Highways:

The present condition:

Here’s an interesting statistic. Ten

out of 28 states (barring Delhi,
which is not a full-fledged state)
account for 65 per cent of the
country’s national highways
totalling around 71,000 km.
Globally, while a goods vehicle
clocks anywhere up to 800 km a
day, in India, this used to be
around 300 km until recently. The
road network of India needs to be
coordinated at both Central and
state levels. One way is to expand
the scope of NHDP III that aims to
connect key national capitals,
towns and cities.

Ports

Shipping minister G.K. Vasan told the parliament recently,

major and non-major ports in India achieved a total cargo
throughput of 844.9 million tonnes, reflecting an increase of
13.6 per cent in 2009-10, compared to a marginal increase
of 2.5 per cent in 2008-09. Separately, growth in cargo
handled at major and non-major ports was 5.7 per cent and
33.2 per cent, respectively, compared to 2.2 per cent and
3.3 per cent, in 2008-09.
The National Maritime Development Programme (NMDP) is aimed at overhauling India’s ports. Of the
total 199 ports, upgradation of 47 has been completed and 71 projects are in progress. For the
remaining 81 ports, upgradation plans are awaiting clearances. In the 12 major ports, 276 sub-projects
have been identified for implementation up to 2011-12.

Airports

Way back in 2003, the Naresh Chandra committee,

which was appointed to look at India’s aviation
infrastructure, had noted that several airports
across India are an embarrassment for the country.
Today, the airports at Delhi, Mumbai, Hyderabad
and Bangalore have become truly world class,
thanks to private sector involvement. But still
travellers to smaller airports such as Ludhiana,
Pune, Ahmedabad, Ranchi, Goa and Bhopal would
vouch for the fact that the state of these airports
have left a lasting impression on them, and we are
not talking positive here.

A carefully worked out plan to involve the private

sector in upgrading at least 35-odd non metro
airports (see map) has been languishing since 2008.
Senior ministry officials say the plan has primarily been stymied by AAI itself. “They don’t have the
money to modernise all the airports,” says a senior ministry source. “But fearing loss of power, AAI has
been opposing the private sector getting involved, too.”

Considering the fact that the ministry has set itself a target of operationalising 500 airports by 2020, it
may be a good idea to take the modernisation and upgradation of existing airports out of the AAI’s
hands so that it can concentrate on operationalising new ones.

Power

If all goes according to plan, in 2010-11, the country is expected to add 21,441 MW of fresh power
projects — the highest ever in a single year. But here’s the irony: the country will still face huge power
shortages over the medium term.

Barring states such as Delhi, Sikkim, Himachal Pradesh, Jharkhand and Orissa, which are expected to
meet peak power demand in 2010-11, all other states are expected to face shortages. As many as 16 of
the 28 states may face a shortage of over 10 per cent. Of these, four states can see a shortage of 30 per
cent.
 In The Pipeline
West Bengal tops the list of states
with upcoming power capacity in the
next year
No. of Capacit
State Projects y (MW)
West Bengal 5 2882
UP 5 2390
Maharashtra 3 2200
Andhra
Pradesh 8 1680
Gujarat 4 1612
Delhi 2 1608
Karnataka 3 1485
Rajasthan 3 1310
Tamil Nadu 2 1250
Orissa 1 1200
Harayana 2 1100
Jharkhand 2 1025
Chhattisgarh 1 500
HP 4 439
J&K 2 240
Uttarakhand 1 200
Kerala 1 100
Sikkim 1 99
Meghalaya 1 84
Assam 1 37
Total 52 21441
A closer analysis of data throws up another interesting
facet. While Delhi is expected to benefit on account of
new projects planned for the Commonwealth Games
(such as Dadri, Jhajjar and Pragati), Chhattisgarh, which
has huge coal reserves, is expected to have close to a
five-fold increase in the level of shortages despite
having over 50,000 MW of power projects in the
pipeline. Why this anomaly? According to a power
ministry official, only one project is expected this year.
The others will spill into the 12th Five Year Plan (2012-
17).

Another important factor is that demand is growing

faster than supply, even faster than what the record
capacity addition can address.

For example, Uttar Pradesh is expected to have more

than 2,300 MW added this year, but forecasts show
that the peak power shortage may increase from (-) 21
per cent to slightly over (-) 29 per cent. In Haryana,
which expects to add 1,100 MW, the peak demand
shortage is expected to rise from (-) 7.4 per cent to (-) 31 per cent. And Andhra Pradesh is expected to
add 1,680 MW while the peak shortage in expected to rise from (-) 10.6 per cent to (-) 14 per cent.

Adding capacity is one way to solve the issue. However, there are projects that get announced but don’t
see the light of day. So, there  has to be a ‘Plan B’. Former power secretary E.A.S. Sarma says that one
way to push power supply is by increasing the efficiency of existing plants.

The bottom line: India needs both new power projects as well as improved efficiencies in existing plants
to meet the burgeoning demand.

Telecom

Telecom is one sector that has seen spectacular success in recent times. The growth of mobile
telephony, in particular, has made India the world’s fastest-growing telecom market. Consider this: in
1995, when private operators
launched their services, the number
of mobile subscribers in India was
77,000. In 2000, that count stood at
3.6 million — a 116 per cent CAGR
(compound annual growth rate).
Since then, thanks largely to
competition and increasing
affordability among consumers, the
sector has grown manifold.
According to data released by
Telecom Regulatory Authority of
India (Trai), at the end of June 2010,
India had 653 million mobile
connections, with 10-15 million
subscribers being added every
month. On an average, developed
countries added 3-4 million
subscribers, latin america added
about 5-7 million, Africa added 1-1.5
million and asia added 8-10 million.

According to a research conducted by the Indian Council for Research on International Economic
Relations (Icrier) in 2008, states with 10 per cent higher mobile phone penetration enjoyed 1.2 per cent
higher annual average growth rate than those with a lower teledensity. However, with new operators
offering lower tariffs, telecom giants are facing a fall in average revenue per user (arpu).

The rise of mobile telephony has sidelined the fixed-line connections. The total fixed-line connections
has fallen from 45 million in 2000 to 36 million at the end of June 2010.
Investment Scenario: Statewise

So, what attracts a business entity to a state? Obviously, availability of land and other resources, access
to markets, availability of skilled labour, etc., all matter. Orissa, Chhattisgarh and Andhra Pradesh, for
instance, offer immense natural resources.

