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Infrastructure: Setting the Platform for Double-Digit Growth 3

…………………………………………………………………………………………………………………………......... A modern, well-organised and widespread infrastructure is essential for a country’s economic growth. The Government of India has been consistently increasing its spending on the development of infrastructure capabilities to attain sustainable economic growth. The nation’s infrastructure spending is expected to grow to 9.9 per cent of GDP during the 12th Five-Year Plan from 7.5 per cent during the 11th plan. The booming economy and strong population growth offers huge investment opportunities in areas such as agriculture, transport, power, telecommunication and urban infrastructure.

1. INFRASTRUCTURE PLAYS A CRITICAL ROLE IN ECONOMIC DEVELOPMENT

Led by increasing government initiatives, rapidly developing manufacturing and service sectors and rising consumer spending, India has emerged as one of the fastest growing economies, with an average annual growth of 7.7 per cent in GDP vis-à-vis world GDP growth of 3.8 per cent. Furthermore, the country's economy is expected to grow at an annual average of 8.2 per cent during 2012-17. This is likely to increase power consumption and freight traffic, and entail easy mobilisation of resources. Also, the growing population would require increased transportation, sanitation facilities and waste management. Development of these infrastructural facilities will play an important role in the economic development of India. To tackle the inadequacies in the current system, the Government of India plans to invest in building infrastructure capabilities, and focus on modernising and expanding the current infrastructure in the 12th Five Year Plan. 2. PRIVATE SECTOR PARTICIPATION IN INFRASTRUCTURE

SPENDING TO GROW The 12th plan emphasises on the need for expanding infrastructure and increasing investments by the government, private and forms of public-private partnerships.

Exhibit 1 Spending on infrastructure as a percentage of GDP

Source: Planning Commission, Eleventh plan mid-term approval, Aranca Research

0

2

4

6

8

10

12

10

th P

lan

FY 0

8

FY 0

9

FY 1

0

FY 1

1

FY 1

2

11

th P

lan

FY 1

3

FY 1

4

FY 1

5

FY 1

6

FY 1

7

12

th P

lan

Infrastructure: Setting the Platform for Double-Digit Growth 4

………………………………………………………………………………………………………………………….........

Exhibit 2

Public and private investment

Source: Planning Commission, Eleventh plan mid-term approval, Aranca Research Total spending on infrastructure development is estimated to increase to 9.9 per cent of GDP in the 12th plan from 7.5 per cent in the 11th plan and 5.1 per cent in the 10th plan. Experts believe that India needs to significantly enhance its infrastructure spending to achieve an economic growth of over 8 per cent. However, infrastructure spending needs cannot be tackled by the government alone. Active participation of the private sector is important in the country’s infrastructure development. The sector is expected to play a key role in funding various projects during the 12th plan. The plan estimates total investment of USD747 billion1 during 2012–17, of which at least 50 per cent would come from private sector (compared to 24.5 per cent and 36.2 per cent contribution by private sector in the 10th and 11th plan, respectively). 3. ELECTRICITY, ROADS & BRIDGES AND TELECOM REMAIN

THE FOCUS AREAS The flow of investments has been particularly buoyant in some sectors such as telecom, electricity and roads that account for about 70 per cent of the total investments. Investments in telecom, electricity and roads are likely to rise at a CAGR of 26 per cent, 14 per cent and 12 per cent, respectively, during the 12th plan. Expenditure on oil & gas pipelines, accounting for 6 per cent of total infrastructure spending, is expected to increase at a CAGR of 15 per cent in the next five years. 1 INR converted using exchange rate of INR100=USD1.82219

-

20

40

60

80

100

10

th P

lan

FY 0

8

FY 0

9

FY 1

0

FY 1

1

FY 1

2

11

th P

lan

12

th P

lan

Public investment Private investment

Per

cen

t

Infrastructure: Setting the Platform for Double-Digit Growth 5

………………………………………………………………………………………………………………………….........

