enabling growth in indian infrastructure : a global perspective

8/2/2019 Enabling Growth in Indian Infrastructure : A global perspective

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Enabling Growth in Indian

Infrastructure:

A Global Perspective

Submitted By:

Namit Chugh

Roll No – 28

Crisil Certified Analyst

Program

Batch - 5



Enabling Growth in Indian Infrastructure

Contents

List of figures: .......................................................................................................................................... 4

List of tables: ........................................................................................................................................... 4

1. Sector Overview .............................................................................................................................. 5

Growth of the Indian Infrastructure after independence .................................................................. 6

Nehru Era ........................................................................................................................................ 6

Indira Gandhi Era ............................................................................................................................ 6

Rajiv Gandhi Era .............................................................................................................................. 7

Era of Decentralized Politics ........................................................................................................... 7

Inference ............................................................................................................................................. 8

2. Policies pertaining to FDI in Infrastructure ......................................................................................... 8

3. FDI in Asia: Trends and Prospects ..................................................................................................... 10

Leveraging TNC (Transnational Corporations) participation in Infrastructure development........... 12

4. FDI and Infrastructure ....................................................................................................................... 12

Opportunities for Foreign Investors ................................................................................................. 14

Tax considerations for foreign players .............................................................................................. 16

Entry and exit strategy .................................................................................................................. 17

Holding the investment................................................................................................................. 17

Cash and profits ............................................................................................................................ 17

Engineering, Procurement and Construction (EPC) Contracts...................................................... 18

Depreciation .................................................................................................................................. 18

Indirect Taxes ................................................................................................................................ 19

Contrast between Infrastructure FDI in Asia and Latin America ...................................................... 19

5. Highways and Roads – Role of Private Foreign players and multilateral agencies ........................... 19

Existing scenario................................................................................................................................ 19

Targets for highways during the 11th Plan ........................................................................................ 20

National Highways ........................................................................................................................ 20

Rural Roads ................................................................................................................................... 20

Types of Public Private Partnership in National Highways Developments ....................................... 21

Mainstreaming of PPP in Roads and Highways sector:..................................................................... 22

Constraints faced by foreign players ................................................................................................ 22

Determinants of FDI in Infrastructure .............................................................................................. 23

CASE ANALYSIS: India and Japan ....................................................................................................... 24

6. Role of Multilateral agencies ........................................................................................................ 24




7. Challenges for foreign players looking to enter the Indian Infrastructure ................................... 25

8. Conclusion ..................................................................................................................................... 27

9. Web References ............................................................................................................................ 28

Other References .............................................................................................................................. 28




List of figures:1. Built up of Minor Irrigation Projects in Indira Gandhi era

2. Global FDI Inflows

3. FDI Routes in Infrastructure

4. Projected Investment in the Road & Highways Sector in the Eleventh Plan

5. Elements of a typical EPC Contract

List of tables:1. Comparative table on definition of Infrastructure sector and Decision of the Empowered

Sub-Committee of Committee on Infrastructure (CoI)

2. Economic growth and Infrastructure spending post independence

3. Distribution of FDI Inflows among economies by range, 2010

4. FDI Ceiling under automatic route

5. Road Infrastructure, Detailed Projections (USD Million)

6. Type of taxes which may be applicable for Infrastructure companies operating in India

7. Overview of Tax Holiday terms for various Infrastructure segments

8. India’s Road Network

9. Projected Public and Private Investment in Roads and Bridges during the Eleventh Plan




Growth of the Indian Infrastructure after independence

India has seen several cycles of Infrastructure development since independence each defined by a

political era, distinct policy focus and interrupted by a crisis. A brief overview of the same is as

under:

Period Economic conditions Growth of GDP Avg. spending on

Infrastructure(as

percent of GDP)

1950-67

(Nehru Era)

Increasing industrialization and

focus on public sector

development

3.6 4.4

1967-84

(Indira Gandhi

Era)

Anti private sector(MRTP Act

passed), High unemployment

4.2 4.1

1984-91

(Rajiv GandhiEra)

De-regulation of the industrial

sector, technologicaladvancements

5.9 5.2

Post 1991-2004

(Decentralized

politics)

Economic reforms and

globalization

6.0 4.5

Table 2: Economic growth and Infrastructure spending post independence

Source: RBI handbook on Indian Economy; Lall and Rastogi, The political economy of Infrastructure

development in post-independence India

Nehru Era

The first three plans were focused on (a) increasing food production, (b) developing basic and heavy

industries; and (c) repairing the damage from Partition. The first required irrigation to be developed,the second needed electric power and facilitating infrastructure such as roads, and the third

required certain strategic assets to be rehabilitated. This, then, defined the government’s priorities

in the infrastructure space.

Hence, massive resources were allocated for the development of multi-purpose irrigation schemes.

