infrastructure project

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Industry Research - Infrastructure Industry

Page 1 of 34 Indian Institute Of Planning & Management UGP-FW/2007-2010

INDUSRTY RESEARCH

A Report Submitted for External Assessment on

Project Topic: Opportunity analysis in Infrastructure Industry in

India.

Under The Guidance Of

Mr. Sarjit Singh Yadav, GM Rathi Bars LTD

NEW DELHI

STUDENT NAME: ISHMEET SINGH KOHLI

BATCH: UGP FW 2007-2010/ PGP FW 2008-2010

Ph.: 9999971855

EMAIL: [email protected]
mailto:[email protected]:[email protected]:[email protected]


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INDEX

S.No . Contents Page No.

1. Abstract 4

2. Introduction 5

3. Urban\Rural Scenario 5

4. Cost Factor 6

5. Classification of Indian Infrastructure 9

6. Govt Initiatives 17

7.Opportunity Analysis of Indian Infrastructure 21

8. Challenges to enter the Indian Market 28

9. Building a sustainable future in India 32

10. Concluding thoughts 33

11. Bibliography 34


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Abstract

The infrastructure industry in the recent past has shown tremendous growth, in tandem with the

growth of the Indian economy and it will not be wrong to say that both the industrial growth and

the economic growth are interdependent. The report highlights the performance of the Indian

Economy with specific reference to its performance during the last year. This performance led to

the growth of Infrastructure sector and also, this performance was due to the growth of the

infrastructure sector in India. This also includes the opportunities this sector presents to the

companies working within the framework of this industry. The infrastructure sector is then

detailed with insights into the key segments for urban infrastructure industry such as; roads,

ports, airports, SEZs, real estate, as to how they are structured, what are the various initiatives

taken by the government for the development of this sector further.

The industrial infrastructure activities mostly in the fields of pipelines and turn key industrial

units in addition to some works in the roads and highways sector. The strategies suggested are

generic and thus can be adapted by organizations having similar scope and activities within the

same industry.


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Introduction

A nations infrastructure develo pment plays a significant role in its economic growth. A fast

growing economy warrants an even faster development of infrastructure. Any discussion about

Indias infrastructure has to briefly cover the planning carried out for the countrys economic

growth, since Independence.

India is the worlds largest democracy in terms of population, with Indias Central Statistical

Organization estimating a population of 1,150 million people as at March 31, 2010. According to

the World Bank, India was the eleventh largest economy in the world in the year ended March

31, 2010, with a GDP in nominal terms estimated to be US$ 1242 billion.

The Rural/Urban Scenario

Today, the rural population accounts for nearly 70 per cent of the total population and nearly half

of them still live in poverty and illiteracy. How good is the rural infrastructure? The latest report

of the National Sample Survey Organization on village facilities is a revelation in itself. To quote

from the report, One fourth of our villages do not have electricity; only 18 per cent of them get

tap water; 54 per cent of them are more than 5 km away from the nearest health center; one third

of them do not have pre- primary schools and 78 per cent do not have post offices! Yes, India

still lives in its villages.

The cities shelter around 30 per cent of the population who contribute to the economic growth.

However, the most vital part of economic growth, which is infrastructure, hardly matched the

demands of even this 30 per cent of urban dwellers, spreading chaos at the slightest provocation

with the danger of turning the clock backwards.


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The Chinese tales

The Chinese success stories are told and retold by many. Can India set her standards by looking

at China? Can one draw a parallel between those mega cities with the Indian ones, or its

infrastructure development for that matter? It is debatable. However, what can be compared is

the Chinese commitment. Look at their endeavors in making the Expressways. According to a

recent newspaper report, when India completed 6000 km of her Expressways in six years, China

had done 40,000 km within that time. Even today the Indian government endlessly debates the

privatization of airports. At least some of the analysts perceive a damaging drag on the

economy due to problems connected to infrastructure. Growth potential is dependent on the

quality of performance of infrastructure to a great extent - a fact the Chinese realized much

earlier than us. The fast growth of this Socialist country is extremely relevant.

The cost factor

There is a cost factor involved in developing the countrys infrastructure. Funds are required and

so is innovation. The government should allow private participation in this area. The political

class should create an environment where investors feel confident of recovering their costs and

the cost of capital. It is the countrys politics that has to decide whether only the fools should

pay for infrastructure as in the case of our power generation. Distribution has to be set up where

it has not been successful in arresting power theft and losses. The practical solution would be

allowing private players to build and manage the infrastructure and let the users pay for the costs.

