national government did arguably little

to pressure the federal state authorities to promote infrastructure projects in their

respective states.

Conclusion

Poor infrastructure is clearly Indias Achilles heel. But it is also the area that is

receiving the most attention from policymakers and one that offers signicant

opportunities to private investors, both domestic and foreign.

Improving Indias infrastructure will drive economic growth, will provide opportunities

to reduce the countrys unemployment rate, boost domestic consumption, lower

operating costs within the country and stimulate exports.

On the other hand if Indias infrastructure development continues to lag behind its

competitors particularly China, foreign investment could stall and development will be

focused solely on services industries such as IT outsourcing.

Failure to make more rapid progress in developing Indias infrastructure, whether

ports, rural roads, power plants or mass transit systems, will cost the Congress-led

coalition any realistic chance of securing not just its objective of double-digit growth

by the end of the ve-year plan, but also several other development goals.

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Energysector

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adinfrastructure

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ayinfrastructure

Water

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USDbn


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September 2008

KenyaIndian company to invest US$500 mnEssar Global Ltd is set to investUS$ 500 mn in Kenyas newestmobile phone service operator,Econet Wireless Kenya Ltd,over the next two years. Recent

comparative statistics on theEast African Community showthat Kenya has the highestnumber of mobile phone usersin the region. This is Essarsrst move into sub-SaharanAfrica and could pave the wayfor future investments intoKenya and the rest of Africa.

MozambiqueBPCL invests US$ 75 mn in MozambiqueBharat PetroResources (BPRL) has spent US$75 mn in order to purchase a 10% stake in aMozambican oil block. BPRL has gone on tostate that the closing of the transaction under theagreement is subject to regulatory approvals of theMozambique government.

Indian Railways to transport coal inMozambiqueRICON, which is a joint venture between IRCONand RITES two of Indias leading Public SectorUndertakings (PSU), has been given a 25 year

concession to rehabilitate, operate and upgrade an850km long rail line in Central Mozambique whichwill also include the Beira Port. The upgrading ofthe rail line is required to ensure the transportationof coal. The improvement will cost around US$ 260mn whilst the rehabilitation and operation of theline will cost US$ 180 mn.

EgyptTata and Essar vie for steel dealThe Egyptian government is considering TataSteel, Indias largest steel producer, and EssarSteel Holdings for a US$ 3 bn steel and billetplant which would focus on exporting to thesubcontinent. The two Indian companies areamong seven global rms who have made it tothe nal round of bidding.

South AfricaCarborundum buys 51% in South Africas FoskorZirconiaIndian abrasives maker Carborundum Universal Ltd hasacquired a 51% stake in South Africas Foskor ZirconiaProprietary Ltd for an undisclosed sum. Foskor Zirconia is

the third-largest producer of Zirconia in the world.

EthiopiaIndian group to invest insugar and paperThe Chadha Group, an Indianconglomerate, will invest a totalof US$ 190 mn into the creationof a sugarcane plantation inaddition to facilities for theproduction of sugar, paperand ethanol. The company isplanning to start the plantationof sugarcane on 100,000hectares of land in West Shoaof Oromia Regional State.

India Inc in Africa

Frontier Advisory tracks Indias commercial movements in Africa. This section provides an overview of key investments in thelast two months.


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September 2008

A look at Indias Infrastructure SectorsZanele Hlatshwayo, Business Analyst at Frontier Advisory

As mentioned in the previous article,

the inadequacy of Indias transport

infrastructure, in both quality and quantity

terms, is one of the biggest curbs oneconomic growth in the country. The

economic losses from congestion and poor

roads alone are estimated to be as high as

US$ 6 billion a year.

India has made considerable progress

in the past 10 years in attracting private

investment into infrastructure: rst in

telecommunications, then in ports and

roads, and most recently in airports andcontainer freight.

But progress elsewhere is considerably

slow. Moreover the private sector is unlikely

ever to be a realistic source of funds for the

investment needed in vital areas such as

rural roads and irrigation.

Roads

National highways in India currently carry

about 40% of the countrys total trafc and

Gridlock cripples cities such as Bangalore,

Mumbai and Gurgaon. Going forward, the

increase in road trafc is expected to rise up

to 2015 by 15% per year on average.

For this reason, the Indian governmenthas launched the National Highway

Development Programme (NHDP) which

provides for a total investment volume of

around Rs 2.3 trillion (US$ 55 billion) up to

2015.

The most important project is the upgrade

of the Golden Quadrilateral which will

signicantly improve the highway linking

Indias four main business centres: Delhi,Mumbai, Chennai and Kolkata.

The government is relying on the support

of private investors both locally and

internationally for nancing the NHDP and

other road construction projects.