What also matters is how the state approaches the idea of investment. Things like tax incentives, how
fast projects can start, how quickly and smoothly land allotment and labour employment clearances are
done, speed of water and electricity connections, etc., make a difference. Gujarat, for instance, is known
for its quick decision-making and good infrastructure. “Most states are getting investments for their
investment-friendly approach,” says Anjan Roy, adviser for economic affairs at Ficci. Adds Sunil R.
Chandiramani, partner and business leader for government services at Ernst & Young: “There has to be
commitment from senior individuals within the government who reach out to the companies and make
those commitments.”

Another important factor in attracting investments is political stability and security. Jharkhand, for
example, attracted investment proposals worth Rs 92,600 crore in 2008-09. But in 2009-10, the number
slumped to a mere Rs 18,800 crore, thanks to security issues.
In terms of attracting foreign direct investment (FDI), the northern and western financial centres top the
charts. Delhi and parts of Uttar Pradesh and Haryana attracted the most FDI in 2009-10 worth Rs 46,197
crore, pushing Mumbai (Maharashtra, Dadra & Nagar Haveli, and Daman & Diu) to second spot (Rs
39,404 crore). According to the World Investment Report 2010, India received $34.6 billion of FDI in
2009 to rank 9th globally. With domestic and foreign investments picking up, India’s economy can only
get stronger.
Major Power Hubs of Future

Going by these plans, on paper, just three states (MP,Orissa & Chattisgarh) will supply 125,000 MW
power in the next decade, and almost 34 per cent of India’s targeted capacity in the next three to four
years (taking into account the spillovers). The contemplated capacity addition during the 12th Five-year
Plan is only 100,000 MW.

More than a decade ago, India’s power map was drawn on different lines. Large projects were near the
consumer or coal mines. Development was solely by central or state governments. And what were called
‘super thermal power stations’ had capacities of only about 2,000 MW.

Now, not only is 2,000 MW small, the factors influencing the location of power stations have changed.
For instance, at Mundra (Gujarat), Tata Power and Adani Power have projects of over 8,000 MW
together; much bigger than the erstwhile ‘super power station’ at Ramagundam in Andhra Pradesh,
whose increased potential is just over 3,000 MW.

Orissa, Chhattisgarh, Madhya Pradesh, Tamil Nadu and Andhra Pradesh also have power hubs.
Arunachal Pradesh has plans for hydel projects of 49,126 MW — more than half of India’s estimated
80,000 MW hydel potential.

This concentration of power projects in a few regions is giving rise to ‘power clusters’ and is happening
mainly due to changes in policy about who can build power plants, merchant sale and, of course, fuel
supply options.
One of the factors responsible for the spurt in mega power projects is delicensing. “With generation
being delicensed, developers are free to set up projects anywhere as long as they have land and fuel
supply source,” says D.V. Kapur, former chairman of NTPC. Other reforms included target-based
performance for government power utilities; distribution in states was split into zones and converted
into companies; and power pricing was freed to an extent — which made power an attractive sector.

A couple of years ago, the central government amended the hydel power policy allowing a promoter to
use 40 per cent of the output for merchant sales. Arunachal Pradesh emerged a hydel power major.
Upper Siang project on the Dibang river alone can produce 11,000 MW — similar to the coastal power
cluster at Krishnapatnam in Andhra Pradesh. Projects totalling 30,000 MW have already been awarded
to developers. Private bidders included big names such as Anil Ambani’s Reliance Power, Lanco
Infratech, KSK Energy, GMR and GVK, as well as smaller players such as Hyderabad-based Rithwik
Projects.

A Win-Win Deal: How can a private player gain?

States get investments as well as cheap power. In Madhya Pradesh, the power generator has to offer 10
per cent of the output at variable cost, which can even be below Re 1 per unit (the fixed or the capital
cost can be Re 1-Rs 2.5 per unit). Indiabulls has offered the Chhattisgarh government a long-term rate of
less than Re 1 per unit for a part of the output from its 1,320-MW Bhaiyathan project; it can sell the
balance in the merchant power market where rates are Rs 4-5 per unit. Its offer of Re 1 per unit is lower
than the Rs 1.19 per unit that Reliance ADAG offered for the Sasan mega project in Madhya Pradesh.

A Look into the Competitor’s Moves

Videocon in Oil & Gas, Telecom & Power: Picked up stakes in Brazilian offshore block which discovered
oil. Also, another field gave such good news. Videocon Group chairman Venugopal Nandlal Dhoot was
suddenly sitting on a goldmine.

Globally, oil and gas delivers a gross margin of 50-60 per cent, while durables offers 13-15 per cent. “The
saviour will be the oil and gas find, which will keep its cash flow (going). Or, it will be tough for the
company operating in highly competitive verticals,” says a senior official from a foreign rating agency.

The pivot of this makeover is oil and gas in which Dhoot will invest $500-600 million in the next 3-5
years. The second axis of this change is a thrust into the power sector where Videocon hasn’t had the
most auspicious beginning. Its first attempt in 1998 with a 1,000-MW plant in Tamil Nadu did not go
through as the state government refused to sanction it. But it has planned two 2,400-MW thermal
plants in Gujarat and Chhattisgarh at an estimated investment of Rs 11,600 crore over four years.

Telecom, where Videocon has already invested an equity capital of Rs 540 crore in four circles, will see
fresh funds of Rs 14,000 crore over five years for an all-India rollout. Established businesses such as
consumer durables are not as capital intensive as the new ones, and DTH is a small business in
comparison. Before the makeover is complete, Dhoot expects to treble the group’s topline to $10 billion
by 2012.
Dhoot’s first oil interest — the ONGC-Cairn Energy-Videocon consortium’s 15-year-old fields at Ravva in
Andhra Pradesh — have seen production fall 44 per cent last year to 40,000 barrels a day as reserves
begin to deplete. At peak production, Videocon’s share of oil from the new fields would be around
10,000 barrels a day, and gas at 0.45 million metric standard cubic meter per day (mmscmd). It may be
small, but significant. In the private sector, for instance, RIL produces 50,000 barrels of oil and 62
mmscmd of gas and Cairn produces 69,095 barrels of oil equivalent per day.

“Videocon is still a small player (in oil and gas), compared to a Reliance Industries and even Cairn Energy.
The business is not big, but it is profitable, and the company has got in at the right time,” says Avinash
Gorakshakar, head of research at Anagram Stock Broking. Oil contributes about Rs 1,100 crore to the
group’s Rs 10,674 crore revenues.