One successful endeavor on this front is the model city coming up near Gandhi nagar, the capital


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of Gujarat on the Sarkhej Gandhi nagar Highway. It was being built under private

entrepreneurship - something worth emulating elsewhere in the country. This model does not

have to apply just to cities, but anything really. However, these decisions call for a strongpolitical will.

Ever since the Indian economy opened up its doors to globalization in 1991, it started realizing

the importance of building a robust infrastructure. After all, more industries in well-developed

industrial areas mean increased employment opportunities. Well-laid roads, airports and sea

ports offer faster surface/air/sea transportation. The Ministry of Civil Aviation decided to

develop 43 new airports by the end of 2010. According to Planning Commission, Indias air

cargo movements would grow at CAGR of 11.5% from 2007-08 to 2011-12. Under National

Maritime Development Program (NMDP), there are around 276 projects in the major ports for

the construction/up gradation of berths, deepening of channels, rail/road connectivity projects,

equipment up gradation/modernization schemes etc. Indian Railways ranks among the worlds

largest and busiest rail networks under single management. India has the second largest road

network in the world. The initiatives by the Government of India to encourage PPP in power

sector has led to a steady rise in the share of private companies in power generation, i.e. about

14.59% of the installed capacity. Private power generation capacity is projected to increase to

18-20% by March 2012. The value of exports is expected to cross Rs. 1,000 billion by fiscal year

2008-09. This has resulted in more number of approved SEZs in the country.

In the backdrop of this encouraging scenario, we have come out with an industry analysis of

infrastructure in India covering power, industrial and transport sectors. The report comprises

eight chapters. It discusses general overview, growth drivers of the industry, issues and


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Classification of Indian Infrastructure

The countrys core sector, comprising six key infrastructure industries, accelerated by 5.1 per cent year-on-year in April 2010, compared with 3.7 per cent in April 2009, according to the data

released by the Union Ministry of Commerce and Industry. The growth was primarily led by an

increase in the production of cement, which stood at 18.87 million tons (MT), compared to 17.36

MT during April 2009.

Electricity production grew by 6 per cent in April 2010, as against 6.7 per cent in the same

month of the previous fiscal. Finished steel production registered a growth of 4.7 per cent during

the month, against a decline of 1.3 per cent in the corresponding period of 2009. Among other

industries, production of crude petroleum rose by 5.2 per cent, as against minus 3.1 per cent,

while production of petro-products registered an increase of 5.3 per cent, as compared to a

contraction of 4.5 per cent during April 2009.

Infrastructure investment in India is set to grow dramatically. As per Union Minister for Finance,

Mr. Pranab Mukherjee, India would require to develop a rupee-denominated long-term bond

market for funding the infrastructure sector that requires an investment of around US$ 459 to

US$ 500 billion by 2012.

Further, investment in the infrastructure sector is expected to be around US$ 425.2 billion during

the Eleventh Five Year Plan (2007-12), as against US$ 191.3 billion during the Tenth Plan.

Meanwhile, private investment into the sector is also projected to increase to US$ 157.3 billion

in the Eleventh Plan, as compared to US$ 47.84 billion in the Tenth Plan. This investment is


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likely to be fulfilled through public-private-partnership (PPP) projects that are based on long-

term concessions. Clearance has been given to nine new investment proposals of around US$

1.05 billion by the State Level Single Window Clearance Authority. Out of these nine proposals,five were from the cement sector, two for setting up aluminum conductor units, and one each for

developing a petroleum coke plant and a maize processing unit.

Meanwhile, a committee on infrastructure under Prime Minister Dr. Manmohan Singh will

conduct quarterly review of development of power, road, ports, civil aviation and railways

sectors, announced the Planning Commission of India recently. Further, the cabinet committee

on infrastructure (CCI) will handle specific infrastructure cases that may require necessary policy

correction or solving issues affecting projects.

Notably, truck sales, a key indicator of goods movement, registered a growth of 74 per cent

during May 2010, as per the data released by the Indian Foundation for Transport Research and

Training (IFTRT). The increase in the demand for cargo transportation from the agricultural and

manufacturing sectors was one of the contributing factors in the increase in the truck sales.

In order to develop eco-friendly infrastructure for new cities in the Delhi-Mumbai Industrial

Corridor (DMIC), Japan-based consultants such as Nikken Sekkei, Mitsubishi and IBM Japan

would work along with DMIDC and three state governments. The project, expected to be

completed by 2018, as per Mr. Anand Sharma, Union Minister for Commerce and Industry is

by far the worlds biggest infrastructure project.


