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Infrastructure development—ambitious plans

	June 22, 2009

An estimated US$ 500 bn is required by 2012 to upgrade India’s infrastructure.



‘Investment in infrastructure’ is the new buzz word of Indian policy making, as infrastructure development assumed paramount importance in a country’s journey—if it has to showcase a similar rate of growth that it has over the last five years. India is striving to become a truly developed nation in the shortest possible time and in order to achieve that, the primary task of the government is to encourage infrastructure investments. Experts believe that for India to emerge stronger from the global economic downturn, infrastructure will have a major role in beefing up its GDP growth.



It is clearly visible that over the years there have been major under-investments in the sector. Clubbed with this, infrastructure growth has slackened a bit due to the recessionary pressures. But the re-election of the Congress has ignited hope for a boost to the infrastructure sector. The policy makers do realize the need to private participation as well as private public partnerships will be essential. Renewed focus will be seen in key ministries such as roads, telecom, oil and gas, power generation, shipping and aviation.With the objective of stimulating and mobilizing increased private sector investments, either from domestic sources or foreign avenues, the government has already offered various incentives such as 100% FDI in most infrastructure related sectors, extendable tax holiday periods and introducing Public Private Partnerships (PPP). A strong emphasis on PPP projects in the field has particularly made investment in India’s infrastructure sector a win-win situation for both Government and private players. Already the country has seen a prompt response to tackle the crisis from its Government, in terms of fiscal stimulus worth Rs 5,00,000 lakh crore and a slew of monetary measures initiated by the Central Bank of the country to boost liquidity by around Rs 4,00,000 crores. This will definitely make more capital available to the infrastructure sector.



PPP projects in infrastructure act as a booster for GDP growth: According to a study prepared by India’s apex industry body ASSOCHAM, the States Pubic-Private Participation (PPP) projects in infrastructure sector, amounting to nearly Rs 2 lakh crore ($41.64 billion) are likely to stem the deceleration in GDP growth rate in FY-10. State PPP projects, both under construction and in pipeline, in sectors like, roads, power, real estate, transport and ports have tremendous potential to put Gross State Domestic Product (GSDP) in higher growth trajectory, while boosting industrial growth, strengthening job creation and speeding up economic recovery. If implemented effectively, the state PPP infrastructure projects, supplemented by Government stimulus packages have the capability to fuel high growth in GSDP, which in turn, will trickle down into buoyant growth of India’s GDP, affirmed the study.



In its report, Global financial services provider BNP Paribas has said that there is a huge impetus on PPP model in India for implementation of proposed infrastructural programmes and PPP ventures are estimated to provide 17 percent of the total infrastructural spending, required. “State level PPP infrastructure projects by all means are a significant stimulant for domestic economy. The thrust area to bolster the Gross State Domestic Product (GSDP) lies with the swift pace in implementation of under construction and pipeline projects” Says ASSOCHAM President, Sajjan Jindal.



Out of the total estimated cost of PPP projects accounting for Rs 1,92,437.71 crores ($40.06billion), the top 5 segments of infrastructure sector, including road, real estate, power, ports and transport together contribute over 83 per cent of total investment outlays. PPP projects under road and real estate encapsulates more than Rs 86,000 crores ($17.91billion) and construction activities in these segments are likely to generate greater employment. PPP power projects in States, amounting to Rs 30,922 crores ($6.44billion) are likely to be given high priority so as to complement the Government’s efforts towards economic recovery. The State PPP projects under port and transport can emerge as a real advantage for India to unleash a healthy growth rate in GDP for FY 2009-10.



The World Bank would also support the endeavour of Indian Government to create crucial infrastructural linkages across the country and will provide loan to the tune of US$14 billion over the next three years to various PPP projects in India.



Roads: India has the second largest road network in the world, with an extensive coverage of 3.3 million kilometers. Road development is considered to be of prime importance to sustain India’s strong economic growth. Being well-aware of the necessity to attract FDI in the segment, the Government has allowed 100 per cent FDI under the automatic route for all road development projects, in addition to offering 100 per cent income tax exemption for a period of 10 years.



According to Ministry of Finance, the ongoing focus on the highway infrastructure development is targeted to yield an annual growth of 12-15 per cent for passenger traffic and 15-18 per cent for cargo traffic. Many international players have been attracted to invest in the growth and reform of the highway infrastructure in India. Investment in Indian road construction projects are seen as lucrative option for several international giants, including Berhad (Malaysia), Italthai (Thailand), Deutsche Bank, Emirates Trading Agency (Dubai), Dyckerhoff (Russia), the Isolux Corsan Group (Spain), Baelim (Korea), IJM Corporation, SDN and Road Builders (Malaysia), Widmann AG (Germany), Kajima and Taisei (Japan). These companies have acquired equity stakes between 10 to 51 per cent in different highway projects floated by the National Highway Authority of India (NHAI) and other State Governments.



