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September 2008 Research & Strategy in and beyond emerging markets
urbanisation. The IMF estimates that India’s three largest cities are all expected to
grow at 20% per annum until 2015.
12,000
10,000
8,000
6,000
4,000
2,000
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 (f)
However, the government has now made significant reforms in the regulatory
framework for infrastructure, by lifting caps on foreign investment and reforms
in the approval processes. As a result of these and other government initiatives,
investments in infrastructure have increased and the sector is now attracting attention
from the international investor community.
As such, Indian infrastructure funds are being established at a rapid pace. In 2007
these funds were responsible for approximately 80 deals, totalling around US$ 1.6
billion across key infrastructure sectors.
To date, foreign players are primarily investing in the transport (airports and ports) and
telecoms sectors.For example,in 2006 the Indian government awarded South African
airports company ACSA (in partnership with Bidvest International Group and GVK)
a 30-year contract for the modernisation and maintenance of Mumbai International
Airport.
Given India’s complex bureaucratic structure, local partnerships are important and
international investors are generally either buying stakes in local companies that own
infrastructure or setting up partnerships with local developers and investors.
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September 2008 Research & Strategy in and beyond emerging markets
80
70
60
50
USD bn
40 India
China
30
20
10
0
2002 2003 2004 2005 2006 2007
The country’s export trade currently amounts to 1.5% of global trade, and is expected
to grow to 1.9% in 2011. This contrasts with China’s 7.7% of global trade, which is
projected to grow to 10.8% by 2011.
To meet the economic growth target of 9% laid down by the government in its 11th
five-year plan (FYP) effective from 2007, significant investments will be needed to
ease these and many other infrastructure bottlenecks. The government has estimated
the required expenditure at around US$ 320 billion by 2012 and hopes that about
40% of this will come from the private sector.
Nevertheless economists argue that the shallow long-term corporate debt market, the
perceived lack of bankable infrastructure projects and ideological/political opposition
to privatisation will leave the government shouldering far more than 60% of the
financial burden.
3
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300
250
200
USD bn
150
100
50
0
Railway infrastructure
Telecommunications
Energy sector
Road infrastructure
Seaports
Airports
Water
Source: Government of India, Department of Commerce 2008
The impact of this is that there has been a trend in decentralisation that has resulted
in complex regional bureaucratic systems which has slowed down the process of
infrastructure development. Until recently, the national government did arguably little
to pressure the federal state authorities to promote infrastructure projects in their
respective states.
Conclusion
Poor infrastructure is clearly India’s Achilles heel. But it is also the area that is
receiving the most attention from policymakers and one that offers significant
opportunities to private investors, both domestic and foreign.
Improving India’s infrastructure will drive economic growth, will provide opportunities
to reduce the country’s unemployment rate, boost domestic consumption, lower
operating costs within the country and stimulate exports.
On the other hand if India’s infrastructure development continues to lag behind its
competitors particularly China, foreign investment could stall and development will be
focused solely on services industries such as IT outsourcing.
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Egypt
Tata and Essar vie for steel deal
The Egyptian government is considering Tata
Steel, India’s largest steel producer, and Essar
Steel Holdings for a US$ 3 bn steel and billet
plant which would focus on exporting to the
subcontinent. The two Indian companies are Ethiopia
among seven global firms who have made it to Indian group to invest in
the final round of bidding.
sugar and paper
The Chadha Group, an Indian
conglomerate, will invest a total
of US$ 190 mn into the creation
of a sugarcane plantation in
addition to facilities for the
production of sugar, paper
and ethanol. The company is
planning to start the plantation
of sugarcane on 100,000
hectares of land in West Shoa
of Oromia Regional State.
Kenya
Indian company to invest US$
500 mn
Essar Global Ltd is set to invest
US$ 500 mn in Kenya’s newest
mobile phone service operator,
Econet Wireless Kenya Ltd,
over the next two years. Recent
comparative statistics on the
East African Community show
that Kenya has the highest
number of mobile phone users
in the region. This is Essar’s
first move into sub-Saharan
Africa and could pave the way
for future investments into
Kenya and the rest of Africa.
Mozambique
BPCL invests US$ 75 mn in Mozambique
Bharat PetroResources (BPRL) has spent US$
75 mn in order to purchase a 10% stake in a
Mozambican oil block. BPRL has gone on to
state that “the closing of the transaction under the
agreement is subject to regulatory approvals of the
Mozambique government”.