The construction of large river valley projects like Bhakra-Nangal, Hirakud, Chambal, Tungabhadra,

Nagarjunasagar and the D.V.C., which provided both irrigation and power, was commissioned.

During the First Plan, as much as 23 per cent of plan expenditures or about 0.8 percent of GDP was

poured into large surface water irrigation schemes. Over the second and third plans, the share of

expenditure on power rose sharply.

There was also some investment into railways and maritime transport, the primary objective being

to rehabilitate assets which had been ignored for a long time due to the Second World War and

separation of Pakistan from India. For instance, Kandla port was developed to compensate for the

loss of Karachi port.

Indira Gandhi Era

Infrastructure during this era was village-oriented and projects with long gestation were substituted

with shorter gestation initiatives. The droughts of 1965 –66 and 1966 –67 highlighted the need for

adequate irrigation facilities to ensure food security. The possibilities offered by the new seedvarieties, both, for increasing yields of cereal crops and for intensifying cultivation, were contingent




on availability of water at the right time. The large multi-purpose irrigation schemes launched during

Nehru’s time were complex due to the long gestation projects. Some of them took 20 –25 years to be

built with numerous time over-runs aggravated by poor implementation capacity. The only

immediate solution was to have ground water based irrigation using tube wells.

Figure1: Built up of Minor Irrigation Projects in Indira Gandhi era

Tube well based irrigation required pump sets to be powered and hence, the delivery of electric

power to the farming sector was critical to this strategy. Efforts were made for rural electrification

and REC-Rural Electrification Corporation was setup. The other infrastructure that consumed

substantial resources in this era was roads, especially rural roads.

Rajiv Gandhi Era

There are two noteworthy features with respect to the wave of infrastructure build-out under Rajiv

Gandhi. First, given Rajiv Gandhi’s pre-occupation with modernization and technology, significantinvestment was made in the country’s telecommunications infrastructure. Second, the build-out of

physical infrastructure for ground water irrigation and electricity supply that was needed to power

the irrigation pumps continued during this wave.

Era of Decentralized Politics

In the era of Decentralized Politics while the financing constraint became the most severe in

decades, shortages in the infrastructure sector intensified, and therefore, the sector began to

attract unprecedented attention.

The India Infrastructure Report (NCAER 1995) emerged as a seminal piece of work in the area withmany of its recommendations finding their way into the several budgets spanning the Eighth Plan.21




The Ninth Plan identified the management of the infrastructure deficit as a key objective which,

given the binding nature of fiscal constraints, was to be achieved through organizational,

management, structural, or in some cases, legislative reforms designed to improve operational

efficiency, cost recovery and financial viability in key infrastructure sectors, and attract private

capital into them.

A Task Force on Infrastructure comprising both Government and industry representatives was

constituted under the Chairmanship of Mr. Jaswant Singh, Dy. Chairman, Planning Commission, with

the aim of attracting investment to specific projects of national and regional importance, and ensure

their timely completion. Initially, the Task Force dealt with the following projects focusing on

innovative methods for financing them:

Six lane expressway of 7,000 km. length, having North-South and East-West corridors

Four-laning of National Highways, and

Five world-class international airports

Source: 9th

Five Year Plan

Inference

We have seen how the dynamics on Indian politics has affected the Indian Infrastructure sector since

Independence. The policies were aimed at the overall development of the sector but the functioning

of the government was slow and flawed. Now the policies have moved towards attracting Foreign

investments, opening up the sector by initiating Public Private Partnership, providing tax benefits

and other measures leading to the development of the sector. We will look at the measures in

details in the further sections.

2. Policies pertaining to FDI in Infrastructure

Foreign Investment through GDRs/ADRs, Foreign Currency Convertible Bonds (FCCBs) is treated

as Foreign Direct Investment. Indian companies are allowed to raise equity capital in the

international market through the issue of GDR/ADRs/FCCBs. These are not subject to any ceilings

on investment. An applicant company seeking Government’s approval in this regard should have

a consistent track record for good performance (financial or otherwise) for a minimum period of

3 years. This condition can be relaxed for infrastructure projects such as power generation,

telecommunication, petroleum exploration and refining, ports, airports and roads.

In order to give further impetus to facilitation and monitoring of investment, as well as for better

coordination of infrastructural requirements for industry, a new cell called the “Investment

Promotion and Infrastructure Development Cell” has been created. The functions of the Cell

include: -

a) Dissemination of information about investment climate in India;

b) Investment facilitation;

c) Developing and distributing multimedia presentation material and other publications;

d) Organising Symposiums, Seminars, etc. on investment promotion;

e) Liaison with State Governments regarding investment promotion;

f) Documentation of single window systems followed by various States;

g) Match-making service for investment promotion;




h) Coordination of progress of infrastructure sectors approved for investment/technology

transfer, power, telecom, ports, roads, etc.;

i) Facilitating Industrial Model Town Projects, and Industrial Parks, etc.;

j) Promotion of Private Investment including Foreign Investment in the infrastructure sector;

k) Compilation of sectoral policies, strategies and guidelines of infrastructure sectors, both in

India and abroad; andl) Facilitating preparation of a perspective plan on infrastructure requirements for industry.

