Indian Infrastructure - Challenges

Milind Joshi
Managing Director

September 2010

Agenda

Introduction to IDFC Project Equity

The case for investing in Indian Infrastructure

Financing

Challenges and Opportunities

IDFC An Infrastructure Focused Financial Services Group

Created for and part of India's Infra development since 1997

Listed 2005 (BSE & NSE stock exchanges), Current market cap ~ US$ 5.7 Bn, ~45% owned by FIIs
500+ employees, FY 31.03.2010 Profits: US$ 226 mn

Corp. +Investment
Banking

Alternative Asset
Management

Public Markets AM

IDFC Foundation

Balance sheet of ~ USD 8.2 Bn; Net worth of ~ USD 1.6 Bn (June 2010)

65% exposure to energy & transportation

Ranked #7 in global PF league tables for April

Largest corpus of 3rd party equity funds in the Indian infrastructure sector

~USD 2.1 Bn of funds under management

~ USD 4.8 Bn of AUM

Rated the best performing fund house in Q1 and Q2 FY10 (ET MF Tracker)

Key advisor in various policy initiatives (Electricity Act, airport privatization, ports, highways
sector Concession Agreements etc)

Leading advisor for PPP project development s

Capacity building, training in the public-private partnership space

June, 2010 (Thomson Reuters)

IDFC Project Equity India Infrastructure Fund

Premier Infrastructure Fund

Core Infrastructure Focus

Collaboration
between the GoI &
leading Indian +
global FIs
Targeting Indias

USD ~930mn (IDFC

core infra

and Citi anchors)

opportunity

India
Infrastructure
Fund
Targeting

Best-in-class Fund

predictable and

Manager: leveraging

sustainable returns

IDFC
Product aligned with

Energy and
Utilities

Transport
Infrastructure
Stable predictable
returns
Barriers to entry
Not cyclical
Inflation hedged
Regulated essential
services
Natural monopoly
characteristics

Social
Infrastructure and
Others

Telecom
Infrastructure

market needs

Attractive Investment Destination?

Case For Infrastructure Investments In India

2nd fastest growing economy @ 7.2%1

GDP growth constrained by lack of infrastructure

Infrastructure investment of 8-9% of GDP required

Govt. investment limited on account of fiscal deficit

Historical Under-investment in Infrastructure

Infrastructure investment as % of GDP

Source: Planning Commission

Stable and conducive Environment

Fiscal incentives for infrastructure

Liberalized FDI environment

Model Concession Agreements in place

Eased norms for foreign investment and ECBs

India likely to dominate Emerging Market Demand

Electricity Capacity
Incremental Demand in 2017

Paved Roads
Incremental Demand in 2017

Source: India CAN Afford Its Massive Infrastructure Needs, Goldman Sachs, Sep 2009
Incremental Demand is ex-China emerging market demand

FY10 Estimates by Govt.; FY09 Growth Rate 6.7%

Attractive, under-served market with large private sector equity opportunity

5

Status of Indian Infrastructure

Sector

Power

Ports

Airports

Roads

Rail

Telecom

Urban
Infra

Status

Opportunity

~157 GW of installed capacity, peak deficit of 12%

Adding 46GW generation capacity by 2012

Inadequate cost recovery by utilities

Franchisee model for distribution

High T&D losses (>30%)

4x increase in transmission capacity

13 major ports operating at 94% capacity

Demand has grown @~9% over last 6 years

Traffic estimates to grow 10%p.a. over next 5 years

High turn around time: 3.9 days

Capacity addition of 819 mn tonnes

Delhi, Mumbai airports successfully privatized

Greenfield airports developed in Hyd & Bangalore

35 non-major airports to be upgraded

92 airports, 8 handle 80% of traffic

Airport services by private operators

Only 2% of roads are NH

NH carry 40% road traffic

>26,000 km of NH projects, Development of Expressways

Vehicle traffic growing @ ~10%

Development (78000km) of State Highways

Insufficient track coverage

Development of freight corridors and railway lines on PPP

3000 kms added in the ~30 yrs

Private container trains

26 stations to be redeveloped by PPP

Tele-density 58% of which Mobile 93%

Operator expansion and new services like 3G and Wimax

Adding ~15m per month

Passive infrastructure

13 private players

37% increase in investment target for period till FY12

Multimodal transportation (Metro Rail, BRTS, Sealinks)

Waste management and water supply projects

Healthcare and Education

Healthcare

Education
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Sector Specific Opportunities

USD 1.7 Trillion Needed over the next decade
Need for Infrastructure Spending (2010-2019,USD Bn)

Proof of Concept (Already spent in FY2008-10,USD Bn)

Source : Goldman Sachs

Source : Planning Commission

Government seeking larger participation by the private sector (Target of 50%; up from 36%)
Policy liberalisation and
regulatory framework

Powerful rationale to invest in Indian infrastructure

Steps taken to promote PPP in Infrastructure

Regulatory framework in
place

Transparency
&
Financing

Fiscal incentives

Liberalized environment

Autonomous regulators, tariff authorities set up: Level playing field

Model Concession Agreements for Roads, Ports, Airports, Railways: Balancing interests

Stable policy environment: optimal risk allocation; cost recovery model

Streamlining approval process through simplification in appraisal mechanisms

Standardizing prequalification and bidding procedures to ensure efficiency

Scheme for Viability Gap Funding

Availability of long-term finance from IIFCL

Tax holidays for infrastructure projects

100% FDI permitted in range of sectors

Eased norms for foreign investment and ECBs

Conducive regulatory environment recognizes need for private investment in infrastructure

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Financing Avenues
Infrastructure Finance required in 2010-11 & 2011-12
(in USD BN)
Source of Funds

Infra Financing from 2007-2010 (%)

Funding
Gap

Requirement

Availability

Commercial Banks

53.5

40.4

NBFCs (incl IIFCL)

24.9

20.1

Insurance Cos.