Dhoot says his biggest advantage is that oil and gas investment will make money at global crude prices
of $40 per barrel and above. “If oil prices go down to $30, we lose,” he says. But with crude prices
hovering around $75 per barrel, the margins are good for now.

He now eyes his consortia’s eight other blocks in five countries (East Timor, Brazil, Mozambique,
Indonesia and Australia) and hopes to continue the dream run by entering Kenya, where the gas
opportunity is likely to be four times bigger than Mozambique.

To his credit, Dhoot knew his limitations in oil and gas. In spite of a decade and a half of experience of
investing in oil and gas at Ravva, he did not bid as an operator in any of the international assets. Bidding
as an operator-investor is not only the big boys’ multi-billion dollar game, but also risky for the low
success rates in discoveries. So, the group continues to be a minority investor in each of the oil and gas
assets.

But even that needs detailed assessment of oil fields. So, as far back as 1992, Videocon had hired S.
Padmanabhan, a retired IAS officer, as a director to advise on the oil and gas and power businesses. In
1996, it set up a research centre in Chennai with three geo-scientists and four geo-physicists — all ex-
ONGC — advising Dhoot in bidding for oil and gas assets.

Power Foray: While a Dhirubhai-like goal of a 5,000-MW plant is still some time away, Videocon is
starting out with two projects of 2,400 MW each in Gujarat and Chhattisgarh, and the company has
pumped in Rs 400-450 crore. This being a low-margin business, players have to be careful in assessing
risks such as execution, raw material availability and tariff,” Today, we can sell power in the open
market. The peak demand price is as high as Rs 7 per unit, against the generation cost of Rs 2.5-3 per
unit.”
Telecom Tussle: Videocon plans to invest Rs 14,000 crore in telecom over the next five years, and has
targeted a market share of 6-7 per cent with 100 million subscribers. But with India’s mobile subscriber
base touching 618 million and the average revenue per user falling to just Rs 260-270 per month, the
challenge is differentiation in a crowded market. Also, Videocon failed to win anything in the recent 3G
auctions.
But as it turns out, Dhoot’s may not have a long-term view on telecom, and may wish to monetise the
investment soon enough. Cellcos can bring in up to 74 per cent foreign partnerships. “People are waiting
to enter India. One would realise a better value of our business if we cover a greater part of the country,
garnering more subscribers,” says Saurabh.

RIL in shale gas: RIL has invested $3 billion in shale gas exploration in North US. What is really attracting
hydrocarbon investors such as RIL to shale gas is the possibility of extracting shale gas at affordable rates
to make it viable for production and sale. Half a decade ago, shale gas finds were not viable. However,
technologies such as horizontal drilling and developments such as hydraulic fracturing has made gas
extraction from shale rocks more affordable.

It may still be a while before shale gas starts flowing freely through gas stations the world over. Or, even
in the US. Production of shale gas is viable at around $5 per million British thermal units (mmbtu) while
current spot price is around $6 per mmbtu (long-term contracts are being tied at over $7 per mmbtu).
However, the hope is that as soon as the US and the world economy recovers, demand should perk up,
raising prices to the level that makes shale gas affordable. Alternatively, new extraction techniques
could bring down costs, making it viable even before. The belief is that the gap between viability and
current costs is so low that a solution will emerge sooner rather than later.

As for RIL, the bet on shale gas is crucial to Ambani’s dream of doubling RIL’s enterprise value from $80
billion to $160 billion in the next decade. “We will enhance efficiencies across the chain by drawing on
our experience in drilling and project management. We will commit capital alongside proven low-cost
operators to accelerate the development of this resource,” he said at the AGM. “Reliance viewed
foreign ventures in a more sombre light because of high political risk. To compensate the risk, it wanted
10 per cent higher return compared to its average of 20 per cent return in India,” says a Mumbai-based
analyst. But with shale gas, RIL may be seeing foreign investments in a different light.

GMR

As visible as airports are in the group’s business — they are impressive showcases — the projects
portfolio is itself changing. In three years from now, energy and power projects will form the biggest
chunk, accounting for more than half of the group’s revenues and capital expenditure.

Infrastructure projects have a few critical success factors: the height of the entry barriers, the ability to
get long-term debt financing, execution within budget and on time, backed by a well-designed overall
plan. On the face of it, most analysts seem to agree that GMR has demonstrated that it has all the
necessary tools, or is in the process of developing them.

Powering Through

The GMR Group started as an independent power

producer in Tamil Nadu several years ago, then went on
to build its first barge-mounted power plant. Post-
Dabhol, greater clarity on contract dispute resolution
and easing regulations created more opportunities:
India’s economic growth could not be built on chronic
power energy deficits and shortages. GMR Energy, a
100 per cent subsidiary of GMRIL, has an aggressive
expansion plan that envisages building a portfolio of
projects — a mix of coal, gas and hydel power — that
will together generate over 7,000 megawatt (MW)
electricity. Currently, the company has an installed
capacity of 823 MW, of which two projects are gas-
based (the barge-based plant that has been shifted to
Kakinada from Mangalore and the second at Vemagiri in
Andhra Pradesh) while the Chennai plant runs on LSHS, or
low sulphur heavy stock, a residual fuel processed from
indigenous crude.

Acquiring 50 per cent stake in InterGen (see G.M. Rao’s

interview on page 38) and Singapore-based Island
Power (which it bought from InterGen) added to the
portfolio. And acquisition of a coal mine in Indonesia gives it access to a mix of fuels. But why not
acquire an Indian coal mine? “The coal available domestically is a high-moisture variety, and there are
logistical difficulties getting it to the power plants,” explains B.V.N. Rao, chairman of the group’s energy
business. “There are few new mines, and pollution effects are high.”

On the face of it, the energy business will be a mix of fixed rate power purchase agreements and
merchant power sales, besides power trading revenue. This demonstrates the group’s  cautious
approach to risk. At present, merchant power sells at about Rs 3.75 a unit. “Our perspective is 15 years,
and it is unlikely that this will be higher (than Rs 3.75). Anything above that price is a lottery,” says B.V.N.
Rao.

There has been talk of getting into distribution, and betting about Rs 3,000 crore on transmission grids.
But the watchword continues to be caution, given the risk of local agitations, and the huge capital costs
associated with building a separate transmission grid
“Earlier, most players built power plants and
operated them, much like any manufacturing
business,” says Udgirkar. “Now, it is all about
managing the business, trading power, dealing with
different buyers and managing risk. Separate risks,
separate management.