Guidelines for the consideration of foreign direct Investment (FDI) proposals by the Foreign

investment promotion board (FIPB)

a) FDI up to 100% is allowed in telecom sector for Infrastructure providers providing dark fibre

b) FDI is permitted up to 74% in infrastructure related to marketing of petroleum products

c) No foreign investment is allowed in Housing and Real Estate sector except for development

of integrated townships and settlements where FDI up to 100% is permitted with priorGovernment approval.

d) FDI up to 100% is permitted in airports, with FDI above 74% requiring prior approval of the

Government.

e) FDI up to 100% is permitted for development of integrated townships, including housing,

commercial premises, hotels, resorts, city and regional level urban infrastructure facilities

such as roads and bridges, mass rapid transit systems; and manufacture of building

materials. Development of land and providing allied infrastructure will form an integral part

of township’s development, for which necessary guidelines/norms relating to minimum

capitalization, minimum land area, etc., will be notified separately by the Government. FDI in

this sector would be permissible with prior Government approval.

f) FDI up to 100% is permitted on the automatic route in hotel and tourism sector.

g) FDI up to 100% is permitted on the automatic route for Mass Rapid Transport Systems in all

h) Roads & Highways, Ports and Harbors: FDI up to 100% under automatic route is permitted in

projects for construction and maintenance of roads, highways, vehicular bridges, toll roads,

vehicular tunnels, ports and harbors.

A new consolidated FDI policy, which facilitates the expansion of established foreign owned

enterprises, allows the conversion of non-cash items into equity (with approval from the

government).

NRI's and OCB's are allowed the following special facilities:

• Direct investment in industry, trade, infrastructure etc.

• Up to 100% equity with full repatriation facility for capital and dividends in the following

sectors:

o 34 High Priority Industry Groups

o Export Trading Companies

o Hotels and Tourism-related Projects

o Hospitals, Diagnostic Centers

o Shipping

o Oil Exploration




o Power

o Housing and Real Estate Development

o Highways, Bridges and Ports

o Sick Industrial Units

o Industries Requiring Compulsory Licensing

o Industries Reserved for Small Scale Sector

3. FDI in Asia: Trends and Prospects

On the occasion of the 2011 Fourth United Nations Conference on the Least Developed Countries,

UNCTAD proposed a plan of action for investment in developing countries. The emphasis is on an

integrated policy approach to investment, technical capacity-building and enterprise development,

with five areas of action: public-private infrastructure development; aid for productive capacity;

building on LDC investment opportunities; local business development and access to finance; and

regulatory and institutional reform.

Global foreign direct investment (FDI) flows rose moderately to $1.24 trillion in 2010, but were still

15 per cent below their pre-crisis average. This is in contrast to global industrial output and trade,

which were back to pre-crisis levels. UNCTAD estimates that global FDI will recover to its pre-crisis

level in 2011, increasing to $1.4 –1.6 trillion, approaching its 2007 peak in 2013. This positive scenario

holds, barring any unexpected global economic shocks that may arise from a number of risk factors

still in play.

For the first time, developing and transition economies together attracted more than half of global

FDI flows. Outward FDI from those economies also reached record highs, with most of their

investment directed towards other countries in the South. Furthermore, interregional FDI betweendeveloping countries and transition economies has been growing rapidly. In contrast, FDI inflows to

developed countries continued to decline. Major emerging regions, such as East and South-East Asia

and Latin America, experienced strong growth in FDI inflows.

State-owned TNCs (Transnational Corporations) are an important emerging source of FDI. There are

some 650 State-owned TNCs, with 8,500 foreign affiliates across the globe. While they represent less

than 1 per cent of TNCs worldwide, their outward investment accounted for 11 per cent of global FDI

in 2010. The ownership and governance of State-owned TNCs have raised concerns in some host

countries regarding, among others, the level playing field and national security, with regulatory

implications for the international expansion of these companies.

Global FDI inflows in 2010 reached an estimated $1,244 billion (figure I.1) – a small increase from

2009’s level of $1,185 billion. However, there was an uneven pattern between regions and also

between sub-regions. FDI inflows to developed countries and transition economies contracted

further in 2010. In contrast, those to developing economies recovered strongly, and together with

transition economies – for the first time – surpassed the 50 per cent mark of global FDI flows.




Figure 2: Global FDI Inflows

Source: World Investment Report 2011, UNCTAD

In 2010, FDI inflows to South, East and South-East Asia rose 24 per cent, to $300 billion. However,

the performance of major economies within the region varied significantly: inflows to the 10 ASEAN

countries more than doubled; those to China and Hong Kong (China) enjoyed double-digit growth;

while those to India, the Republic of Korea and Taiwan Province of China declined.