Nevertheless the national road-building

programme has slowed down in the past

two years, falling to just over 800km 2007

from 2,500km in 2005, despite soaring sales

of trucks and cars.


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September 2008

India Road Networks 2006

Source: Department of Road Transport & Highways, India

Railways

In terms of length of railway network, India has one of the most extensive railway

networks in the world with about 63,000km of track. This roughly matches Chinas

railway network. However, investment and maintenance of Indias rail infrastructurehas been insufcient in recent decades.

Moreover the capacity bottlenecks on heavy travelled railway routes combined with

the system-related advantages of other transport modes means that private investors

play a small role in nancing the necessary railway infrastructure than is the case with

other modes of transport.

Nevertheless the Indian government has allocated around Rs 2.3 trillion (US$ 55

billion) to railway development projects. A new dedicated 1,469km freight line is under

construction from Jawaharlal Nehru Port, near Mumbai, to Dari, near Delhi. Work on

the 1,469km line will cost Rs114 billion (US$ 2.77 billion).

The question remains whether the new corridors will be built fast enough to handle

the surge in trafc growth and rail liberalisation will be effective enough, given that

state-owned Concur, which is jointly owned by Indian Railways and the central

government, will still haul the trains.

Increase in Indian railway trafc (2001-2011)

Source: Indian Ministery of Railways

Length (km) Share %

65,950 2

128,000 4

470,000 14

2,650 80

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Passengers (bn) Freight ( m t onnes)


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September 2008

Seaports

India has twelve major ports and around 190 small ports along its 7,500km coastline.

Overall the ports handle 95% of Indias trade in goods by volume and 70% by value.

The Indian government acknowledges that in order to reach its target of more rapidindustrialisation, as well as achieving global status as a top player in world trade, the

country must expand its port capacities. As a consequence of this, the government is

aggressively pursuing its plans to expand and modernise ports across the country.

The projects are mostly being implemented through private-public partnerships

(PPPs) and as such, there has been a signicant increase in private investment in

port terminals. Nevertheless, government interference has been cited as a major

concern for international private investors looking to invest in Indian ports.

Composition of main Indian port trafc (2006 - 2007)

Source: Indian Ports Association

Airports

Air trafc in India is set to boom over the next ve years. Passenger trafc is expected

to increase by 15% per year and cargo trafc by 11% per year on average until 2015.

The Centre for Asia-Pacic Aviation, a consultancy, predicts that domestic trafc will

grow 25-30% per year until 2010, with international trafc growth at 15%, taking the

overall market to more than 100 million passengers per annum.

The trend towards deregulation of the Indian air transport market is likely to continue

thus dismantling the remaining market entry barriers for private airlines in cross-

border trafc. The Indian government is responding to the expectations of higher air

trafc by investing in the modernisation of existing airports as well as the construction

of new ones. In 2008, the government announced that 35 new airports will be in

operation by 2009.

Similar to seaports, the majority of airport infrastructure projects in India are nanced

through PPPs. The public funds needed for these projects are estimated at Rs 400

billion (US$ 9.5 billion) up to 2010.


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September 2008

Expansion of Indian air trafc (2002-2012)

Source: Airports Authority of India

Telecoms

As the telecoms sector shows, where private capital and management disciplines

have been introduced the results have been remarkable. Indian telecommunications

has become one of the fastest-growing telecommunications markets in the world.

The industry added more than 5 million subscribers a month on average during

2007 and is expected to have 575 million within ve years. It has moved from being

a country with one of the most expensive tariff rates in the world to one with the

cheapest.

Energy

As industry expands and rising incomes create greater power demand from

consumers, energy consumption will steadily grow.

With about 70% of Indias population is based in rural areas much of which is

without electricity per capita energy consumption was just 594 kilowatts in 2003,

according to the UN Development Programme, against 14,057 kW in the US.

The main reason for the supply bottlenecks is the previous shortage of investment in

power stations and the grid which failed to keep pace with the increase in demand.

In response to the power-supply problems, the Indian government has launched a

series of development programmes which include modernising power stations and

building new facilities.

The 11th FYP calls for an investment volume of Rs 10.3 trillion (US$ 245 billion). With

regards to opportunities for foreign investment, the investment climate in the Indian

energy sector is still largely prohibitive and until regulatory barriers are dismantled, the

scope for foreign investment in energy infrastructure is highly limited.

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September 2008

Moreover power remains a highly political issue in India because much electricity to

rural areas and farmers is supposed to be free.

That leaves fewer options for some state-owned power companies to operate like

incentive-driven private companies. Until that happens, the leading players in manyindustries will continue to sidestep the problem by building their own private power

stations.

Share in installed electricity generation capacity 2007 (%)

Source:Indian Ministry of Power, 2008

52.40%

34.00%

13.80%

States Central government Private sector


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September 2008

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