Exhibit 3 Infrastructure spending in different sectors (12th plan)

Source: International Finance Corporation report, Aranca Research

Exhibit 4

Trend in infrastructure spending (USD billion)

Source: International Finance Corporation report, Aranca Research

31%

12%

26%

8%

9%

4%

1% 2%

1% 6%

Electricity

Roads & bridges

Telecom

Railways

Irrigation

Water supply & sanitation

Ports

Airports

Storage

Oil & gas pipelines

-

50

100

150

200

250

Elec

tric

ity

Ro

ads

& b

rid

ges

Tele

com

Rai

lway

s

Irri

gati

on

Wat

er s

up

ply

&sa

nit

atio

n Po

rts

Air

po

rts

Sto

rage

Oil

& g

as p

ipel

ines

10th plan 11th plan 12th plan

Infrastructure: Setting the Platform for Double-Digit Growth 6

…………………………………………………………………………………………………………………………......... 4. PUBLIC-PRIVATE PARTNERSHIP GAINING IMPORTANCE IN

DEVELOPMENT OF INFRASTRUCTURE PROJECTS The Government of India is encouraging private sector participation in infrastructure projects in many forms. Of late, public-private partnership (PPP) models are increasingly being used for construction and operation of infrastructure projects. It is expected that this model would augment resource availability, improve efficiency and reduce time & cost overruns compared to public sector ventures.

Exhibit 5 Type of private sector participation

Source: “Public Private Partnerships in India” by Athena Infonomics, Aranca Research

Divestment

EPC/ Service contracts

Public procurement

Management contracts,

O&M contracts

PPP Models

Ow

ner

ship

Typ

e

Operated by Private Public

Pri

vate

P

ub

lic

Infrastructure: Setting the Platform for Double-Digit Growth 7

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Exhibit 6 PPP projects (number and value)

Source: PPP database, Aranca Research According to the PPP India database, there are 881 PPP projects (awarded and underway) with an estimated cost of about USD98.9 billion. However, these projects were concentrated in the transport sector, mainly roads, which accounted for 51.9 percent of total number of projects (in value terms, roads accounted for 45.0 per cent). On the other hand, ports accounted for 7.0 per cent and 15.2 per cent in terms of number of projects and investments, respectively, thanks to the large average size of the projects. PPP projects in other domains remain low although there are significant opportunities in sectors such as power (transmission and distribution), water supply & sewerage, and railways as well as in social sectors such as health and education, which are suffering from lack of resources and inefficient service delivery.

Roads

Urban development

Energy

Ports

Airports

Tourism

Railways

Education

Healthcare

Others

457

181

77

62

6

55

9

19

13

2

44.51

18.10

15.51

15.01

3.49

0.90

0.71

0.35

0.34

0.01

Total 881 98.94

Some of the major PPP projects include the Delhi, Mumbai, Hyderabad and Bengaluru airports; four ultra-mega power projects at Sasan (Madhya Pradesh), Mundra (Gujarat), Krishnapatnam (Andhra Pradesh) and Tilaiya (Jharkhand); container terminals at the Mumbai, Chennai and Tuticorin ports; 15 concessions for operation of container trains; the Jhajjar power transmission project in Haryana; and 298 National and State Highway projects.

Source: “An approach to the Twelfth five year plan” – Planning Commission India

No of Projects Value of contract (INR billion)

