Less talk, more action

India has a new government. It is led by the same party that also led the previous administration, but this time things are widely anticipated to be different. The election that finished on 13 May delivered such an emphatic victory to the Indian National Congress party that Prime Minister Manmohan Singh’s cabinet is now expected to be able to govern more effectively than at any point during its first five years in power.

In infrastructure circles, the outcome of the democratic process is being welcomed: not only are practitioners confident that the government will go on managing the economy competently; they also look forward to it continuing its effort to foster the much needed investment into the country’s infrastructure.

Inclusive growth

Luis Miranda is president and CEO of IDFC Private Equity in Mumbai, which is currently investing its third infrastructure fund with $700 million of capital. In total, the group manages $1.3 billion and has built a multi-sector infrastructure portfolio that includes investments in Delhi International Airport, Gujarat Pipavav Port, Manipal Education and Doshion Water.

Commenting on the political and economic significance of the election, Miranda says: “The big story is that this was a vote for stability across the country. The government has a mandate now to focus on inclusive growth, i.e. growth that benefits everyone, including rural areas and those at the bottom of the pyramid.”

Because Congress won 206 of the 543 seats in the Lokh Saba, the lower chamber of India’s parliament, and now runs its United Progressive Alliance (UPA) coalition with relatively few partnering parties, it is deemed powerful enough to push harder than it used to implement policy. According to practitioners, the infrastructure sector can only benefit. Anil Ahuja, who runs the Indian operations of the infrastructure arm of global alternative capital provider 3i: “The new government has a strong mandate, which limits the need for consensus building every time a project is proposed.”

Another manager of infrastructure funds operating in India says the election has given the government a “new purpose of accomplishment”. He says the last five years have been something of a lost opportunity because “intense ideological debate” among politicians of varying stripes and colour often got in the way of genuine progress: “Debate is good, but in the end roads must get built.”

This ties in with the view that despite a clearly articulated pro-infrastructure agenda, recently there has only been limited advancement of the creation of the infrastructure assets that India, with its economy still growing strongly despite the global downturn, so urgently requires.

One area still in need of significant investment is transport. Says the source: “There is so much more to do with the roads, the ports programme is not finished, and neither are the airports.”

The government recognises that steps forward will need to be taken quickly. In June, Kamal Nath, India’s new road transport and highways minister, announced plans to create a new agency that will oversee efforts to markedly increase road construction. Nath told the Financial Times: “The roads are in a mess. At the moment we’ve been struggling with [building] 2 kilometres a day – I’ve set a target for 20 kilometres a day,” Nath was quoted as saying. To help finance the step change, foreign investors will be encouraged to participate.   

Reduced risk

There is no question that large sums of foreign direct investment will be needed. All told, observers calculate that India today requires several hundred billion dollars of new investment in infrastructure.

IDFC’s Miranda speaks of $500 billion of necessary funding, of which about a third must go into the power sector – “still the biggest bottleneck”. He sees transportation as the country’s “second priority”, followed by improvements to the water supply as well as waste management.

Ahuja at 3i is equally emphatic: “What is very clear to everyone is that India’s infrastructure shortfall remains very significant. Whether the current investment requirement totals $300 billion, $500 billion or $750 billion almost doesn’t matter – either way you are looking at a huge number and, if you assume that at least a quarter will need to be financed with equity, at a very interesting investment opportunity.”

3i has invested $500 million of the $1.2 billion India Infrastructure Fund it closed last year. The fund has invested $227 million for a stake in Adani, a Gujarat-based company developing a network of power plants in India that is currently preparing for an IPO. Another 3i Infrastructure investment in India is Krishnapatnam Port Company, which is at an advanced stage of developing a new deep-water port in the state of Andhra Pradesh on the country’s east coast.

Despite the remaining bottlenecks affecting the creation and deployment of new infrastructure in the country, investment professionals are adamant that many positive development have happened in the recent past as well. Ahuja says: “The last five years have provided clarity on the demand side: if you can build a high-quality piece of infrastructure that does the job, people will use it and they will be willing to pay.” In other words, for well-chosen and appropriately diligenced projects the commercial risk is no longer significant.

And with the new government in place, Ahuja also feels that regulatory uncertainty is now less of a concern: “One thing infrastructure investors no longer need to worry about is regulatory stability. Other risks remain of course, but this is one big one out of the window. I expect this government to create the requisite framework to enable people to get things done.”

The onus is now on the government to deliver. The to-do list is long, but rarely in India’s recent history does there seem to have been an equally promising opportunity to get the job done.