Ports: According to the Planning Commission of India there is an investment opportunity of around US$ 25 billion by 2011-12 in India's ports and shipping sectors, as the country plans to double its ports capacity to 1,500 MT. While ports sector would offer a US$ 13.75 billion investment opportunity, inland waterways and shipping are likely to encapsulate US$ 11.25 billion in domestic and foreign investments. Just like the road segment, 100 per cent income tax exemption for a period of 10 years is provided for all port developmental projects and 100 per cent FDI under the automatic route is permitted.



India is also likely to emerge as a major destination for container operations. The International Container Transhipment Terminal (ICTT) project, being developed at Vallarpadam, Kochi, in the State of Kerala is projected to be the largest single player among the container terminals, planned in India and the first to operate in a special economic zone (SEZ). Konig and Cie Asia Advisors Pvt. Ltd, a subsidiary of a German investment bank of the same name, has opened its business office in India. In the past few months two other investment banks, namely, DnB NOR Bank ASA of Norway and the largest shipping bank of the world, HSH Nordbank have unveiled their Indian operations, as India is expected to witness a shipping boom. In addition, classification societies, those who certify the safety of vessels, such as Korean Register of Shipping and Germanischer Lloyd have joined the league to set up shop in India.



Power: In the vast landscape of India, there is a tremendous opportunity to grow in the field of power generation, transmission and distribution. A recent study by consultancy major McKinsey predicts that India's power demand will increase from the present 120 gigawatt (GW) to 315 GW–335 GW by 2017, if the country continues to grow at an average of 8 per cent over the next one decade. This would require a five- to ten-fold rise in power production, envisaging investments worth US$ 600 billion.



To fuel its ambitious growth plan, India requires an additional 100,000 MW of power generation capacity by the year 2012 and subsequent is the need of huge capital investment to meet this target. There lies strong opportunity in transmission network ventures as additional 60,000 circuit kilometers of transmission network is likely to come up by 2012, with a total investment gamut of nearly US$ 200 billion. The potential has attracted numerous power generation, transmission and distribution majors across the globe to establish their operations in India under the PPP projects. Still experiencing a large demand-supply gap, the Government has permitted foreign equity participation up to 100 per cent in the power sector under the automatic route.



Major foreign players in the power sector include, China Light and Power (CLP), Marubeni Corporation and AES Corporation (USA). According to a JP Morgan estimate, nuclear power generation in India is likely to provide investment opportunity of around US$ 10 billion in the next five years, subsequent to the Indo-US nuclear deal and India getting clearance from the Nuclear Suppliers Group (NSG). GE Hitachi Nuclear Energy has already tied up with public sector undertakings (PSU), NPCIL and Bharat Heavy Electricals Ltd (BHEL) for building multiple GEH-designed nuclear reactors. Sweden is eyeing a market of around US$2 billion in India for back-end operations, like nuclear waste management. The European Union is also keen to initiate a joint nuclear research programme with India that would allow India to partner in developing technology and facilitating easier transfer of technology.



Railways: Indian Railways, the fourth largest rail network in the world and the second largest in Asia, is the backbone of country’s socio-economic growth. Over the last few years, Indian Railways has attracted immense global attention as it has succeeded in net profit making, despite reasonably low passenger fares and freight charges.



Germany has joined hands with India to co-operate in the fields of railway infrastructure development. According to German Minister for Transport, Building and Urban Affairs Wolfgang Tiefensee, “We have met the Railways and discussed public-private-partnership projects for upgrading the infrastructure of Indian Railways,” Representative of German Government had visited India in 2008 to meet officials of the Indian Railway Board regarding technology transfer for various railway infrastructure projects, including bogies and wagons. Indian PSU, BHEL has inked an agreement with US-based technology provider General Electric (GE) to float a joint venture to manufacture diesel locomotives for Indian Railways. The facility would be built in Marhoura, Bihar, with initial capacity of producing 120 locomotives per year.



Tremendous opportunity: In a recent report by PricewaterhouseCoopers (PwC) has urged the global Engineering and Construction (E&C) companies to divert attention towards India for their growth, as domestic markets continue to contract. “Foreign companies who do not acknowledge the opportunity now may miss out on a critical opportunity to establish a long-term presence in one of the world's largest growth markets”, asserts PwC. The company has projected that India will become world's third largest economy by 2050, which is in line with the projections earlier made by Goldman Sachs and CLSA.



Proponents of Indian Government in their part have been very active in urging foreign companies to invest in Indian infrastructure. In his April 2009 visit to Kuwait, Indian Vice President Hamid Ansari invited business captains of Kuwait to invest in the Indian infrastructure sector, which has the capacity to absorb US$500 billion in the coming years. In his visit to Oman in late 2008, Prime Minister Manmohan Singh urged energy-rich Gulf countries to invest their surplus funds in India’s key infrastructure sectors. In a recent official visit to India, Foreign Minister of UAE Sheikh Abdullah Bin Zayed Al Nahyan told External Affairs minister S M Krishna that UAE is looking for more opportunities to investment in Indian infrastructure. Indian High Commissioner to Malaysia, Ashok K. Kantha has asked Malaysian companies to continue investing in India's infrastructure sector in the face of the current world economic slowdown.



Empowered with the deliberate Government strategy to develop infrastructure, coupled with liberalization of regulations to attract FDI, India is definitely the destination-to-be for foreign investors.