A landmark of sorts was achieved in India’s quest for world-class infrastructure this year: the government handed over the country’s two largest airports, in Mumbai and Delhi, which together share about 40% of total air traffic, to be run by the private sector.
After a contentious, three-year-long selection process, the government-controlled Airport Authority of India finally picked two consortia in January that include foreign airport operators from Frankfurt, Malaysia and South Africa – to form joint venture companies that will run the two airports and execute a $1.2 billion plan to modernize them by 2010. To put that in context, India has about a hundred airports, 11 of which operate international flights, and about 30 of which are being currently developed with help from the private sector.
India’s “infrastructure deficit” is clearly the key constraint on India’s ability to achieve prime minister Manmohan Singh’s target of pushing up annual GDP growth to 10%. Yet, progress, as might be expected from a fractious coalition government that leans on leftist parties for support, is mind-numbingly slow.
Before it awarded the airport contracts, the government had to negotiate several obstacles, from the level of foreign equity that could be permitted (eventually restricted to 49%) to how slum dwellers on airport land would be rehabilitated, and tackling striking airport employees worried about possible job losses. In May, the Delhi High Court dismissed a plea by Reliance Airport Developers, the losing competitor, challenging the airport contracts.
“The government is serious in its intent, and while it may take time, the process is, by and large, transparent,” says S Balakrishnan, managing director at Lazard Capital, an adviser to the GMR consortium which won the contract for the Delhi airport.
Infrastructure needs
A report by Morgan Stanley put out in November last year says current spending on infrastructure at 3.5% of GDP ($24 billion in 2004) needs to rise to 10% of GDP by 2010 (about $100 billion) to push India on to a sustained GDP growth rate of 8% to 9%. Based on current projections, however, it expects an increase to about 4.7% of GDP or $47 billion by 2009.
Investment bank Merrill Lynch reckons, in its report on emerging market infrastructure put out in March, that infrastructure spending in India should increase to $109 billion between FY2006 and FY2008, or about 5% of GDP per year, and 61% higher than in the previous three years. For this, it points out, private-sector participation is crucial, given India’s large budget deficit.
Where the government has got the policy framework right, however, the private sector has arrived – in a big way. “The spectrum of success achieved in telecoms has made it the poster boy for infrastructure in India,” says Urjit Patel, executive director of policy at Infrastructure Development Finance Corporation (IDFC), who has worked as a consultant to the ministry of finance.
Only a few years ago there was logjam in the sector, but timely and deft intervention by the telecoms regulator has helped make India one of the fastest-growing markets, and the third largest telecoms network in the world.
Private-sector partnerships
A more focused approach has successfully drawn the private sector into partnerships with the government in the roads and ports sector. The Golden Quadrilateral, begun in 1999 as part of the country’s ambitious national highways project, is building 5,846km of four- and six-lane expressways linking four major Indian cities, and should finally be complete this year.
“The templates are set for private participation. The developer can now take a call on traffic projections, the feasibility of toll hikes, and hope to make a return on investments,” says Shahzad Dalal, who heads private equity investments at Infrastructure Leasing & Financial Services (ILFS), whose investments included Noida toll bridge, an early private-sector initiative now listed on London’s AIM, which is developing around 1,200km of roads in partnership with the government of Rajasthan.
The sector that has lagged behind enormously and which, by some estimates, requires the largest investments, of around $200 billion, is power. Non-payment of dues is a major obstacle and, so far, the government appears reluctant to take the political consequences of reforming power distribution. “Around 40% of the power generated is not paid for, and unless that is sorted out, the private sector will not come in,” IDFC’s Patel points out, adding that he “can’t see those problems being fixed in the immediate future”.
Money no object
If the government were to get its act together though, money would not be a constraint.
JP Morgan Partners and IDF, a private quity fund promoted by IDFC, recently invested Rs5 billion in L&T Infrastructure, a leading infrastructure developer. Darby Asia Investors, the private equity arm of Franklin Templeton and an investor in the Noida toll bridge and Spice Telecom, is looking to invest in private power companies. IFC has about $300 million invested in infrastructure, while ILFS has about $250 million invested in various projects, some of which it has exited successfully after earning an enviable international rate ofreturn (IRR) of 27%.
“Our infrastructure investments are among the most profitable over the last four and a half years – the risk is upfront, but once they start to generate revenues, investors are ready to step in,” says ILFS’ Dalal.