Going On A Roadshow
The company has eight road projects, with a mix of
toll roads and annuities. Of the six that are
operational, three are toll-based and three
annuities. (The company’s revenues from toll roads
depends on traffic and a revenue sharing
arrangement with governments, while annuities pay
the company a fixed fee each year and the company
maintains and manages the roads). Two projects
(one toll-based and one annuity-based) are
expected to become operational in 2012.

GMRIL’s success in the roads segment is based on

its execution capability: all its roads have been
completed within the timeframe agreed upon, and
two of them well ahead of time, earning the company a performance bonus from the National Highways
Authority of India (NHAI).

The toll road has to be lucrative, which puts the bulk of the risk on the developer. Second, it is more
than building the road: maintenance is a continuous factor, and needs consistent investment. “Rising
vehicular traffic may be a great thing, but users’ expectations are also higher,” says a senior partner in a
consulting firm who wished to remain anonymous. “If freight traffic has to wait at toll stations for long,
the effects could be adverse. So service levels are critical.”

G.M. Rao says the trick is to get longer stretches of

road to design and build — the longer the road, the
more lucrative it is. Having stayed in the company’s
comfort zone of south India (it has only one road
project in north India), the roads business has
proved a good bet.
OIL RETAIL BUSINESS: Has price deregulation helped?

The retail fuel pump owners and managers of three private

sector companies — Essar, Reliance Industries and Shell —
are hoping that this move will give them the edge to get
their business back on track, at least partially (diesel prices
are still regulated). At least Essar and Reliance fuel pumps
are hoping that their more efficient refineries and better
managed buying capacities, coupled with quicker decision
making, will help them undercut public-sector fuel pumps in
petrol prices and woo away customers.

At the moment, the three players  have a mere 2,829 pumps

between themselves compared to around 37,331 pumps of
the public-sector oil marketing companies (OMCs). The market share of the private players in the fuel
retail business is a minuscule 4 per cent of the overall 53 million tonnes retail market. Of the trio, Essar
has the biggest retail operation currently — it has 1,340 outlets and 2.5 per cent of the total market. It
has sanction to set up 2,500 by the end of the year. Reliance Industries has 600- odd pumps functioning.

Shell is the smallest, and perhaps the weakest of the lot. It has 74 pumps operating currently, and it is
handicapped by the fact that it does not have any refinery of its own. It buys petrol and diesel from the
Mangalore Refinery, and sells it through its pumps. So its flexibility in pricing is limited.(M&M can also
enter this way.)

Analysts expect a price war to

break out soon — at least in
petrol and in the areas the
private sector players have their
pumps — because of a few
reasons. For one, given that the
private sector players

really have no other weapon

than pricing in their armoury to
take away customers from
public-sector pumps, they could
play it to the hilt. More
importantly, the public sector
OMCs will be somewhat
handicapped initially at least.
Sources in the petroleum and
natural gas ministry say that the
public sector OMCs are expected
to maintain pricing parity with each other, and also revise petrol prices only once every three weeks. On
the other hand, Reliance and Essar will not have to deal with issues like this. Also, because they have
modern refineries capable of handling a wide range of crude oil varieties and very efficiently at that,
they have a cost advantage in terms of refining compared to public sector OMCs. Many of the old public-
sector refineries that supply oil are capable of producing only limited varieties of oil, which makes them
somewhat uncompetitive while buying crude from the global market.

Currently, Essar seems best poised to take advantage of the petrol decontrol move. It runs its retail
outlets in a ‘Franchisee Model’, wherein the ‘franchisee’ brings in suitable land, which is taken on lease
by the company at the rate of 5 per cent of the government assessed value of the land. Then the
franchisee puts up the RO as per Essar design and he is compensated for the same by way of ‘Return on
Investment’ at the rate of 5 per cent of the investments every year. He then gets commission for the
product ‘bought and sold’ by him.

Reliance operates through two models — Coco (company owned, company operated) and Dodo (dealer
owned, dealer operated). The dealer-owned, dealer-operated outlets had the worst time during the
price hike, because they could not remain competitive. Most of the 815 outlets that closed were dealer-
owned outlets. Reliance compensated them by buying their land and helping them exit when the
businesses became unviable. Analysts say that Reliance will expand mostly through the company-owned
and -operated route.

Is power profitable?

Currently, around 100 power projects are being developed by the private sector in India. Most of these
plants have an installed capacity of over 1,000 megawatt (MW), and add up to over Rs 5,00,000 crore of
investment. But a similar enthusiasm in power projects was witnessed just over a decade back. Of that
list, totalling 74,000 MW, barely 2,000-3,000 MW actually got commissioned. Investors came and left,
and the projects remained only on paper. So what has changed over the past 10 years for this renewed
enthusiasm?

The biggest attraction is something that did not exist 10 years ago — power trading. A rather obtuse
concept for a power-deficient nation, power trading on exchanges is a lucrative opportunity for power
producers with peak rates rising to as high as Rs 7-8 per unit — especially during summer — compared
to Rs 2.5-3 per unit for power sold to the state utilities. It is this high price — that states are willing to
pay — that encourages merchant power producers to bear the risks instead of opting for assured long-
term power supply contracts for the entire project.
Deficit Attracts
As per the Centre’s 17th Power Survey, India will have a peak demand of 218,209 MW by 2016, a 70 per
cent increase in six years — it is estimated to be 126,951 MW for 2010-11 (FY11). In terms of deficit,
even with an installed capacity of 160,000 MW, the peak deficit for FY11 is expected to be around
15,418 MW (12 per cent). In the past fiscal, deficit remained at this level.

Look at it differently: even with record capacity addition of 21,441 MW expected in FY11, a deficit of 12
per cent indicates the demand-supply gap remains. Going by this trend, even if 18,000 MW is added
each year, India will still have a peak deficit of 12 per cent by 2016. According to Central Electricity
Regulatory Commission (CERC), the size of the short-term market (spot market) has grown by 20 per
cent between 2008 and 2009. In terms of value, CERC says, the short-term market was about Rs 19,217
crore in 2009 with a whopping Rs 15,897 crore being traded through trading licencees.