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Ports

The major ports in India handled 45.8 million tons cargo in February 2010, as compared to 45.2million tons in February 2009. The cargo growth during April-February 2010 registered an

increase of 5.5 per cent as compared to the corresponding period in the 2009 fiscal, as per data

released by the Indian Ports Association (IPA).

The annual combined capacity of the major and non-major ports in the country will be 1.5 billion

tons by 2012, stated by Minister of Shipping, Mr. G K Vasan, while speaking at the Logistics

Outsourcing Summit organized by the Confederation of Indian Industry (CII).

The Union Cabinet has given the approval to the Shipping Ministry for declaring Andaman and

Nicobar ports as major port, stated Union Minister of Shipping, Mr. G K Vasan.

The Cabinet Committee on Infrastructure (CCI) has approved a proposal to develop the fourth

container terminal at the Jawaharlal Nehru Port (JNPT), the country's busiest port, at an

estimated cost of US$ 1.44 billion. The government also cleared a proposal to build standalone

container handling facility at Mumbai port at a cost of US$ 129.6 million. The project would be

implemented within two years from the date of the award of the project.

Airports

The domestic airlines flew about 4.78 million passengers in May 2010, an increase of almost 22

per cent over the number carried in the same period in the previous year.


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The Union Minister of State for Civil Aviation, Mr. Praful Patel, stated that the country will

become the top-five civil aviation markets in the world in the next five years. India is the ninth

largest civil aviation market in the world at present. The Airports Authority of India (AAI), theagency responsible for civil aviation infrastructure, is likely to spend over US$ 1.01 billion on

the modernization of non-metro airports in the current year. Aircraft manufacturing companies,

Boeing and Airbus, remain upbeat over India's aviation growth potential. Airbus has forecast that

India will need 1,032 new aircraft worth US$ 138 billion by 2028, while Boeing has forecast that

the country will require 1,000 aircraft worth US$ 100 billion over the next two decades.

Mumbai Airport posted its highest ever monthly passenger traffic in its history in December

2009. According to Mumbai International Airport (MIAL), the Chhatrapati Shivaji International

Airport (CSIA) saw a record 2.53 million passengers in December 2009. This number is the

highest-ever passenger volume handled by the airport in its history, with the previous high

standing at 2.38 million passengers in January 2008. The government has mandated MIAL with

the task of upgrading and modernizing CSIA, which is a joint venture between the Airports

Authority of India and the GVK-SA consortium. The state-of-the-art integrated terminal, called

T3, of Indira Gandhi International Airport (IGIA) in New Delhi is the worlds third -largest, after

Dubai in the United Arab Emirates and Beijing in China, in terms of size. Once T3 starts

operations in July 2010, IGIA will become the worlds fifth -largest in terms of capacity. T3

increased the capacity of IGIA to 60 million passengers annually, from 23 million after it starts

commercial operation in July 2010.

The new Terminal 3 is a two-tier building, with the bottom floor being the arrivals area, and the

top being a departures area. This terminal has 168 check-in counters, 78 aerobridges, 30 parking


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bays, 72 immigration counters, 15 X-ray screening areas, for less waiting times, duty-free shops,

and other features. Over 90% of passengers will use this terminal when completed. This new

terminal has been completed in time for the 2010 Commonwealth Games, which are to be held inDelhi, and will be connected to Delhi by an eight-lane motorway (National Highway 8), and

the Delhi Mass Rapid Transit System. Terminal 3 will cater to 34 million passengers a year. Its

official inauguration was on July 3, 2010.

Railroads

During the first month of the 2010-11 fiscal, the Railways reported an increase of 9.69 per cent

in its total earnings at US$ 1.62 billion, as compared to US$ 1.5 billion in the same month last

fiscal. The Railways garnered US$ 459 million in total passenger earnings in April 2010,

compared to US$ 411.6 million in April 2009. According to the Department of Industrial Policy

and Promotion (DIPP), the foreign direct investment (FDI) inflow into railways related

components has been US$ 109.56 million from April 2000 to March 2010.

The Delhi Metro is a rapid transit system serving Delhi, Gurgaon and Noida in the National

Capital Region of India. The network consists of five lines with a total length of

125.67 kilometers. The metro has 107 stations of which 17 are underground. It has a combination

of elevated, at-grade and underground lines and uses both broad gauge and standard

gauge rolling stock. Delhi Metro is being built and operated by the Delhi Metro Rail Corporation

Limited (DMRC). As of April 2010, DMRC operates more than 100 trains daily between 6:00

23:00 with a frequency of 3 to 4.5 minutes. The trains have four to six coaches and the power

output is supplied by 25-kilo volt, 50 Hz AC through overhead catenary. The metro has an


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average daily ridership of over a million commuters, and has carried over a billion commuters in

seven years since its inception.