FDI to South Asia declined to $32 billion, reflecting a 31 per cent slide in inflows to India and a 14 per

cent drop in Pakistan, the two largest recipients of FDI in the subcontinent. In India, the setback in

attracting FDI was partly due to macroeconomic concerns, such as a high current account deficit and

inflation, as well as to delays in the approval of large FDI projects;10 these factors are hindering the

Indian Government’s efforts to boost investment, including the planned $1.5 trillion investment in

infrastructure between 2007 and 2017.

The table below indicates the range of FDI Inflows among Asian Economies. India is amongst the

major nations receiving funds from other countries.

Range Inflows

Above $50 bn China and Hong Kong

$10 to $49 billion Singapore, India and Indonesia

$1.0 to $9.9 billion Malaysia, Viet Nam, Republic of

Korea, Thailand, Islamic

Republic of Iran, Macao (China),

Taiwan Province of China,

Pakistan, Philippines and

Mongolia

$0.1 to $0.9 billion Bangladesh, Cambodia,Myanmar, Brunei Darussalam,




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 catalysing 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 takesaround 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

liberalisation is expected as the Government continues to emphasise infrastructure investment.

Figure 3: FDI Routes in Infrastructure

Source: Manual on FDI in India, Department of Industrial Policy and Promotion, Ministry of

Commerce and Industry

Automatic clearance for foreign investment (not requiring the approval of the FIPB) was first

introduced for infrastructure sectors like power and roads. The sectoral investment limits for the

critical infrastructure sectors are presented in table below:

Sectors Percent

Telecom 49

Electricity generation,

transmission and distribution

100

Roads and highways 100

Ports and Harbours 100

Civil Aviation (in Greenfield

airport ventures)

100

Table 4: FDI Ceiling under automatic route

Source: Manual on FDI in India, Department of Industrial Policy and Promotion, Ministry of

Commerce and Industry

From an exchange control perspective, India is moving towards full current account convertibility.

Most revenue transactions are freely permitted, except certain transactions like royalty, consultancyfees, etc., which are subject to certain limits. Capital account transactions need prior approval,




except where 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.

In August 2008, a press report stated that Morgan Stanley was looking to invest up to a quarter of itsUS$4 billion global infrastructure fund in emerging markets, notably India and China – and that in

India, Morgan Stanley would face competition from Australia’s 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.

Cross border investments and technology transfers that broadly constitute Foreign Direct

Investment have multiplied greatly over the past two decades. Several global economic changes

have fuelled this growth. These include:

• Liberalisation and economic reforms across a large swathe of national economies

• The emergence of regional trading blocs particularly in Europe and North America

• Rapid technology absorption and industrialisation in East Asia

The role of Foreign Direct Investment in an economy goes beyond simply easing financial

constraints. FDI inflows are associated with multiple benefits such as technology transfer, market

access and organisational skills. Consequently, there is an increasing and intense competition

between countries to maximize the quantity of FDI inflows. Any successful policy for attracting FDI

has to keep this competitive scenario in mind.

The Benefits of FDI Inflows can be broadly identified as:

Bridging the financial gap between the quantum of funds needed to sustain a level of growth

and the domestic availability of funds

Technology transfer coupled with knowledge diffusion that leads to improvement in

productivity. It can, thus, fasten the rate of technological progress through a ‘contagion’ effect

that permeates domestic firms

The transfer of better organisational and management practices through the linkages between

the investing foreign company and local suppliers and customers

Opportunities for Foreign Investors

India’s 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 country’s 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. The quantum of funds

invested as part of these programmes will significantly exceed that invested in recent history. Such

programmes would be funded via a mix of public and private initiatives.




Table 5: Road Infrastructure, Detailed Projections (USD Million)

Source: Crisil Research; Planning Commission

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 favours players with good experience and sound financial strength.

Figure 4: Projected Investment in the Road & Highways Sector in the Eleventh Plan

Source: 11th

Five Year Plan, Planning Commission, Government of India




Tax considerations for foreign players

Infrastructure companies looking to invest in India need to consider a variety of tax issues.

Table 6: Type of taxes which may be applicable for Infrastructure companies operating in India

Source: Crisil Research

The Government’s strong focus on promoting infrastructure development also extends to tax policy,

with a number of policy measures and incentives now in place for the construction of infrastructure

facilities, including a numbers of tax holidays, although Minimum Alternate Tax (MAT) of 11.33%

may be payable on book profits during this period. Relevant tax holidays, their applicability, and the

eligibility of each infrastructure sector are detailed in Table below.

