Depending on who you talk to, India needs to invest anywhere between US$300bn and US$450bn on infrastructure development over the next five years. And staggering though these amounts are, bankers believe it will not be difficult to finance given the level of interest from the government and private sector.
Infrastructure – or the lack thereof – is the single biggest constraint on India maintaining its impressive 8%-plus economic growth rate. Poor infrastructure is said to drain as much as 1.5% to 2% off Indian’s GDP growth every year, making it an albatross around the Indian economy’s neck.
And even though poor infrastructure has not (so far) proven to be a deterrent to foreign investment in India, few believe such aggressive investment levels can be sustained if the country’s infrastructure needs are not met. These needs span the gamut from roads, railways and airports, to power and water supplies.
India cannot hope to maintain a double digit growth rate if it does not address its infrastructure problems, which poses a serious impediment to productivity. Poor infrastructure is eroding India’s competitiveness and hurting the growth of labour-intensive enterprises, particularly export-oriented manufacturing, which has the potential to absorb India’s fast-growing working population.
With India on the road towards more inclusive economic growth, one that would encompass a far greater percentage of the population, it is vital that measures be taken to beef up infrastructure.
The good news is that infrastructure development is being taken more seriously than ever before. “There’s never really been any master plan or design for infrastructure development and financing. Now, though there has been a unanimous recognition of the importance of it and it is a top priority,” says Sanjay Nayar, CEO for Citigroup in India.
“Everyone realizes that the dream run the Indian economy has had over the past four years can quickly unwind if we don’t do anything about infrastructure,” said S Nanda Kumar, who covers the sector for Fitch Ratings in the southern Indian city of Chennai.
The most important step so far has been the Indian government’s recognition that it needs the private sector to finance infrastructure projects. Even though it took quite a while to get the dynamic going, the Indian government has been encouraging the private sector in many ways, according to Hemant Kanoria, vice chairman and managing director of SREI International Finance. The government has paved the way for successful public-private partnerships in several areas, and it has also facilitated the possibility of some infrastructure projects being financed entirely by the private sector.
“We are on the right track and the most important thing is that both the government and the people have realized the critical need for proper infrastructure,” he said.
While different sectors are at different stages of development, the most prominent area and one in which the greatest strides have been made is the power sector. India’s power needs are massive and it has taken about 15 years of trial and error for the sector’s development to finally get on the right track, largely thanks to government reforms over the past few years.
Beginning with the Electricity Act of 2003, which delicenced generation, liberalized the power distribution business and allowed private sector power companies to engage in the business of power trading, the Indian government has ensured that power is an area that the private sector would be keen to finance.
The government has also done much of the groundwork necessary to make power projects, which range from the modest to the ambitious ultra-mega, financially viable undertakings. The government is, among other things, providing clearances and links for the necessary coal and fuel, and governmental agency Power Finance Corporation (PFC) is providing technical, financial and managerial support to the power sector, thereby making power a more credible area for private investments.
Another area where good strides have been taken is in roads, and like power, the sector requires a lot of investment fast, since most of the country is still rural, and linkages are important.
The concept of a toll road in India was not even a consideration until recently and financiers had serious doubts as to whether people using these roads would actually pay for their services. However, the toll roads that have been financed as either plain vanilla concession models or under a build-operate-transfer (BOT) model, have been big successes.
“The people themselves have realized the value of good roads and are willing to pay for them,” Nanda Kumar said. “The concept of independent traffic studies to evaluate the tollability of roads is also catching on, and this is good, as it increases the economic viability of these projects.”
The financing of airports is also well underway, with the greenfield projects in Bangalore and Hyderabad, and the partial privatisation of Mumbai and Delhi airports, both of which will begin to see some refurbishment by the end of this year.
However, even if things do appear to be moving in the right direction, there are nevertheless some important issues that need to be considered, not least the need for stable policy.
“In order to really attract international investors, project developers and financiers, the next couple of years are very important from an infrastructure attractiveness point of view, because these people are concerned with stability,” said Anita George, chief investment officer of the International Finance Corporation (IFC), the World Bank’s private sector arm, which has put in US$1bn in Indian investments through the end of June, and participated in a range of infrastructure projects. “We need people to believe that this is more than just a great market where there is a lot of demand, so the stability and consistency of policy on infrastructure is very important.”
Equally important is the need to deepen the funding avenues for infrastructure projects in India. So far most ventures in which the private sector has been involved have been financed purely by bank loans, but experts agree that there is a real need to move beyond this, and broaden out to capture both domestic and foreign funds in other ways.
According to Citi’s Nayar, there is more than enough money in India itself, which could be deployed for infrastructure financing if the domestic bond market develops further.
“There is no way that local banks can provide the 12 to 15-year funding that many of these projects require,” Nayar said. “We really need to harness the savings that are available in India and use them for infrastructure, but for that, we need a broader and deeper local bond market.”
Indeed, if investors such as insurance companies and pension funds were able to invest in long-tenor bonds, infrastructure financing would really be taken to the next level, especially since the Indian government has recently put the brakes on the amount of foreign exchange borrowings Indian companies can avail of, by limiting the amount of external commercial borrowings that can be brought into the country.
“Infrastructure assets are, by definition, long-duration assets,” said Fitch’s Nanda Kumar. “Neither a road nor an airport has a finite life, these are long-term undertakings so they have to be financed in order to match their tenor.”
Of course, there is plenty of equity interest in India infrastructure financing. Citi together with the Infrastructure Development Finance Co, the Indian Infrastructure Finance Co and private equity house the Blackstone Group has just launched The India Infrastructure Financing Initiative, a collaborative effort to deploy around US$5bn (US$2bn in equity and US$3bn in long-term debt financing) for infrastructure projects in India.
“The fund is the first of its kind and it has generated a lot of interest from overseas investors,” said Citi’s Nayar says. “There is definitely money for project equity but we need the matching debt as well and thus it is crucial that the local bond market continues to broaden and deepen.”
However, even if private equity players both in India and overseas seem interested in financing Indian infrastructure and there is capital being put to work, there is so much that needs to be done, and it will really take a leap of faith for private investors to get beyond more large-scale undertakings, the IFC’s George says. As such, the IFC sees itself as a trailblazer of sorts, lending to projects that have not received a great deal of hype, and are happening in areas such as waste management, in rural areas of the country. These kinds of projects are also vital, George says, and the hope is that the IFC’s involvement will encourage other private sector investors to follow suit, in order to hopefully finance more than just the very large-scale undertakings.
Savita Iyer