South Africa
Carborundum buys 51% in South Africa’s Foskor Indian Railways to transport coal in
Zirconia Mozambique
Indian abrasives maker Carborundum Universal Ltd has RICON, which is a joint venture between IRCON
acquired a 51% stake in South Africa’s Foskor Zirconia and RITES two of India’s leading Public Sector
Proprietary Ltd for an undisclosed sum. Foskor Zirconia is Undertakings (PSU), has been given a 25 year
the third-largest producer of Zirconia in the world. concession to rehabilitate, operate and upgrade an
850km long rail line in Central Mozambique which
will also include the Beira Port. The upgrading of
the rail line is required to ensure the transportation
of coal. The improvement will cost around US$ 260
mn whilst the rehabilitation and operation of the
line will cost US$ 180 mn.
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65,950 2
128,000 4
470,000 14
2,650 80
Railways
In terms of length of railway network, India has one of the most extensive railway
networks in the world with about 63,000km of track. This roughly matches China’s
railway network. However, investment and maintenance of India’s rail infrastructure
has been insufficient in recent decades.
Moreover the capacity bottlenecks on heavy travelled railway routes combined with
the system-related advantages of other transport modes means that private investors
play a small role in financing the necessary railway infrastructure than is the case with
other modes of transport.
Nevertheless the Indian government has allocated around Rs 2.3 trillion (US$ 55
billion) to railway development projects. A new dedicated 1,469km freight line is under
construction from Jawaharlal Nehru Port, near Mumbai, to Dari, near Delhi. Work on
the 1,469km line will cost Rs114 billion (US$ 2.77 billion).
The question remains whether the new corridors will be built fast enough to handle
the surge in traffic growth and rail liberalisation will be effective enough, given that
state-owned Concur, which is jointly owned by Indian Railways and the central
government, will still haul the trains.
0
2001 2003 2005 2007 2009 (f) 2011 (f)
Passengers (bn) Freight (m tonnes)
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Seaports
India has twelve major ports and around 190 small ports along its 7,500km coastline.
Overall the ports handle 95% of India’s trade in goods by volume and 70% by value.
The Indian government acknowledges that in order to reach its target of more rapid
industrialisation, as well as achieving global status as a top player in world trade, the
country must expand its port capacities. As a consequence of this, the government is
aggressively pursuing its plans to expand and modernise ports across the country.
Airports
Air traffic in India is set to boom over the next five years. Passenger traffic is expected
to increase by 15% per year and cargo traffic by 11% per year on average until 2015.
The Centre for Asia-Pacific Aviation, a consultancy, predicts that domestic traffic will
grow 25-30% per year until 2010, with international traffic growth at 15%, taking the
overall market to more than 100 million passengers per annum.
The trend towards deregulation of the Indian air transport market is likely to continue
thus dismantling the remaining market entry barriers for private airlines in cross-
border traffic. The Indian government is responding to the expectations of higher air
traffic by investing in the modernisation of existing airports as well as the construction
of new ones. In 2008, the government announced that 35 new airports will be in
operation by 2009.
Similar to seaports, the majority of airport infrastructure projects in India are financed
through PPPs. The public funds needed for these projects are estimated at Rs 400
billion (US$ 9.5 billion) up to 2010.
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300
250
200
50
0
2002 2004 2006 2008 (f) 2010 (f) 2012 (f)
Telecoms
As the telecoms sector shows, where private capital and management disciplines
have been introduced the results have been remarkable. Indian telecommunications
has become one of the fastest-growing telecommunications markets in the world.
The industry added more than 5 million subscribers a month on average during
2007 and is expected to have 575 million within five years. It has moved from being
a country with one of the most expensive tariff rates in the world to one with the
cheapest.
Energy
As industry expands and rising incomes create greater power demand from
consumers, energy consumption will steadily grow.
With about 70% of India’s population is based in rural areas – much of which is
without electricity – per capita energy consumption was just 594 kilowatts in 2003,
according to the UN Development Programme, against 14,057 kW in the US.
The main reason for the supply bottlenecks is the previous shortage of investment in
power stations and the grid which failed to keep pace with the increase in demand.
The 11th FYP calls for an investment volume of Rs 10.3 trillion (US$ 245 billion). With
regards to opportunities for foreign investment, the investment climate in the Indian
energy sector is still largely prohibitive and until regulatory barriers are dismantled, the
scope for foreign investment in energy infrastructure is highly limited.
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Moreover power remains a highly political issue in India because much electricity to
rural areas and farmers is supposed to be free.
That leaves fewer options for some state-owned power companies to operate like
incentive-driven private companies. Until that happens, the leading players in many
industries will continue to sidestep the problem by building their own private power
stations.
13.80%
52.40%
34.00%
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September 2008
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