Sector Applicability Time-frame Eligibility

Power Undertaking’

which generates

power

Undertaking’

which transmits or

distributes power

Undertaking’

which carries out

substantial

renovation and

modernisation

10 consecutive

years out of 15

years

All the above

should commence

before March 31,

2010

Ports and Airports Companies

developing and/or

operating &

maintaining ports

and airports

Applicable also to

Inland waterway,

Inland port,

Navigational

channel in the sea

10 consecutive

years out of 15

years

‘New’

infrastructure

facility

Agreement with

government/

statutory body




Railways Companies

developing and/or

operating &

maintaining rail

system

10 consecutive

years out of 20

years

‘New’

infrastructure

facility

Agreement with

government/

statutory bodyRoads and Highways Companies

developing and/or

operating &

maintaining roads

and highways

10 consecutive

years out of 20

years

‘New’

infrastructure

facility

Agreement with

government/

statutory body

Water Includes water supply

project, water

treatment system,

irrigation project,

sanitation andsewerage system or

solid waste

management system

10 consecutive

years out of 20

years

‘New’

infrastructure

facility

Agreement with

government/statutory body

Table 7: Overview of Tax Holiday terms for various Infrastructure segments


Effective tax structuring into India is vital as this impacts on how attractive a project is to target

investors and has a direct influence on the net internal rate of return. It is therefore particularly

important that international investment opportunities are structured appropriately to take into

consideration tax, accounting, regulatory and legal aspects. Some of the key issues are discussedbelow:

Entry and exit strategy

Holding company location – Appropriate planning in respect of a holding company jurisdiction is

necessary to minimise Indian withholding tax and Indian capital gains on the sale of shares in Indian

companies. Financing – In order to introduce debt into India, there are various issues that need to be

considered such as the Indian External Commercial Borrowings rules, withholding tax issues on

distributions out of India and the availability of a tax deduction for the distribution at the Indian

level.

Holding the investment

Permanent Establishments – One of the risks with managing investments in India is managing the

Indian permanent establishment position, where if the Indian tax authorities successfully argue that

there is an Indian permanent establishment of the foreign operations in India, then there may be

significant adverse tax implications. It is therefore important to carefully manage the operations

carried out at the Indian level.

Cash and profits

There are various options on repatriating profits from the structure, such as dividend distributions,

share sale, capital reductions, etc, all with differing tax impacts.




Engineering, Procurement and Construction (EPC) Contracts

In an infrastructure project the execution of projects is undertaken substantially by way of an

engineering, procurement and construction (EPC) contract. A typical EPC contract will have the

following scope of work in a single project:

• Supply of equipment (offshore and onshore)

• Installation/commissioning • Services (offshore and onshore)

• Software/technology transfer (offshore and onshore)

Under a typical EPC contract, a non-resident contractor performs a multitude of activities. The scope

of work under an EPC contract would include both onshore and offshore activities. Taxability of

payments received by foreign companies under EPC contracts has become a matter of great debate

and litigation. Onshore supplies and services are normally taxable in India. Offshore supply of goods

and services under a composite contract are something of a grey area. The Indian revenue

authorities often attempt to bring the entire EPC contract, including the offshore supplies and

services, within the range of taxes in India. The tax authorities may cite a business connection in

India, and also note the presumed indivisibility of EPC contracts.

Figure 5: Elements of a typical EPC Contract


Depreciation

In order to make infrastructure projects more attractive for companies and investors, the Indian

Government is re-examining the existing depreciation policy for such entities. The infrastructure

sector may be eligible for a higher rate of depreciation in book value for BOOT (build, own, operate,

transfer) projects. The Government is still examining this proposal and also evaluating whether

depreciation should be allowed or, alternatively, there could be a policy for amortisation of the

entire expenditure for such companies. Private players are needed to invest in infrastructure

projects on the BOOT basis, and in the future, infrastructure companies may benefit from the

creation of a sinking fund by such companies for the concession period. Such a fund would depend

on the life of the project and the concession period could vary widely, depending on the contractual

conditions of the specific project.




Indirect Taxes

The majority of Infrastructure services rendered by a company in India are subject to either service

tax, VAT, or both, depending on whether the services rendered are in the nature of a construction

contract or service contract. Apart from the above, there are certain other indirect tax issues which

need to be addressed appropriately, especially relating to contract structuring. Companies need to

ensure that indirect taxes are taken into account as they make decisions around how to structure aparticular project.

Contrast between Infrastructure FDI in Asia and Latin America

Internationally, countries have followed two routes to infrastructure development. Latin American

economies generated the vast majority of their infrastructure FDI inflows through privatisation. This

constituted about 88 per cent of total inflows during 1999-2000 with the rest coming from green-

field investments and concessions. In Asia, on the other hand, Governments relied exclusively on

green field investments through the BOT route. India has followed the Asian route where the bulk of

FDI in infrastructure has come in through the green-field route rather than through privatisation.

The Government, for instance, has allowed strategic investment in major airports with a 74 per centequity ceiling.