It is not just the deficit that offers a lucrative business opportunity. Potential power producers have
realised that the bigger the project, the better could be its economies of scale. A developer of an MPP
admits that the rock-bottom tariffs offered by the first two ultra-mega power projects, or UMPPs (the
Mundra and Sasan projects) sent a wake up call to other developers. These two 4,000-MW projects,
based on supercritical technology, were not only able to quote long-term tariffs of less than Rs 2.5 per
unit, they are projected to make profits at these tariffs as well. So, the difference between the cost of
generation and the potential to pay became too huge to ignore.

The Power Rush

Short-term markets are more lucrative with trades hovering between Rs 5.73 and Rs 7.57 per unit for
the past two years in bilateral trade and trade through exchanges. It is no surprise that three years after
the MPP policy was announced, out of a list of 97 power plants, every third project is an MPP. Gung ho
about the prospects, Gautam Adani, chairman of Adani Group, says that he will set aside 15-20 per cent
of capacity from their projects towards merchant sales.

Apart from the Adani Group, Naveen Jindal group and Videocon group, companies such as  Indiabulls,
Moser Baer, Sona Group and Navbharat Ventures, all have also announced plans to set up MPPs. “If I get
customers who are willing to pay tariffs of over Rs 5 per unit, there is a ready market for my project,”
says Kuldeep Drabu, advisor of Videocon Industries, which is executing an MPP in Gujarat.

However, S.S. Rao, who till recently was joint MD and CEO of JSW Energy, says that once the plant, its
buyers and the avenues of finances have been identified, it is very important to “maintain the schedule”
and execute the plant within 36-40 months.

Is MPP correct way to enter?

In 2006, the Union power ministry came out with the concept of merchant power plants (MPPs) with
generation capacity of less than 1,000 megawatt (MW) each. These private power plants — which could
be standalone plants or part of the capacity of regular power plants could be set aside for merchant
power — would not be tied to any power distribution firm or electricity board through power purchase
agreements (PPAs). Instead, they would supply power — to either power distributors or open access
consumers — through an open grid. They are confident that there are consumers who are willing to pay
in a shortage.

The response has been phenomenal. Several private players have invested significant amounts in setting
up MPPs. And banks have also been willing to live with the risks and finance their projects. The
Chhattisgarh government, which is sitting on huge coal reserves, has entered into memoranda of
understanding (MoUs) with companies for over 50 projects, each over 1,000-MW capacity. Of course,
not all will finally take off as MPPs or even as conventional power projects with firm buyers. In all, an
estimated 16 projects with a capacity of 14,000-15,000 MW of merchant power is now in the pipeline,
say power ministry sources.

The Enablers
To run a power plant, you need fuel, and coal dominates in India. Coal has been in short supply
in recent times even for the existing power plants. So, to ensure merchant power projects do not
come a cropper right at the outset, the power ministry has reserved coal for them.

Fifteen coal blocks with estimated reserves of about 3.6 billion tonnes have been identified for
merchant and captive power plants. Of this, about 2.4 billion tonnes are expected to be reserved
for MPPs. There are some who plan to import coal.

The government has also allowed hydel power plant developers to set aside 40 per cent of
capacity for merchant sales, besides permitting developers of regular thermal plants to keep aside
up to 15 per cent of capacity for merchant sales.

But what has really got the sector buzzing is the Rs 1.19 tariff that Reliance Power, the developer
of the Sasan ultra mega power project (UMPPs, plants with capacity of 4,000 MW), has
promised to charge. Normal prevailing tariffs in the country average Rs 2.63. Sasan’s tariff has
made merchant power developers believe that they, too, can peg their costs really low. A lip-
smacking possibility, given that state governments in distress have been willing to pay more than
Rs 10 per unit in recent times. That translates to amazingly high margins in the best case
scenario. “If I get customers who are willing to pay tariffs of over Rs 5 per unit, then there is a
ready market for my project,” says Kuldeep Drabu, director of Videocon Industries.

BW Research (Pic By Tribhuwan Sharma)

According to ministry officials, Union Power
Minister Sushil Kumar Shinde is planning to
move a proposal to extend the tax sops — excise
and customs duty waivers — given to UMPPs to
MPPs. If implemented, these would help further
bring down the cost of generating power and,
consequently, the tariffs. 

T.N. Thakur, chairman and MD of PTC (Power Trading

Corporation), says, “A plant will be called an MPP if
the developer has only short-term contracts and is
still to enter into long-term contracts.” By that definition, MPPs should be high-risk projects because
they do not have life-long power-purchase pacts that Indian power plants have traditionally had with
state governments. In reality, however, these are not that risky.

For, if the yardstick for an MPP is that it should not have any long-term contracts, then practically none
of the current breed of projects would qualify as MPP— most of the projects have a mix of both short
and long-term contracts. By government definition, a long-term contract is for seven years and above, a
medium-term contract is between one and seven years, and anything less than one year is a short-term
contract.

Consider these examples. The 1,000 MW Hinduja National Power project in Andhra Pradesh is classified
as MPP, but not all of its capacity is marked for merchant sales. Officials say around 60 per cent of the
output has been tied up with PTC. The promoter will be selling 25 per cent of the plant’s capacity to the
state, while the balance 15 per cent is left for the market.

Even JSW Energy’s 1,200-MW Ratnagiri project in Maharashtra is split into four units of 300 MW each.
Sources say, though the project is identified as MPP, it has a conventional power-purchase agreement to
sell 300 MW to the state at Rs 2.72 per unit. Another 300 MW is also under discussion with the state.
Only the balance is expected to be set aside for merchant sales.

According to government policy, there are typically three ways to procure power. First, the ‘case 1’
bidding for power, where the location, technology, or fuel is not specified by the buyer. Second, the
‘case 2 projects’ where the buyer specifies the location, fuel and quantum of power, and offers the
project to the bidder with lowest tariff. The third mode is buying through exchanges and short-term
bilateral trade.

MPPs can fit into any of the three cases depending on the policies of the state where the project is
located as well as the
riders attached with a
project when it is offered
to a developer —
especially in hydel
projects. For instance, for
case 1 projects located in
Gujarat, after having
acquired land, the state
policy only requires the
developer to set aside 10
per cent of capacity for
sale to the state. In case the government gives the fuel, the developer gets 30 per cent capacity to sell in
any manner he likes. In Maharashtra, this amount is 50 per cent.

Take Uttar Pradesh. On 16 June the state called for long-term bids for 2,000 MW to cater to a portion of
base load (minimum power requirement during the entire day through the year) requirements of the
state. Such bids show there will be a steady demand for power from projects located anywhere in the
country.