Infrastructure: Setting the Platform for Double-Digit Growth 8

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5. INFRASTRUCTURE SECTOR OFFERS ABUNDANT GROWTH OPPORTUNITIES

5.1. Transportation

The Government of India is expected to increase its spending on the development of the transport sector to USD173.1 billion in the 12th plan. At about 4.2 million kilometres, India has the second largest network of roads in the world. These roads carry about 65 per cent of freight and 85 per cent of passenger traffic. Cargo and passenger traffic is expected to grow at an annual rate of 15 per cent and 12 percent, respectively. However, the National Highways account for just 2 per cent of the total length, of which about 30 per cent is still single-lane, 53 per cent is double-lane and only 17 per cent has four/six/eight lanes. The government has undertaken upgradation of around 20,000 kilometres of national highways to the two-lane standard. During the 11th plan, the National Highways Development Programme (NHDP)-I (Golden Quadrilateral connecting India's four largest metropolises: Delhi, Mumbai, Chennai and Kolkata) and NHDP-II (North-South East West links) were effectively built. Other phases of this programme have commenced and are expanding. About 12 per cent of total investment in the 12th plan is expected to be in the roads sector alone; private sector’s contribution in total road development is expected at 44 per cent. The government is encouraging the PPP and Build-Operate-Transfer (BOT) models in road development. Indian Railways, carrying about 22 million passengers every day and 923 million tonnes of freight annually, is one of the largest rail networks in the world. Passenger and goods kilometres have increased at a CAGR of 3.5 percent and 3.7 percent respectively during 2002-03 to 2010-11. Vision 20202 aims to add 25,000 kilometres of routes to the existing railway network. One of the major projects is the western and eastern dedicated freight corridors. Dedicated Freight Corridor Corporation of India and the Japan International Cooperation Agency have signed an USD78.3 billion agreement for the upcoming western corridor project that involves construction of nine large industrial zones, a high-speed freight line, three ports, six airports, a six-lane intersection-free expressway connecting Mumbai with Delhi and a 4,000-MW power plant. India has 13 major and 187 minor ports across its nine maritime states. These ports handle about 95 per cent of volume and 70 per cent of international value trade. In past 15 years, 30 major port projects have been implemented and operational. These projects increased port capacity by 204 MTPA. The total traffic of ports is expected to increase to 1,758.26 MT by 2016–17. To match this demand, the total capacity of the port sector is likely to be increased to 2,301.63 2 Vision 2020 is a plan proposed by former president of India Dr A.P.J. Abdul Kalam to make India a developed country by 2020

Infrastructure: Setting the Platform for Double-Digit Growth 9

…………………………………………………………………………………………………………………………......... MT by the end of the 12th plan. Investment in ports is expected at USD11.6 billion in the next five years. About 25 projects have been identified in 2012–13, to be awarded under the PPP model. 5.2. Power Gross electricity generated from utilities has increased at a CAGR of 5.4 percent during 2000-01 to 2010-11, and the loss in transmission has decreased from 33 percent to 18 percent during the same period. Furthermore, to attain a GDP growth of 8.2 per cent over the 12th plan, it is estimated that the supply of energy should grow at a CAGR of 6.5 percent in next five years. Total energy usage in 2010–11 stood at 522.81 million tonnes of oil equivalent; this is expected to reach 738.07 million tonnes by 2016–17, of which about 38 per cent would be met through imports. The Power Ministry aims to add 76,000 MW of electricity capacity during the 12th plan to the existing capacity of 182,689.62 MW (as of 31 October 2011). Total funding required for these projects in the next five years is estimated at USD235 billion. 5.3. Agriculture Nearly half of the Indian population is dependent on agriculture and related activities for its livelihood. The 12th plan aims to achieve a growth of 4 per cent for the agriculture sector compared to 3.3 percent in the 11th plan and 2.4 per cent in the 10th plan. This would entail investments in agriculture-related infrastructure such as irrigation and logistics. In the 12th plan, investment for irrigation is expected at USD71 billion, or 9 per cent of the total infrastructure investments. 5.4. Urban infrastructure India’s urban population has increased from 285 million in 2001 to 380 million in 2011, and is expected to reach over 600 million by 2030. The number of towns has increased by 2,532 in the last decade. Statutory towns with urban governance structure grew by just 242, indicating that more than 2,000 towns are highly populated without proper town governance and infrastructure. This necessitates a sound urban infrastructure that addresses the issues of traffic/transportation, sanitation and waste management. About USD729 billion is estimated to be required as capital expenditure for building urban infrastructure and another USD364 billion for operation & maintenance in the next 20 years. 6. LIBERAL POLICIES INDUCING INVESTMENTS BY PRIVATE

SECTOR To encourage private investments in infrastructure, the Government of India has relaxed its FDI norms and introduced tax holidays. Some of the initiatives are listed below:

Infrastructure: Setting the Platform for Double-Digit Growth 10

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Exhibit 7 Government policy initiatives