5. Highways and Roads – Role of Private Foreign players and

multilateral agencies

Existing scenario

Road network in India aggregates to about 3.3 million kilometre. This extensive road network, the

second largest in the world, caters to about 65 per cent of the freight traffic and 87 per cent of the

passenger traffic. National Highways constitute about 66,590 kilometres which is only 2 percent of

the total network. However, it caters to nearly 40% of the total road traffic. Out of the total length of

National Highways, 17 percent is four laned, 53 percent is two-laned and 30 percent single laned.

Road type Length (In kms)

Expressways 200

National Highways 70,934

State Highways 1,31,899Major district roads 4,67,763

Rural and other roads 26,50,000

Total Length 3.3 Million Km (approx.)

Table 8: India’s Road Network

Source: www.nhai.org/roadnetwork

The large network of Indian roads is still insufficient to meet the requirements of India’s huge

population.

http://www.nhai.org/roadnetwork







Targets for highways during the 11th Plan

National Highways

Six-laning 6,500 km of Golden Quadrilateral and selected National Highways

Four-laning 6,736 km on North-South and East-West Corridors Four-laning 20,000 km of National Highways

Widening 20,000 km of National Highways to two lanes

Developing 1,000 km of Expressways

Constructing 8,737 km of roads, including 3,846 km of National Highways in the North East

Rural Roads

Constructing 1, 29,707 km of new rural roads, and renewing and upgrading existing 1,77,726

km covering 60,638 rural habitations

Table 9: Projected Public and Private Investment in Roads and Bridges during the Eleventh Plan (Rs

Crore)

Source: 11th

Five Year Plan, Planning Commission, Government of India

Currently, the private sector contribution in the development of roads is a mere 33% which has

picked up soon.

Historically, road infrastructure has been provided by the State. The enormous investment

requirement, long gestation period and uncertainty of returns were mainly responsible for the lack

of interest by the private sector including foreign players. The presence of significant externalitiesalso warranted the dominant role of the State in providing basic road infrastructure. In the allocation

of budgetary resources, therefore, the development of road infrastructure is still given priority.

However, the resource requirements for maintenance and expansion have far exceeded the capacity

of the budget, making a strong case for private sector participation. Resource constraints, however,

are not the only reason for encouraging private sector participation in the development of road

infrastructure. A number of benefits accrue as a result of private sector participation in the

development of road infrastructure. The most palpable benefit is the expansion of road network. In

addition, private sector participation is expected to help upgrade the technology, improve the

quality and lower the costs.

The central as well as a few state governments have successfully harnessed private sectorpartnership in road development. The government is now convinced of the merits of partnering with




the private sector. Projects are offered on BOT basis to private agencies. After the concession

period, which can range up to 30 years, road is to be transferred back to the Government/public

sector by the concessionaire. Also, to attract the private sector to projects that are not commercially

viable but considered essential, the government has established a Viability Gap Funding (VGF)

mechanism to provide a grant of up to 40% of the project cost.

Types of Public Private Partnership in National Highways Developments

The three common forms of Public Private Partnership popular in India and which have been used

for development of National Highways are -

- Build Operate and Transfer (BOT) Toll basis.

- Build Operate and Transfer (BOT) Annuity basis.

- Special Purpose Vehicle (SPV) basis.

- In addition the recently introduced Operate Maintain and Transfer (OMT)Concession.

(a) BOT (Toll) Model

• In a BOT (Toll) Model, the concessionaire (private sector) is required to meet the

upfront/construction cost and the expenditure on annual maintenance.

• The Concessionaire recovers the entire upfront/construction cost along with the interest and

a return on investment out of the future toll collection.

• The viability of the project greatly depends on the traffic (i.e., toll). However, with a view to

bridge the gap between the investment required and the gains arising out of it, i.e., toincrease the viability of the projects, capital grant is also provided (up to a maximum of 40%

of the project cost has been provided under NHDP).

(b) BOT (Annuity) Model

In the BOT (Annuity) Model, the Concessionaire (private sector) is required to meet the

entire upfront/construction cost (no grant is paid by the client – NHAI / Government) and

the expenditure on annual maintenance.

The Concessionaire recovers the entire investment and a pre-determined cost of return out

of the annuities payable by the client every year.

The selection is made based on the least annuity quoted by the bidders (the concessionperiod being fixed).

The client (Government/NHAI) retains the risk with respect to traffic (toll), since the client

collects the toll.

(c) Special Purpose Vehicle

The NHAI has also formed Special Purpose Vehicle (SPV) for funding port connectivity road projects.

(d) Operate, Maintain and Transfer (OMT) Concession

NHAI has recently taken up award of select highway projects to private sector players under an OMTConcession. Till recently, the tasks of toll collection and highway maintenance were entrusted with




India notified construction as an approved activity under industrial concern but stopped short of

declaring the sector as a fully fledged industry. This has limited the sector’s opportunity to be

brought under industrial regulations and better access to market finance.

4. Land acquisition:

Land acquisition procedures and compensation demanded for transfer of Government land

hinder the implementation of projects in Roads Sector.