Roads

An in-principal approval for converting 10,000 km of state roads to national highways has been

given by the Empowered Group of Ministers (EGoM). It is estimated that around US$ 3.3 billion

would be required over the next five years to undertake this project. Further, the Cabinet

Committee on Infrastructure (CCI) has approved four highway projects of about US$ 543.8

million on June 10, 2010. These projects would cover states such as Gujarat, West Bengal, Bihar,

Uttar Pradesh and Madhya Pradesh. Anil Dhirubhai Ambani Group (ADAG)s flagship company

Reliance Infrastructure Ltd (R-Infra) won a US$ 197.3 million project from the National

Highways Authority of India (NHAI). It is the tenth road project it won from the NHAI. Earlier,

R-Infra won a US$ 218.3 million road project from the Gujarat government, within a week after

winning the US$ 380 million Pune-Satara Road project from the National Highway Authority of

India (NHAI). The project is to execute a 71 kilometer four-six lane corridor connecting the ports

of Mundra and Kandla in Gujarat.

Recently, the elevated expressway between Silk Board junction and Electronic City junction,

built for US$ 165.5 million, was opened to public use. A consortium comprising Soma

Enterprise Ltd, Nagarjuna Construction Company and Maytas Infra Ltd constructed the 9.985

km long elevated road project. The project, executed through a special purpose vehicle,

Bangalore Elevated Toll way Ltd, was built on a build operate transfer basis for the NHAI.


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Investments

The infrastructure sector seems to have emerged as a favorite for the private equity (PE) in 2010.According to Venture Intelligence data, so far in 2010, there have been 19 deals in this sector at

an approximate investment of US$ 1.1 billion, as compared to 14 deals with an investment of

US$ 257.5 million during the same period last year. JSW Energy (Bengal) Limited, a special

purpose vehicle (SPV) for the Bengal power and coal project, plans to invest around US$ 423.6

million in coal mine development. SembCorp Utilities, a Singapore-based company, has bought

49 per cent stake in Thermal Powertech Corporation India Ltd, a SPV and subsidiary of Gayatri

Projects Ltd, for US$ 235.1 million. An investment of around US$ 425 million has been made by

a consortium of investors led by Morgan Stanley Infrastructure Partners along with Goldman

Sachs Investment Management, General Atlantic LLC (GA), ever stone Capital, Norwest

Venture Partners and others in Asian Genco Pte (AGPL), an infrastructure company.

Larsen & Toubro (L&T), the countrys largest engineering company, will invest around US$

5.46 billion to build its thermal power business in the next five years. L&T Power, the wholly-

owned subsidiary of L&T, will have a generation capacity of 5,500 MW, including hydro power,

by 2015. Larsen and Toubro Ltd also formed a joint venture with Malaysia-based Sapura Crest

Petroleum to install pipelines and construct offshore rigs and platforms in India, the Middle East

and South East Asia. Tata Power has lined up investments of US$ 5.19 billion for its upcoming

plants in Mundra, Maithon and Jojobera over the next three years. Tata Power and Reliance

Power are coming up with UMPPs with a combined generation capacity of close to 16,000 MW.

Jindal Steel & Power, which has a production capacity of 1,000 MW, plans to add another 4,380

MW thermal power and 6,100 MW hydro power capacity in the next five years.


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Government Initiatives


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The infrastructure finance companies (IFC) are being included in the category of non-banking

finance company (NBFC) by the Reserve Bank of India (RBI). The IFCs would require a capital

adequacy ratio of 15 per cent and the similar criteria of NBFCs would be applied to IFCs as well.Further, RBI stated that at least 75 per cent of the assets of these institutions should be used in

infrastructure and their net owned funds should be US$ 64.6 million or more. While presenting

the Union Budget this year, the Finance Minister has announced the allocation of US$ 37.7

billion, around 46 per cent of the total plan outlay of US$ 81 billion for 2010-11 to infrastructure

sectors. In the last fiscal, this proportion was about 30 per cent. The Government of India has

envisaged capacity addition of 100,000 MW by 2012 to meet its mission of power to all.