Aspects Government regulation

FDI • 100 per cent FDI is allowed under the automatic route for road and port development projects such as construction and maintenance of roads, highways, vehicular bridges, toll roads, vehicular tunnels, ports and harbours

• 100 per cent FDI is permitted in the power sector for projects related to electricity generation, transmission and distribution, other than atomic reactor power plants. There is no limit on the project cost and quantum of FDI

Tax Holidays

• 100 per cent tax deduction for 10 consecutive years out of a period of 20 years for undertakings engaged in developing, operating and maintaining infrastructure facilities such as roads, bridges, rail systems, highway projects, water supply projects, water treatment systems, irrigation, sanitation and sewage systems or solid waste management systems

• 100 per cent tax deduction for 10 consecutive years out of a period of 15 years for undertakings involved in developing, operating and maintaining ports, airports, inland waterways or inland ports

• 100 per cent tax deduction for 10 consecutive years out of a period of 15 years for the following undertakings: o Those engaged in the generation and/or distribution of power

and planning to generate by 31 March 2013 o Those engaged in laying a network of new transmission or

distribution lines and starting transmission or distribution by 31 March 2013

o Those undertaking substantial renovation and modernisation of the existing network of transmission or distribution lines by 31 March 2013

Investment and Borrowing Caps

• Union Budget 2012–13 allows financial institutions to raise up to USD10.9 billion from tax-free bonds

• Limit for overseas borrowing in infrastructure sector increased to USD500 million from USD100 million

Source: Investing in India website, PWC report on “Quest for Growth Destination India 2012”, Overseas Indian Facilitation Centre website, Aranca Research

7. INFRASTRUCTURE DEBT FUNDS TO PROVIDE LONG-TERM CAPITAL FOR INFRASTRUCTURE PROJECTS

To further promote long-term investments in the sector, the government has introduced an innovative mode of funding – infrastructure debt funds (IDF). These are designed to ensure low-cost funds for a long term for capital-intensive infrastructure projects. IDFs structured as non-banking finance companies (IDF-NBFCs) are regulated by the Reserve Bank of India (RBI). As per RBI guidelines, IDF-NBFCs can invest only in PPP infrastructure projects that are into a tripartite agreement and have completed at least one year of satisfactory commercial

Infrastructure: Setting the Platform for Double-Digit Growth 11

…………………………………………………………………………………………………………………………......... operations. This ensures lower risk and high credit ratings of IDFs. The government has also announced tax-free income and reduced the withholding tax on interest payments on borrowings by the IDFs to 5 per cent from 20 per cent to attract off-shore funds. Rapidly growing economy, increasing population and favourable government initiatives make infrastructure an attractive destination for investors to park their funds. The Indian government’s focus on improving infrastructure and increasing spending on it is likely to encourage higher private participation. Source of information: Planning Commission of India reports titled “Eleventh Plan Mid-term Approval” and “An Approach to

the 12th Five-year Plan” “Infrastructure Development in India: Challenges and Opportunities” provided by International

Finance Corporation Overseas Indian Facilitation Centre website PPP database Investing in India website “Public Private Partnerships in India” by Athena Infonomics PWC report on “Quest for Growth Destination India 2012” Economic Times articles on IDF India vision 2020 Ministry of shipping Ministry of statistics and programme implementation

Banks and financial institutions started launching IDFs in 2012. The first IDF was launched in March 2012 by ICICI Bank, Bank of Baroda, Citicorp Finance India Limited and Life Insurance Corporation of India. This would be structured as an NBFC-IDF with an initial size of USD1.5 billion. Another NBFC-structured IDF was launched by IDBI along with a consortium of public sector banks, having an initial equity of USD182 million to raise funds up to USD4.7 billion. An IDF structured as a mutual fund was launched by IDFC. Srei Mutual Fund too plans to raise about USD500 million through IDF in January 2013. India Infrastructure Finance Company Ltd initiated a USD 1 billion IDF in April 2012, which is expected to be operational soon.

Infrastructure: Setting the Platform for Double-Digit Growth 12

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