Example: Compensation demanded for transfer of Govt. land for NHDP projects

Source: Ministry of Road Transport and Highways

5. Environment and Forest Clearances.

Delay in getting the forest clearance/wildlife clearance is another constraint. Additional

conditions and demands for compensatory afforestation, dedicated strip for plantation, staff

quarters, etc. have resulted in delays in implementation of projects.

Determinants of FDI in Infrastructure

While a liberal ‘entry’ policy can go a long way in encouraging foreign investments in infrastructure,

the willingness to invest in infrastructure projects has been restrained by a number of constraints

across a number of economies. Thus, any successful strategy of attracting Foreign Direct Investment

into these sectors will have to deal with these issues directly. These are:

Subsidised pri ces: In most developing countries, infrastructure services are priced below the

cost of supply. Subsidies may be hidden as increasing arrears to the banking system or

outstanding payments to State agencies (like State Electricity Boards). This undermines thefinancial viability of projects.

Mixed signals from different constituencies: Many diverse groups with varying levels of

influence on Government policy have a stake in the policy that affects private infrastructure

operations. Consumers benefitting from subsidised prices may resent price increases

associated with privatisation. Managers and employees of public utilities are understandably

concerned about their jobs. This often influences policy related to private infrastructure and

affects the investment environment.

Loss of authority: Governments are often reluctant to abdicate control over key sectors of

the economy particularly where foreign ownership is involved. Most Governments do nothave a strong record of regulating private industries because the public sector has been so

dominant. This often results in rules prohibiting private entry into certain sectors, imposing

limits on foreign ownership.

Misunderstanding regarding what private involvement can offer and what investors require:

Although private sector involvement does offer extra financing and the willingness to

manage some risks (construction and operation risks), they are unwilling to bear risks that

they cannot control (policy or regulatory risk).




CASE ANALYSIS: India and Japan

Japanese Prime Minister Yoshihiko Noda arrives in New Delhi today to participate in the Sixth Annual

Summit between the two countries on 28 December 2011.

With the West reeling under severe financial crisis, Asia is being looked upon as the propeller of the

global economy. It now accounts for 35% of the world’s GDP, up from less tha n 20% in 1980. Overthe last 30 years, developing Asia has surpassed the rest of the world in recording a phenomenal

GDP growth of 7.2 per cent. Japan perhaps may well be the fastest growing developed economy in

2012.

India and Japan have strengthened bilateral relations in recent years through new initiatives in the

spheres of economic and cultural linkages to defence and security co-operation. It is hence no

surprise that Japan and India’s leaders will devote considerable attention to reviewing this Strategic

and Global Partnership.

On the economic front, under the India-Japan Strategic and Global Partnership, the two sides have

launched a Special Economic Partnership Initiative, which has several high-visibility flagship projects

like the Western Corridor of the Dedicated Freight Corridor to be partially funded by Japanese softODA loan and the Delhi-Mumbai Industrial Corridor (DMIC), whose project development is to be

partially funded by Japan. The DMIC, projected to attract about $92 billion in foreign investment, will

be built around the DFC. A consortium of Japanese private sector companies is collaborating with

the DMIC Development Corporation as well as the governments of the concerned states, in

developing eco-friendly townships in the DMIC zone using Japan’s best practices.

http://www.indianexpress.com/news/japan-may-invest-4.5-bn-in-delhimumbai-corridor/892773/

The Japanese Prime Minister is also expected to sign a currency swap deal worth $10 billion to

support the rupee when it fluctuates against the US dollar. This a classic example of an Infrastructure

deal between two countries leading to greater diplomatic relations between them and alsobenefitting economy of both countries in not just the sector of deal but otherwise as well.

6. Role of Multilateral agencies

Given the various risks associated with infrastructure projects, the role of bilateral and multilateral

agencies in funding these projects becomes critical. There can be three reasons for this:

Given their structure, they are better able to absorb these risks than pure private

participants

Their participation often gives ‘comfort’ to private investors who are more likely to

participate in projects where there is some involvement of a multilateral agency

The relatively long history of participation of the sector in ‘development finance’ also equips

them better to assess the viability and risk of projects in developing countries

Multilateral and bilateral agencies have played an important role in funding infrastructure in India.

The box below lists some of the key projects funded by bilateral and multilateral agencies in India.

Multilateral agencies such as the World Bank, The Department for International Development

(DFID), Japan Bank for International Cooperation (JBIC) and Asian Development Bank (ADB) etc. have







financed projects in India across infrastructure sectors such as power, roads and highways, telecom,

irrigation etc. Some of the key projects are:

Road and Highways

National Highway Loans, JBIC : A loan of Japanese Yen 11,360 million was signed in January

1994 for four-laning of Chilakaluripet-Vijaywada Section of NH-5 in Andhra Pradesh. The civilwork on three contract packages commenced in March 1999,whereas civil work on the

fourth contract for construction of 2.88 km long two-lane bridge over river Krishna

commenced in May 1999.