In fact, developers are innovating ways to sell power in the merchant market. Power traders are
entering ‘power-tolling agreements’ with power companies. In these agreements, fuel for the plant is
arranged by the trading company. PTC has entered into one such agreement with Meenakshi Group that
plans a 540-MW plant in the Nellore district of Andhra Pradesh. Under the arrangement, PTC will buy 70
per cent of the power and the balance is left for merchant sales.

The Risks
“One of the important aspects that needs attention is ensuring states implement the provisions of open
access,” says Razdan. “This will allow a consumer to choose his source of supply.”

To spread the risk, some promoters would like to apportion some capacity for merchant sale and tie up
the balance with assured buyers through PPAs. The key for attracting debt financing for an MPP,
according to Singh of PFC, is that the tariff should be around the national average of Rs.2.63 per unit.

The Housing Sector: How Lucrative It Is?

There is a slight difference between the current construction activity and the one during the boom of
2006-08. During that period, while many residential projects had been announced and built, the big
focus area for many of the big builders was commercial space. Currently, there is relatively little activity
on the commercial property area, which is still struggling to offload the huge inventory built up during
the boom.

But interest in buying homes has picked up sharply once again. Reserve Bank (RBI) data shows there has
been a robust growth in the disbursement of home loans in the past few months. Fresh home loans
disbursed for 12 months
ending 26 February 2010 (the
latest data available)
amounted to Rs 22,880 crore,
compared to the Rs 16,431
crore disbursed over the same
period in the previous year.

Mixed Trends In Low-Cost

Housing
At the trough of the slowdown
from July 2008 to end 2009,
desperate builders abandoned
premium projects as demand
had plunged. They turned to
mass, ‘budget’ homes to keep
the market ticking. Some
cautious builders are still
sticking to affordable housing
— houses costing less than Rs
20 lakh in the metros. In April,
some big Mumbai builders
signed an MoU with the
Maharashtra government to
build 500,000 affordable
homes in the Mumbai
Metropolitan Region (MMR) over five years. The government has promised to relax density norms. In
the National Capital Region — Gurgaon, Faridabad, Noida, Ghaziabad and Indirapuram — dozens of low-
priced projects have been announced. But a number of builders who had embraced low-priced housing
projects are slowly upgrading many of these to target middle- and higher-income groups. These
segments, after all, offer far better returns.

Of course, there are still those who swear by mass housing. “This is the only way out in the long run.
Builders must learn to work with small margins and large volumes,” says Sunil Mantri, president of the
Maharashtra Chamber of Housing Industry.

Interestingly, builders in NCR are also creating projects targeting buyers who prefer independent floors
on low-rise flats — buildings that do not exceed ‘ground +4’ floors. Low-rise flats, long adopted in Delhi
Development Authority colonies, are 25 per cent cheaper to build, though it also means less utilisation
of land. In suburbs where land is cheap, this allows builders to peg competitive prices for mid-sized
homes. Nearly 25-30 per cent of new launches in Gurgaon and Noida are in this category.
PPP scene in India:

PPPs: Do they Make it Easier?

Given the central and state governments’ financial position, it’s fairly clear that private public
partnerships (PPPs) will hog a huge chunk of infrastructure projects in the country. Thus far, Rs 1,36,000
lakh crore in 300-odd projects has been the envisaged investment through PPPs across sectors. Contrary
to popular expectations, domestic players have accounted for roughly Rs 1,34,000 lakh crore in 278
projects, the rest going to foreign players.

But the success record for PPPs is a little mixed; in ports, which account for 32 per cent of the total
investment (but where GMRIL has no presence) things are going well, while in airports (15 per cent)
regulatory hurdles are an issue. “There is always the risk of future regulation,” says Vishwas Udgirkar,
executive director at PricewaterhouseCoopers, the global consultancy. “We will have to wait and see
how the new regulator, the Airports Economic Regulatory Authority (AERA), views its role.”

This might explain why just five airport projects have been awarded (a sixth is for a cargo terminal in
New Delhi), of which two — Kolkata and Chennai — are being handled by the Airports Authority of India
(AAI). Roads account for another 35 per cent of the total investment, urban infrastructure about 4 per
cent and energy about 13 per cent.
Opportunity in Power Equipment Manufacturing

For five decades, India had only

one power equipment
manufacturer — government-
owned Bharat Heavy Electricals
(BHEL). Over the next two years,
BHEL will have at least three
companions, all private sector
joint ventures (JVs): L&T-MHI, a
JV between Larsen & Toubro
(L&T) and Japan’s Mitsubishi
Heavy Industries (MHI); Bharat
Forge-Alstom, a JV between
Baba Kalyani’s Bharat Forge and
France’s Alstom; and JSW-
Toshiba, between Sajjan Jindal’s
JSW and Japan’s Toshiba.

Why the rush? India’s power

generation capacity is projected
to explode by 2030, making the
country the world’s third biggest
power producer. Current
demand is so high that BHEL,
even with an annual capacity of
15,000 MW, already has an
order book of this size. Besides
BHEL, there are Chinese
companies, whose equipment’s
reliability is doubtful, and
manufacturers from developed
countries, who are expensive.

This presents a golden opportunity for Indian companies to participate in a market that, as per estimates
of World Energy Outlook towards capacity addition, amounts to Rs 60,000 crore annually. Profit margins
of 18-20 per cent have only added to the lure.

Domestic production of power equipment gives immense advantage to India’s power sector. The three
JVs, for instance, can manufacture equipment for 10,000-12,000 MW within 3-4 years, effectively
doubling domestic capacity. These companies plan to compete with not only BHEL, but also the rapidly
advancing Chinese companies, whose progress played a big role in the government encouraging private
sector production of power equipment.
The Chinese Invasion

Chinese manufacturers, who have been gaining ground, supply equipment that is 20 per cent cheaper,
and have garnered 20 per cent of the market. Ravi Uppal, managing director and CEO of L&T Power, says
orders worth 50,000 MW has been placed with Chinese companies.

According to industry observers, the problem with Chinese equipment is, nobody knows whether they
will perform as per their rated output, say, in 10 years. But that has not stopped private sector power
companies from placing huge orders with Chinese equipment suppliers, creating a sense of unease
about the future.

The government caught on to this early and, in 2007, decided to encourage domestic production of
power equipment from companies other than BHEL. At the initiative of Prime Minister Manmohan
Singh, veteran technocrat V. Krishnamurthy, the then finance minister P. Chidambaram and others, the
government decided to give preference for government power projects to JVs of Indian private sector
companies and foreign power equipment manufacturers. But there was a caveat: the foreign company
had to transfer its technology to the Indian partner over the years.

