Indian Infrastructure - Challenges

Milind Joshi September 2010

Managing Director
Agenda

1 Introduction to IDFC Project Equity

2 The case for investing in Indian Infrastructure

3 Financing

4 Challenges and Opportunities

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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

Balance sheet of ~ USD 8.2 Bn; Net worth of ~ USD 1.6 Bn (June 2010)
Corp. +Investment

65% exposure to energy & transportation
Banking

Ranked #7 in global PF league tables for April ‐June, 2010 (Thomson Reuters)

Alternative Asset
Largest corpus of 3rd party equity funds in the Indian infrastructure sector
Management
~USD 2.1 Bn of funds under management

~ USD 4.8 Bn of AUM

Public Markets AM

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)
IDFC Foundation

Leading advisor for PPP project development s

Capacity building, training in the public-private partnership space

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IDFC Project Equity – India Infrastructure Fund

Premier Infrastructure Fund Core Infrastructure Focus

Collaboration
between the GoI &
leading Indian +
global FIs Energy and Transport
Utilities Infrastructure
Targeting India’s
USD ~930mn (IDFC
core infra • Stable predictable
and Citi anchors)
opportunity returns
• Barriers to entry
India • Not cyclical
Infrastructure • Inflation hedged
Fund • Regulated essential
services
Targeting • Natural monopoly
Best-in-class Fund
characteristics
predictable and Manager: leveraging
sustainable returns IDFC Social
Infrastructure and Telecom
Others Infrastructure
Product aligned with
market needs

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 Attractive Investment Destination?

Case For Infrastructure Investments In India Historical Under-investment in Infrastructure

Infrastructure investment as % of GDP

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

Source: Planning Commission

Stable and conducive Environment India likely to dominate Emerging Market Demand

Electricity Capacity Paved Roads

Fiscal incentives for infrastructure Incremental Demand in 2017 Incremental Demand in 2017

Liberalized FDI environment

Model Concession Agreements in place

Eased norms for foreign investment and ECBs

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

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FY10 Estimates by Govt.; FY09 Growth Rate – 6.7%

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

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Status of Indian Infrastructure

Sector Status Opportunity

• ~157 GW of installed capacity, peak deficit of 12% • Adding 46GW generation capacity by 2012
Power • 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

• Traffic estimates to grow 10%p.a. over next 5 years
Ports • Demand has grown @~9% over last 6 years
• Capacity addition of 819 mn tonnes
• High turn around time: 3.9 days

• Delhi, Mumbai airports successfully privatized

• 35 non-major airports to be upgraded
Airports • Greenfield airports developed in Hyd & Bangalore
• Airport services by private operators
• 92 airports, 8 handle 80% of traffic

• Only 2% of roads are NH

• >26,000 km of NH projects, Development of Expressways
Roads • NH carry 40% road traffic
• Development (78000km) of State Highways
• Vehicle traffic growing @ ~10%

• Development of freight corridors and railway lines on PPP

• Insufficient track coverage
Rail • Private container trains
• 3000 kms added in the ~30 yrs
• 26 stations to be redeveloped by PPP

• Tele-density 58% of which Mobile 93% • Operator expansion and new services like 3G and Wimax
Telecom • Adding ~15m per month • Passive infrastructure
• 13 private players • 37% increase in investment target for period till FY12

• Waste management and water supply projects

Urban • Multimodal transportation (Metro Rail, BRTS, Sealinks)
• Healthcare
Infra • Healthcare and Education
• 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

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Steps taken to promote PPP in Infrastructure

• Autonomous regulators, tariff authorities set up: Level playing field

Regulatory framework in
• Model Concession Agreements for Roads, Ports, Airports, Railways: Balancing interests
place
• Stable policy environment: optimal risk allocation; cost recovery model

• Streamlining approval process through simplification in appraisal mechanisms

Transparency
• Standardizing prequalification and bidding procedures to ensure efficiency
&
• Scheme for Viability Gap Funding
Financing
• Availability of long-term finance from IIFCL

Fiscal incentives • “Tax holidays” for infrastructure projects

• 100% FDI permitted in range of sectors

Liberalized environment
• 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

Infra Financing from 2007-2010 (%)
(in USD BN)
Funding
Source of Funds Requirement Availability
Gap
Commercial Banks 53.5 40.4
NBFCs (incl IIFCL) 24.9 20.1
Insurance Cos. 10.4 8.5 25.1
ECBs 15.4 10.1
Total Debt Funds 104.2 79.1
Equity (incl FDI) 37.3 36.9 0.4
Source : Planning Commission
Total 141.5 116.0 25.5
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 India’s 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 Global Infra Funds

Established
Capital
Holding • IDFC Project Equity •GE-CSFB
Markets
Company
• SBI Macquarie •Morgan Stanley

• Actis •AIF

Holding Private Equity Funds investing in Infra

Company
Private
with need • Sequoia (Ind Bharat)
Equity
for growth
capital • TPG Growth (Greenko)

• Bessemer (ITNL)

Project
Asset Equity /
Level Mezzanine
Capital

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Equity Financing

Public Markets Private Markets

Movement of SENSEX Private Equity in Infrastructure (US$ MM)

Indian companies raised USD 6.7 Bn of equity in first half
Out of USD 4.6 BN invested in H1 2010, Infrastructure
of 2010. (further USD 9 BN raise planned in 2H) received USD 1.6 BN.

Infra QIPs: GVK, Lanco, HCC
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)
Developmental Capital

Exits have picked up with 63 exits worth US$1.8 BN in
Long term Infrastructure Equity
2009, as against 22 exits worth USD 1 BN in 2008

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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

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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

• Land acquisition issues

Execution challenges
• 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

Higher equipment Better technical studies
Thermal MW supply capacity Hydro MW and inter-agency
needed coordination needed
Delay in equipment supply 3960 Geology and nature 960

Delay in award of works 998 For various Delay in MOEF Clearance 400
reasons including
Delay in financing 1500 Delay in DPR/ MoU 400
land acquisition,
Escrow cover 500 statutory Delay in award of works 823 Could be for various
clearances like
Law and Order 500 Delay in financing 1400 reasons including land
environment
acquisition, other
Total 7458 R&R issues 400 statutory clearances
Litigation 675
Total 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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