Recently, a ministerial group discussing large power plants with a capacity to generate 4,000

MW of power has approved, in principle, a proviso requiring such plants that will be awarded in

the future to use local power generation equipment. The move is expected to provide a fillip to

domestic manufacturing. The decision on so-called ultra-mega power plants, or UMPPs, will

also benefit domestic power generation equipment manufacturers such as state-owned Bharat

Heavy Electricals Ltd (Bhel) and Larsen and Toubro Ltd (L&T), which has a joint venture with

Mitsubishi Heavy Industries Ltd (MHI) of Japan. At least three joint ventures, between Toshiba

Corp. of Japan and JSW Group; Ansaldo Caldaie SpA of Italy and GB Engineering Enterprises

Pvt. Ltd; and Alstom SA of France and Bharat Forge Ltd are looking to start manufacturing

power equipment in India.

Further, the government is also implementing the National Solar Mission, aimed at setting up

20,000 MW of solar power capacity by 2020. The Asian Development Bank (ADB) has

approved a financial assistance for US$ 200 million under the Assam Power Sector

Enhancement Investment Program. The project has some innovative features like franchisee-


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based distribution, off-grid electrification with renewable energy, reduction in CHG emissions

through efficiency gains. The road transport and highways ministry has proposed priority sector

status for road development, allowing private highway developers more funds from banks. Majorinfrastructure development requires a substantial influx of investment capital. The policies of the

Indian Government seek to encourage investments in domestic infrastructure from both local and

foreign private capital. The country is already a hot destination for foreign investors. As per the

World Investment Report of the UNCTAD, India was rated the second most attractive location

(after China) for global FDI in 2007. Currently, India has FDI of about US$21 billion per year,

well below the targeted US$30 billion. In order to increase FDI inflows, particularly with a view

to catalyzing investment and enhancing infrastructure, the Indian Government has introduced

significant policy reforms. For example, it now permits 100% FDI under the automatic route for

a broad range of sectors only certain post investment intimation is required. For FDI in a few

sectors, a prior approval is required, which takes round 6-8 weeks. As part of policy reforms, the

Indian Government is constantly simplifying the approval route process, including setting up

several agencies to expedite FDI approval. Further liberalization is expected as the Government

continues to emphasize infrastructure investment. In August 2008, a press report stated that

Morgan Stanley was looking to invest up to a quarter of its US$4 billion global infrastructure

fund in emerging markets, notably India and China and that in India, Morgan Stanley would

face competition from Australias Macquarie Group, JP Morgan, Goldman Sachs and Deutsche

Bank, all looking to channel foreign investors money into Indian infrastructure. While some of

this planned investment may be reduced or delayed given the current environment in the credit

markets, India is still likely to garner substantial FDI, particularly if its economy is able to

maintain a fairly strong rate of growth in the face of a global recession. From an exchange


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control perspective, India is moving towards full current account convertibility. Most revenue

transactions are freely permitted, except certain transactions like royalty, consultancy fees, etc.,

which are subject to certain limits. Capital account transactions need prior approval, exceptwhere specifically permitted. In order to promote the construction sector, the Indian Government

has relaxed some of the exchange control restrictions and is now allowing foreign nationals/

citizens to acquire immovable property in India, subject to certain conditions and procedures.

Hurdles to investment remain. Although India has a well-developed legal system, the current

legal and regulatory environment sometimes acts as an obstacle to the necessary injections of

foreign private capital into Indias infrastructure. Major infrastructure projects are governed by

the concession agreements signed between public authorities and private entities. Tariff

determination and the setting of performance standards vary somewhat by sector. In the roads

and highways sector, the ministry generally sets tolls while in major ports projects, and many

of those in electricity generation, an independent regulator will decide relevant tariffs. In the

airport sector, a new independent regulator is planned for 2009 and is likely to play a major role

in determining tariffs in concession agreements for the segment. In some instances, ministry or

regulator control over potential proceeds can act as a disincentive to the private infrastructure

developer. As is the case in many countries, there is no single regulator which formulates the

policy for all infrastructure projects. There is also no standardization in the concession

agreements across the different infrastructure sectors. As a result, the development of certain

sectors in India may be hampered due to lack of adequate and co-ordinated planning. Projects

which are approved may face difficulties if related projects are substantially delayed. One

example is Bangalores new international airport, one of the largest PPP projects to date. The

project is facing growing pains related to insufficient road and rail connections to the new


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facility, in part due to delays of expected high-speed rail and highway projects under the auspices

of other government bodies.

Opportunities Analysis of Indian Infrastructure


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Roads & Highways

Indias roads are already congested, and getting more so. Annual growth is projected at over

12% for passenger traffic and over 15% for cargo traffic. The Indian Government estimates

around US$90 billion plus investment is required over FY07- FY12 to improve the countrys

road infrastructure. Plans announced by the Government to increase investments in road

infrastructure would increase funds from around US$15 billion per year to over US$23 billion in

2011-12 (see Figure 2). The quantum of funds invested as part of these programs will

significantly exceed that invested in recent history. Such programs would be funded via a mix of

public and private initiatives.