The strategy worked. Foreign companies saw good reason to come into India in a JV due to the sheer
size of the opportunity. In fact, the L&T-MHI (51:49 per cent equity distribution) combine has already
bagged orders more than its initial capacity.

Reason to Invest In HealthCare

The Finance Bill extended a five-year tax holiday granted to new hospitals with 100-plus beds in semi-
urban and rural areas in 2008 to such projects in large cities such as Mumbai, Pune, Chennai, Kolkata
and the national capital region. “The fact that the incentive is no longer limited by geography should
help unlock future investments in the sector,” says Vishal Bali, CEO, Fortis Hospitals

How events can present infrastructure opportunities to a state: Case Study of Delhi

Thanks in part to the massive infrastructure build-up for the Commonwealth Games, Delhi now tops the
list as the most competitive state to do business in, relegating Maharashtra to second place. The fact
that Delhi, being India’s capital, is the centre of political power, does tend to sway businessmen as well
as workers its way. But to its credit, the state has also taken several steps to ensure heightened
commercial activity. In fact, out of the four major parameters of the BW-Institute for Competitiveness
study, Delhi tops on three.

In the past two years, Delhi’s government stepped up revenue expenditure massively — by Rs 3,971
crore between 2008 and 2010 — leading to visible improvements on the ground. While spending on
transport and communication went up by 60 per cent, education, sports and culture spend rose by 66
per cent. Expenditure on energy rose by a huge 117 per cent. With the Commonwealth Games in mind,
the Centre has also pumped in money to raise the state’s infrastructure to world class standards.
Therefore, Delhi now has new metro lines,
a new airport metro express, new flyovers
and bridges — changes that cannot be
missed.

Delhi’s Public Works Department (PWD)

alone has more than doubled its spending
from Rs.533 crore in 2008 to over Rs.1,230
crore in 2009. For the Games, the Delhi
PWD is building 26 flyovers and 31 foot
over-bridges. Nineteen flyovers have been
completed. Also, according to chief
minister Sheila Dikshit, over the next three
to four years, Delhi should have 10,000
new buses — currently, it has 3,000. As
many as 1,475 buses will be procured
before August for which the Delhi
government allotted Rs.2,019 crore in the
2010-11 Budget.

The Gas Distribution Status

Worldwide, gas discoveries and production are taking centre-stage even while oil production is slowing
down somewhat. For most of the world, gas is turning out to be a great source of energy because it is
relatively clean, can be substituted for oil in many cases (not all), and is also cheaper than oil as an
energy source.

Not only Pakistan, in the past 25 years, natural gas has grown to account for 24 per cent of total energy
consumption globally. Even Brazil (20.1 per cent) and China (25.8 per cent) are far ahead of India, which
only meets 9 per cent of its energy needs from gas.

The only issue with gas is that it is not as easy to transport as oil is. “The situation is just like the chicken
and egg story,” says B.S. Negi, member of the PNGRB. “Which comes first? Gas or infrastructure? My
answer in this case would be the chicken, which is the infrastructure — that is, pipelines.” Talking to BW,
Negi says that in the past two decades, the country’s largest gas transmission company, GAIL, had failed
to capitalise on opportunities and slowed down the process. “If we see what they have added in terms
of gas exploration and pipelines, it is minuscule.”

In India too, there seems to be a huge amount of gas waiting to be discovered. India’s gas inventory will
be doubled by the end of fiscal 2010-11 as Reliance Industries’ D6 block reaches production of 90 million
metric standard cubic metres per day (MMSCMD) — more than twice its present 44 MMSCMD.

Yet, even while the world is embracing gas wholeheartedly, India is in danger of missing the bus because
it doesn’t have a proper gas pipeline network and new pipeline projects are
being built too slowly. India has also failed to work out a proper policy for gas
carriage, which is why not too many players want to get into building
pipelines. Other than GAIL , RGTIL (Reliance Gas Transportation India) and
GSPL (Gujarat State Petronet) are the only major players in transporting gas
through pipelines. Indian Oil Corporation (IOCL) and Oil India (OIL) have also
entered the segment but in a small way.

Of the 119 MMSCMD of gas currently consumed in India, 64 per cent goes to
the power and fertiliser sectors, and only 9.5 per cent reaches the nation’s
transport and city-based gas distribution systems. Further, there is another
policy shortcoming that is making the switch-over to gas difficult.

“The current regime of gas allocation across various sectors is decided by the
EGoM (empowered group of ministers), and is vague,” says Ajay Arora,
partner and national leader for oil and gas at advisory firm Ernst & Young.

The ongoing multiple gas pricing regime is messy: the administered pricing
mechanism (APM) is applicable to government-nominated fields; companies
in production sharing contracts (PSCs), a common contract signed between a
government and a company that extracts resources, follow a different system.

There is another price for imported re-gasified liquefied natural gas or RLNG;
and the spot LNG price is variable. Other than the government’s claim that it is
examining the idea of a unified gas pricing regime, there has been no progress
on this front.

Pricing of gas supply from different sources is even more uncertain in the long term. Of course, there is
room for multiple interpretations, but PSC terms need to be spelt out clearly, which will assure their
enforceability for future investors in the oil and gas sector.

At present, the domestic tax law provides a 10-year tax holiday for laying and operating cross-country
natural gas distribution networks, including pipelines and storage facilities. Tax holidays were introduced
with the aim to promote and set up gas infrastructure, and simultaneously reduce the existing subsidy
on LPG.

Stuck In The Pipelines

Typically, there is a blame game afoot. U.D. Choubey, former chairman and managing director of GAIL,
blames PNGRB for its slow approach, and for creating troubles in the growth of pipeline infrastructure,
especially in the city gas distribution systems. “World over, regulatory boards have shown a soft hand in
order to promote the gas industry,” says Choubey. “But in India, the restrictions are too big too handle.
The bidding process takes so much time. The PNGRB is responsible for the slow growth of the gas
industry.”
“GAIL’s major focus is to
maintain its dominant
position in the gas
business, especially in the
transmission segment,”
says the company’s official
spokesperson. “Therefore,
during the 11th Five-Year
Plan, GAIL will build 5,000
km of pipeline with an
estimated investment of
Rs 28,000 crore.” When
these pipelines are
commissioned by 2012-
13, GAIL’s gas-carrying
capacity will double to about 300 MMSCMD. However, in the larger picture, this will be far from enough.