Tumkur-Haveri Project, ADB: Upgrading of Tumkur-Haveri section of NH-4 to a four-lane

divided carriageway for a length of 259 km. ADB approved a loan amount of USD 240 million

to incorporate a number of road safety measures such as partial access control, enlarged

cross culverts etc.

Power Rajasthan Power Sector Restructuring Project, World Bank : Loan of US$ 266.8 million

approved in 2001 to reduce Rajasthan State Electricity Board’s (RSEB) technical and non-

technical losses; reinforce transmission/distribution systems; install system electronic

(static) meters and provides technical assistance in the areas of reform project management

etc.

Orissa GRIDCO Restructuring Project, DFID: Loan of British Pound 6,000,000 granted to

Government of Orissa for completion of the power sector reforms process in Orissa resulting

in an efficient, self financing and accountable power sector which provides quality services

to consumers at reasonable prices.

Telecom and IT

Telecommunication Sector Reform Technical Assistance Project, World Bank : Loan amount of

US$ 72 million granted to the Department of Telecommunications to strengthen its policy

making capacity; and, modernise the Wireless Planning and Coordination (WPC) wing’s radio

frequency management. This included financing of software, and hardware equipment, in

addition to capacity building, and strengthening the capacity of the Telecommunications

Engineering Centre.

7. Challenges for foreign players looking to enter the Indian

Infrastructure

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 Engineering and Construction companies may therefore look at

foreign entrants in the market as tough competitors – or as strong potential partners.

Wharton Business School’s 2007 analysis of India’s construction boom pointed out that the

proposed US$50 billion infrastructure spend per year in India is nearly two and half times the currentturnover 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.

There are many factors that influence the role of the local players vis-à-vis foreign players – for

example, the criteria used for the selection of developers is an important influence on what role the

foreign players will take. Risk-sharing on a PPP project also needs to be carefully considered. The

revenues of most infrastructure projects in India will be denominated in the local currency. Foreign

players will need to consider the currency and tax issues already mentioned in some detail,

particularly on a PPP project where significant private investment is also sought.

International EPC contractors, including Toyo Engineering, Jacobs H&G, Uhde, Tecnimont and AkerKvaerner, are already leading players in India. At the same time, many Indian companies e.g. Larsen

& Toubro (L&T), Gammon, Bharat Heavy Electrical Limited (‘BHEL’), Engineers India Ltd and Thermax

have either scaled up their skill sets or extended their operations to overseas projects.

India has a very well established infrastructure developer market. Local firms have evolved in recent

times into fully-fledged national players (and in some cases international players). In certain sectors,

such as highways, power and water, the local firms also have significantly progressed on the

technological front. Some of the India based companies such as L&T, Punj Lloyd, Reliance, GMR,

Suzlon, Tata Power, etc. are very active in the international markets and thus, can no more be

deemed ‘local’ E&C companies. Indeed, they are global organisations based out of India. These and

other large firms clearly look at foreign players as both partners and competitors. However, smallerand medium-sized infrastructure construction companies and developers (such as KMC, Nagarjuna,

IVRCL, Gammon, etc.) are often happy to partner with foreign players without necessarily

considering them as competitors.

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

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.

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 India’s

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 standardisation in the concession agreements across thedifferent 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.

8. Conclusion

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 fromJapan, 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 maximise tax benefits where appropriate, and taken a long-

term, sustainable perspective.



9. Web References

1. http://www.mha.nic.in/

2. http://www.pppinindia.com/

3. http://www.indiainfrastructure.com/

4. http://indiajuris.com/

5. http://dipp.nic.in/English/default.aspx

6. http://planningcommission.nic.in/

7. http://articles.economictimes.indiatimes.com/2011-07-

26/news/29816541_1_infrastructure-sector-foreign-investments-korean-companies

8. http://www.projectsinfo.in/News.aspx?nId=s/qoPv/lnMEORW9IOfFj/A

9. http://www.nhai.org/

10. http://www.unctad.org/

11. http://www.idfc.com/

Other References

1. World Investment Report, 2011; UNCTAD

2. International Economics, Carbaugh

3. 11th Five Year Plan, Planning Commission

http://www.mha.nic.in/


http://www.pppinindia.com/


http://www.indiainfrastructure.com/


http://indiajuris.com/


http://dipp.nic.in/English/default.aspx


http://planningcommission.nic.in/


http://articles.economictimes.indiatimes.com/2011-07-26/news/29816541_1_infrastructure-sector-foreign-investments-korean-companies



http://www.projectsinfo.in/News.aspx?nId=s/qoPv/lnMEORW9IOfFj/A


http://www.nhai.org/


http://www.unctad.org/



http://www.idfc.com/















enabling growth in indian infrastructure : a global perspective

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