The Indian Government, via the National Highway Development Program (NHDP), is planning

more than 200 projects in NHDP Phase III and V to be bid out, representing around 13,000km of

roads. The average project size is expected to US$150 million-US$200 million. Larger projects

are likely to reach the US$700 million- US$800 million range. About 53 projects with aggregate

length of 3000km and an estimated cost of around US$8 billion are already at the pre-

qualification stage. The procurement process favors players with good experience and sound

financial strength. The opportunities do not stop there. More than 10 states are also actively

planning the development of their highways. While the average size of these projects is smaller

than the NHDP projects, most will still be substantial, in the US$100 million- US$125 million

range. All told, more than 4,500km of state highways are likely to be awarded by the end of

2010.The Indian Government has also recognized existing infrastructure gaps and capacity

constraints in the rail system, and as a consequence plans large scale investment over the five

years from FY07-FY12. Projected investments total US$65 billion, of which 40% is expected to

be contributed by the private sector. One major PPP program is already in its initial phases. The


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Dedicated Freight Corridor project is designed to alleviate congestion on the rail routes between

Delhi and Mumbai and Delhi and Kolkata by building long-distance, cargo-only rail lines, at an

estimated cost of US$6 billion-7 billion. Other proposed initiatives include the development of manufacturing plants for rolling stock with long-term committed procurement for several years,

and the setting up of logistics parks. City metro systems are also in the pipeline. The first

corridor of the Mumbai Metro Project has already been awarded to Reliance Infrastructure and

the Government has asked the final shortlisted companies to submit detailed financial bids for

the second phase of the Mumbai Metro. Indian Railways is also looking for private partners to

help modernize railway stations to world-class levels, and for projects focused on increasing

connectivity with ports.

Ports and airports

Increasing connectivity with inland transport networks is just one of many challenges currently

facing Indias ports, which have seen massive swells in the amount of goods transported. Traffic

is estimated to reach 877 million tons by 2011-12, and containerized cargo is expected to grow at

15.5% (CAGR) over the next 7 years. Indias existing ports infrastructure is not sufficient to

handle the increased loads cargo unloading at many ports is currently inadequate, even where

ports have already been modernized. An estimated investment of around US$22 billion is

targeted for port projects in the five year period from FY07- FY12. The National Maritime

Development Program includes 276 projects, with a required investment of about US$15 billion

over the next ten years, with private investment targeted at around US$8 billion. In addition to

improving road and rail connections, projects related to port development (construction of jetties,

berths, container terminals, deepening of channels to improve draft, etc.), will provide major


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opportunities for E&C companies. Recent deregulation of the sector now permits 100% FDI, and

an independent tariff regulatory authority has been set up to facilitate projects at major ports.

Air traffic has increased rapidly in recent years, although this slowed in 2007. While a number of

Indian airlines have faced challenging market conditions in 2008, and the rate of growth is likely

to be significantly less than initially projected, Indians are still flying in much greater numbers.

Estimates made in 2007 by the Indian Governments Committee on Infrastructure suggest that

passenger traffic will grow at a CAGR of over 15% in the next 5 years. Indian manufacturers are

also looking to the skies the same source anticipates that cargo traffic will grow at over 20%

p.a. over the next five years. Even if these estimates prove somewhat optimistic, the growth

already achieved has put tremendous pressure on airport infrastructure. The Indian Government

has projected that an investment of around US$8 billion in the five year period from FY07-12

will be needed to help cope with additional demand, and private sector participation is expected

to play a key role. The private sector has already stepped up to the challenge of airport

infrastructure development in several cases, with private participation in recent years at Delhi,

Mumbai, Hyderabad, Cochin and Bangalore supplementing the efforts of the Airports Authority

of India. The Government has proposed the establishment of an Airport Economic Regulatory

Authority (AERA) to promote efficiency, competitive pricing and a customer-focused service.

State governments are also getting involved and looking to facilitate the development of new

airports. The total investment on new airports has been proposed at about US$10 billion by 2012.

Greenfield airport projects are planned in resort destinations and emerging metros such as Goa,

Pune, Navi Mumbai, Greater Noida and Kannur. Further, 35 non-metro airports are proposed for


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development. Prequalification of bidders for development of Amritsar and Udaipur airport has

already been completed, and bids for 10 non-metro airports are scheduled to be invited shortly.