10.4

8.5

ECBs

15.4

10.1

Total Debt Funds

104.2

79.1

Equity (incl FDI)

37.3

36.9

0.4

Total

141.5

116.0

25.5

25.1

Source : Planning Commission

Source : Planning Commission

Debt Financing Avenues

Domestic Banks Credit/NBFCs

Insurance Companies

IIFCL

Proposed USD 11 BN Infra Debt Fund

ECBs
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Credit Financing - Issues

Fixed rate not available beyond 3 t o 5 years - Leads to interest rate risk
Tenor Restrictions typically 10-15 years - Infra projects require very long term financing
Interest Rate linked to Bank PLRs - Not a very transparent mechanism
Domestic Financing

Primarily done by commercial banks Liabilities are short term

Need to encourage insurance & pension funds

Can provide 15-25 year debt

Commonly provide debt in International markets

Ability of foreign banks constrained by Indias sovereign rating

ECBs

Project structuring inadequate to provide comfort to foreign banks

Foreign currency risk difficult and expensive to diversify

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Equity Financing

Equity Financing Avenues

Private Equity Funds investing in Infra

India Focused Infra Funds

Established
Holding
Company

Holding
Company
with need
for growth
capital

Asset
Level

Capital
Markets

Global Infra Funds

IDFC Project Equity

GE-CSFB

SBI Macquarie

Morgan Stanley

Actis

AIF

Private Equity Funds investing in Infra

Private
Equity

Sequoia (Ind Bharat)

TPG Growth (Greenko)

Bessemer (ITNL)

Project
Equity /
Mezzanine
Capital

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Equity Financing
Public Markets
Movement of SENSEX

Indian companies raised USD 6.7 Bn of equity in first half

of 2010. (further USD 9 BN raise planned in 2H)

Infra QIPs: GVK, Lanco, HCC

Private Markets
Private Equity in Infrastructure (US$ MM)

Out of USD 4.6 BN invested in H1 2010, Infrastructure

received USD 1.6 BN.

Deals have been of 4 types:

Revival in IPO Markets.

Discount to IPO

>USD 1.6Bn raised through infra IPOs (Jaypee Infra,

Growth Capital

SJVNL, ILFS Transport, JSWE)

Exits have picked up with 63 exits worth US$1.8 BN in

2009, as against 22 exits worth USD 1 BN in 2008

Developmental Capital

Long term Infrastructure Equity

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Equity Financing
Expected Risk & Return

Actual Return of FTSE IDFC Infra Index

FTSE IDFC Infra Index has increased at a

CAGR of 31% over last 8 years

13

Challenges for PPP in Infrastructure

Targets not getting translated to steady pipeline of projects because of limited
Institutional Capacity

institutional capacity
Multiple Approvals
Overlap of Jurisdiction

Underdeveloped Debt Capital Markets

Availability of Capital

Pension/Insurance Sector to be opened up

Shortfall in Equity Capital with local sponsors

Execution challenges

Land acquisition issues

Delayed permits & clearances

Dispute Resolution

Lengthy dispute resolution mechanism

The next frontier in Emerging Challenges for a successful PPP program is Implementation
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Case in point: Growth in power sector

Unsatisfactory

track

record

in

meeting

development targets!


Even an expected capacity increase of 14,000

MW in FY11 is below target by around 35%

Under-achievement in capacity increase has

ranged between 31% - 66% in the last 3 years

Target too high or pace too slow?

Reasons for delay during 2002-07

Thermal
Delay in equipment supply
Delay in award of works
Delay in financing

MW
3960
998
1500

Escrow cover

500

Law and Order

500

Total

7458

Higher equipment
supply capacity
needed
For various
reasons including
land acquisition,
statutory
clearances like
environment

Hydro

MW

Geology and nature

960

Delay in MOEF Clearance

400

Delay in DPR/ MoU

400

Delay in award of works

823

Delay in financing

1400

R&R issues

400

Litigation

675

Total

Better technical studies

and inter-agency
coordination needed

Could be for various

reasons including land
acquisition, other
statutory clearances

5058

Need to identify the right partners with an established execution track record
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Case in point: Road traffic estimates

Traffic on some recently commissioned projects has been below projections by more than 35%

Ensuring return of capital essential for stakeholders:



Debt: Enough elbow room to be kept in the form of a tail to allow for restructuring

Equity: Geographically diversified portfolio of roads to be created for risk management

Demonstrating superior returns post commissioning is the key

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Case in point: Fuel shortage

 Coal India Ltd (CIL) targeting a growth rate ~33% higher than historical trends
 Only 24/210 blocks operational primarily due to land acquisition issues, permit delays and infrastructure problems
 Supply target requires acquisition of 50,000 Ha of land per annum may not be achieved

 Even if growth targets are met, disparity between demand - supply to continue

Captive coal mines are also running behind schedule:
CIL Coal Production

CIL Deficit Scenario

 A number of private sector coal mines scheduled for commissioning between FY12-15 are still awaiting
environmental clearances

Due diligence on project readiness is critical

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THANK YOU

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