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$350 bn at core of India's growth

Discuss $350 bn at core of India's growth within the Articles !! forums, part of the Mirror View - Ebooks Links & Miscellenous Reading Material category; W hen smart money (read private equity) heads for a country or a sector, you can be reasonably sure that ...



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$350 bn at core of India's growth - January 1st, 2007

When smart money (read private equity) heads for a country or a sector, you can be reasonably sure that the returns are in the high-two-digit bracket.

This money is currently making inroads into India and what has always been seen as a low-to-negative returns sector - infrastructure.

"Private equity funds would not have touched infrastructure two years back.

Today, they are queuing up to give money," says Jayesh Desai, national director at Ernst & Young, as he rattles out some recent investments made by these funds - JP Morgan in L&T and Och-Ziss in Gammon.

Citigroup is reportedly mulling a $5-billion infrastructure fund, as is private equity firm Blackstone.

These would be small investments in the overall requirement of $350 billion for infrastructure, a figure arrived at by the Planning Commission after taking into account the demands of a growing economy, and the plan for higher spend on infrastructure - from 4.7 per cent of GDP to 8 per cent.

Sourcing the $350 bn
Private sector investments are nevertheless expected to provide about $75 billion of the $350 billion required over the next five years, according to Vinayak Chatterjee of consulting firm Feedback Ventures.

That is a huge order, and if even a tenth of that sum comes from overseas, it will double the FDI inflow into India ($7.7 billion this year).

The bulk of the overall burden - $200 billion - is likely to be shouldered by the government and its agencies on a stand-alone basis or through the public-private partnership route, while the balance will be managed through Overseas Development Assistance, according to Feedback Ventures.

Shortage of "cooked" projects
The problem is not of funds but rather of "cooked" projects which are ready to take in investment, says Chatterjee, who also heads CII's Infrastructure Committee.

A good example of cooked, ready-to-invest projects are the two ultra mega power projects that - with an investment of Rs 16,000-20,000 crore (Rs 160-200 billion) each - attracted an eye-popping 16 bids when even the most optimistic estimates were below 10.

The response has been equally enthusiastic in other sectors where sensible projects have been put together to garner investment, whether it is ports or airports.

The amazing infrastructure story in India today is not of a paucity of bidders, or of capital, but of bankable projects.

More large-scale projects are required not only in the power sector that, at $120 billion, would account for the largest chunk of infrastructure spend over the next five years, but also in all other sectors.

The $50-billion National Highways Development Programme, for example, does not have a single "one billion dollar project," according to PwC's executive director Amrit Pandurangi.

The country needs to look at bigger, multi-billion dollar projects to attract the large domestic and international players, and also address two other critical gaps - the lack of regulators in some sectors and the absence of political will to levy user charges.

"The roads sector has the potential to absorb a lot more investment. In fact, an efficient port-to-rail-to-road chain could have a major impact on growth," says KPMG's executive director Arvind Mahajan.

Seeking Financial Reforms
There is also a need to "broaden and deepen the domestic and international investor base for debt and equity funds for infrastructure," says Vikram Limaye of IDFC, one of the two institutions that provide long-term funding for infrastructure, the other being the year-old Indian Infrastructure Finance Company.

The pipe of funds flowing into the infrastructure sector could be seriously broadened through pension and insurance reforms, deepening of the debt market and availability of long-dated paper.

It seems the stage is being set for "appropriate" financial reforms, with the government asking IDFC chairman Deepak Parekh to do a "quick report" on long-term financing for infrastructure.

However, if the country continues with the "business as usual" refrain, investing just over 4 per cent of GDP in infrastructure instead of the target 8 per cent, the investment would be limited to $220 billion, according to Montek Singh Ahluwalia, deputy chairman of the Planning Commission.

If talk does not translate into action, "infrastructure investment will not touch even half of that required," says Pwc's Pandurangi.

If the country manages to swing it right though, there are optimists like KPMG's Mahajan who see investment even exceeding $350 billion over the next five years. From time and cost over-runs to an investment over-run - that is what India truly needs!

Source : BS


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