As the density of airports increases in various regions, increased competition is likely to bringnew issues into focus, such as corporate performance management. Airports will look to

diversify their revenue sources through the development of city-side infrastructure. Airlines will

also be looking for new technology solutions to maximize revenues and reduce costs. MRO

(Maintenance, Repair & Overhaul) facilities could therefore also present new business

opportunities. The need for improved aviation infrastructure extends beyond the construction of

new airports existing metro airports also require significant modernization and upgrading. EPC

contractors are expected to be sought for Chennai and Kolkata airports in the immediate future.

Power

Increased manufacturing activities and a growing population are also causing a surge in power

usage. India has the fifth largest electricity grid in the world with 135 GW capacity, and the

worlds third largest transmission and distribution (T&D) network. Large investments are needed

to meet growing demand and provide universal access. The policy and regulatory framework

Is pro-investment shifting away from negotiated and guaranteed to open and market

competition. Given the increased competition, diversity, and number of opportunities, project

and collaboration risk must be more carefully assessed and managed. An investment of US$167

billion is projected for electricity projects in the five year period from FY07-FY12. The massive

number and scope of potential projects has attracted a number of new investors, lenders and

operators. All new awards are through open, competitive bidding. A rush is on to develop new


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assets, harness natural resources, and attract global finance but an industry focus and strategy is

necessary to properly tap into this opportunity. E&C companies may want to consider

Involvement in the construction of power stations and T&D networks, particularly if sustainablebuilding and generation technologies can be leveraged. The Indian Government is also looking to

encourage the generation of wind and solar power by providing generation-based incentives to

those companies who do not claim accelerated depreciation, so E&C companies with experience

in building these types of alternative energy projects may find excellent opportunities.

Public private partnerships

Funding Indias wide -ranging, US$500 billion program of infrastructure expansion over a five-

year period is likely to be beyond the means of total government funding, so policies have been

designed to facilitate private investment to the maximum level possible. If the Indian

Governments targeted level of private sector involvement and investment are met

(approximately 30%), the quantum of funding required would be around US$150 billion. The

investment achieved over the past decade by comparison. Achieving this level of investment is

ambitious. Several frameworks and plans are already in place, however, that may facilitate

reaching these goals. The PPP/PFI market in India is still at a relatively early stage. However,

over the past decade or so, there has been an increasing trend at the central as well as state

government level to use PPPs for meeting critical infrastructure gaps. The results have been quite

encouraging. Establishing a PPP is now considered to be the default option for major

infrastructure projects in sectors such as roads, railways, airports, ports and other transport

segments. First preference will be given to the PPP model, and only in cases where projects are

expected to fail to attract private sector interest will more traditional models be considered. Most


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infrastructure sectors have an overall long-term plan and program that provides guidance on the

projects that are likely to come up for development. Key policy frameworks for procurement of

projects through PPPs have also been drafted. For example, the NHDP discussed earlier in thispaper details a long-term plan for the roads and highways segment, with seven defined phases

And largely clearly identified projects (along with project costs) and an agreed timeframe. The

roads and highways segment also has a generally successful PPP model concession framework.

The NHDP is mandated to a dedicated agency that also has clearly earmarked source of funding

coming in to support the program. Almost all the other sectors have similar plans. Over the last

3-4 years, there has been a push towards expanding the scope of PPPs for the provision of urban

infrastructure through establishment of another government program for urban

Renewal across the country. This is likely to further increase the scope, scale and number of

PPPs in the country.

Not surprisingly, international interest in Indian PPPs has soared in 2008, with over 50

international players showing interest in a variety of types of projects in the first three quarters of

the year. Local players are also increasing their interest. Until recently, only a very limited

number of large domestic players were fully conversant with PPP models and had the capability

to deliver on them. However, local developers and contractors are catching up fast and domestic

capacity has increased substantially in recent months. E&C companies looking to participate

In this burgeoning segment do face certain hurdles. The typical PPP project design and

preparation process is still largely technically-oriented, with limited appreciation of the overall

financial and commercial risk issues involved. Often information distortions in the market


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Challenges to enter the Indian market

Foreign firms do not get their own infrastructure to execute projects, such as skilled manpower,

Plants & equipments and construction materials etc. They usually try to employ locally

available

Resources in order to cut costs.

Without doubt then, there is huge opportunity in the Indian infrastructure space in the short- and

medium-terms at least. The policies of the Indian Government, which have been evolving

very rapidly in recent years, continue to encourage the private sector in taking on a larger and

more diverse role from being an infrastructure builder (under a publicly financed arrangement)

to an infrastructure developer (under PPP structures which include private finance).

These developments have led to a large number of infrastructure projects open up

As opportunities for the private sector. Considering the liberal FDI guidelines, these lucrative

projects present both an opportunity and a threat to local players. In many cases, foreign players

are believed to have greater technological expertise, deeper pockets and more extensive

experience compared to domestic companies. These advantages could mean overseas companies

winning work at the expense of local players, or partnering with them. Domestic E&C

companies may therefore look at foreign entrants in the market as tough competitors or as

Strong potential partners. If most of the forecasted projects go ahead as planned, there should be

more than enough work for everyone. Wharton Business Schools 2007 analysis of Indias

construction boom pointed out that the proposed US$50 billion infrastructure spend per year in

India is nearly two and half times the current turnover of the entire existing domestic

construction industry (US$15 billion and growing fast), and that many of the major E&C

companies have massive order backlogs. Wharton also flagged talent shortages as an issue in


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foreign players as both partners and competitors. However, smaller and medium-sized

infrastructure

Construction companies and developers (such as KMC, Nagarjuna, IVRCL, Gammon, etc.) areoften happy to partner with foreign players without necessarily considering them as competitors.

The recent guidelines issued by the Indian Government for the selection of PPP developers have

also led to a slightly distorted behavior in the local marketplace. The guidelines favor

Larger players, even when the project investments and execution can be easily carried out by

mid-sized companies. This has led to situations where many of the small/medium-sized local

players

Are looking at partnering with the foreign players primarily for the purpose of getting qualified

and winning the job, rather than to actually bring in investment or expertise. It is expected that

such behavior will soon change as the guidelines become more reflective of market dynamics

and mid-sized Indian companies mature. Foreign players looking to enter into the Indian

marketplace and team with local players need to evaluate carefully the cost competitiveness of

their prospective participation. India has witnessed huge interest from a number of foreign

infrastructure companies in the past, but not many have really been able to offer a cost-

competitive proposal. Since India has evolved its own model of cost competitive delivery in

many sectors (for example, in telecoms), local players have an incentive to work with foreign

companies only if the partnering offers a competitive edge over other bidders. There have been

few such success stories so far where the foreign player has offered a particularly cost-

competitive product or service. In instances where we have seen the successful entry of foreign


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players (such as in the port sector), foreign companies have often been able to bring technology

or management advantages, or expanded reach into international markets, to supplement the

capabilities of local partners.


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Building a sustainable future in India

Whilst the need for greater infrastructure investment is clear, equally important is the need to

sustainably manage such investments. The Indian Governments success in infrastructure

provision will be measured not by the quant um of funds invested, but on how infrastructure

contributes to the achievement of Indias economic, social and environmental objectives.

Importantly, infrastructure investment should be considered as a means to an end, not an end in

itself. Challenges in infrastructure provision are not unique to India. Uncertainty, scarcity

of available funds for investment, and competing priorities present challenges to all governments

in infrastructure planning and delivery. Sustainability requires that future generations are not

compromised by the investment decisions of current generations. Sustainably managing

infrastructure through the appropriate pricing, funding and prioritization frameworks is important

to ensure the benefits that accrue from the significant investment that India is currently making

in key social and economic infrastructure are maximized. Global climate change creates further

challenges. New infrastructure must not only support social and economic goals, it must also do

so within acceptable environmental parameters. Given that Indias growth rate is likely to

continue at high levels, it is important that considerations of issues such as fuel mix, encouraging

more fuel efficient modes of transport such as rail, and the possible use of CCS technology,

come fully into discussion and are implemented whenever possible. In our view, it is imperative

that debate on the issue of sustainability in infrastructure provision is heightened and that the

challenge that it presents is effectively met. Government and infrastructure agencies will also

need to retain sufficient focus on issues of feasibility and prioritization when the primary focus

shifts to delivery. Those that do so have a unique opportunity to make a major difference in a

growing economy while enhancing their own bottom line.


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Concluding thoughts

Although it may not always be easy to navigate the plethora of views, opinions and perceptions

expressed by various local stakeholders, a vast opportunity exists for foreign contracting

companies looking to invest in Indian infrastructure. Already, a number of contractors from

Europe, Australia, China, Malaysia and Korea have made their presence felt in India. Further,

many E&C companies, particularly from Japan, Spain, France and the UK are also now

aggressively looking out for opportunities to enter India for business. Overall, the opportunities

to develop a significant business in India are extremely promising for E&C companies, if they

have carefully selected strong local partners, structured contracts sensibly to maximize tax

benefits where appropriate, and taken a long-term, sustainable perspective. Foreign companies

who do not acknowledge the opportunity in good time may miss out on a critical opportunity

to establish a long-term presence in one of the worlds largest growth markets.


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