Future Gas Supplies

The world’s natural gas production is expected to grow to 106 trillion cubic feet by 2030 from 65 trillion
cubic feet in 2006. According to a report by US statistical and analytical agency Energy Information
Administration (EIA), non-OECD countries will account for 84 per cent of this hike. OECD’s gas
production, on the other hand, grows by only 0.8 per cent per year — from 40 trillion cubic feet to 47
trillion cubic feet.
With more than 40 per cent of the world’s proven natural gas reserves, West Asia will account for the
largest increase in regional natural gas production by 2030, thus accounting for more than one-fifth of
the total increment in world production.

Currently, there are four major natural gas producers in West Asia: Iran, Saudi Arabia, Qatar, and the
United Arab Emirates, which together accounted for 83 per cent of the natural gas produced in West
Asia in 2006. Each of the four countries has announced plans to expand natural gas production in order
to meet the expected increase in regional demand and (or) to supply markets outside the region, says
EIA in a report published at the end of last year.

Education Sector as business proposal

For much of the next five decades(post Independence), higher education became almost entirely the
preserve of the government. Private citizens and corporate houses studiously stayed away, deterred
perhaps by the unfriendly government policies. The past decade saw private interest rekindle. However,
the activity was largely confined to a few states that were flexible with rules. More states have followed
suit in the past couple of years and, in the recent months, there has been an even greater spurt in
businesses talking of setting up institutes.
Philanthropy Or Business?

Why the sudden rush? No new incentives have yet been announced by the government to woo private
money into higher education, and nor have any of the curbs been lifted to make it easier for
businessmen to set up higher-education institutes.

Experts and analysts tracking the area differ on the reasons behind the sudden rush. Some say that
despite its public pronouncements, the government’s attitude has changed towards private capital in
higher education. One of the reasons, they point out, is that barely 22 per cent of the total outlay for
education for 2008-09 is earmarked for higher education. While Rs 26,800 crore was kept for primary
and secondary education in last year’s annual Plan, only Rs 7,600 crore was earmarked for higher
education. Given the enormous demand for skilled workers, and the realisation that economic growth
cannot be sustained without enough people with college degrees, the government is perhaps becoming
more flexible. More importantly, many states, too, are making it easy for the private sector to set up
institutes.

Others feel that businessmen who have built big empires are now in a philanthropic mood and want to
set up institutes that will stand as a testimony to their lives. Amitabh Jhingan, partner and education
leader at Ernst & Young, says, “The big players are venturing into education these days as this is a great
brand building exercise. They want to leave a legacy behind.”

The Mechanics Of Starting

Setting up an educational institute costs a lot. Even without factoring in the cost of land, it takes Rs 12-
15 crore to set up the infrastructure for a single-subject institution. Add other sundry costs and you are
looking at an initial investment of Rs 25 crore for a very small institute. And then there is the cost of
land. If you had to pay for land at current market prices in, say, Noida or Gurgaon, the costs could
balloon to Rs 500 crore. It takes several hundreds of crores to set up a full-fledged university, even when
the cost of acquiring land is excluded.

The big advantage that private institutes have, of course, is that they are free to charge for the courses
whatever they think the market can bear — and thanks to the shortage of higher education facilities, the
market has shown it can bear a lot. Thus, a private technical institute can charge students over Rs 6 lakh
per annum, against the fraction that is charged by government institutes for a similar course.
Consultants who do project reports for private companies setting up educational institutes say that
purely from a point of view of quick returns, building a technical institute is far easier. One, the initial
investment required is low. More importantly, there is a huge demand for degrees and diplomas in
technical and business management fields. The demand for courses in liberal arts is relatively low.
Hence, institutes that offer technical or management courses can set the fees very high, as they can be
confident of getting students.
Consultants say that most technical institutes can hope to cover their initial costs within six to eight
years, and after that they can enjoy earnings before interest, taxes, depreciation and amortisation, or
EBIDTA, of 25-30 per cent. Of course, according to current laws the surplus generated cannot be taken
out by the promoter as profits, nor can it be used for setting up new colleges. Banks fund colleges and
institutes as businesses, and it is possible for well-run projects to start generating enough cash to pay
back the bank loans from year one of operations itself, says E&Y’s Jhingan.

Apart from quick returns, what is equally important is that setting up technical institutes is often a way
of ensuring a ready pool of talent. Taken together, these factors explain why technical institutes are
mushrooming everywhere. Even big corporates such as Nirma, ArcelorMittal, NIIT, Reliance ADAG and
the Modis and Amity have set up technical universities rather than multi-disciplinary institutions
catering to arts and commerce streams too.
Of course, when it comes to sheer prestige, a technical institute does not compare with a university.
Atul Chauhan, chancellor of Noida-based Amity University, says, “There is no comparison in power and
status between an institute and a university.” Moreover, setting up one’s own university gives one the
freedom to devise and run courses and decide how many students one wants to take.

However, opening a university needs enormous resources and commitment. The Vedanta institute in
Orissa, when it comes up, will be the biggest private multi-disciplinary university in recent times. Anil
Agarwal, chairman of Vedanta Resources, is reportedly giving the biggest-ever endowment — $1 billion
(about Rs 4,800 crore). The largest private university, as of now, is perhaps the Lovely Professional
University (LPU) in Jalandhar promoted by Ashok Mittal, who made a fortune from his sweet shop in the
city. Spread over 600 acres, LPU offers over 150 courses to 24,000 students. It has 1,500 faculty
members.

Despite the huge demand and ready students available for almost any higher education-institute, there
are significant hurdles that promoters need to negotiate. The AICTE has stringent norms for accredition.
Apart from an annual fee of around Rs 50,000, there are strict norms for per student requirement of
space in laboratories, classrooms, etc. According to LPU’s Mittal, to set up a decent engineering
institute, one needs at least 10 acres, and five acres are needed for a management institute. A medical
college requires at least 25 acres. The University Grants Commission (UGC) norms for setting up a
university are even more stringent.

Such norms ensure that only people with deep pockets can get into the game. C.S. Venkata Ratnam,
director of Delhi-based International Management Institute (IMI), says, “True academicians or scholars
cannot set up an institute today because of the land norms laid down by AICTE.”

To keep costs low, businessmen often flock to states that give land at cheap or concessional rates, such
as Punjab, Andhra Pradesh, Rajasthan and Gujarat. The Punjab government, for instance, had given 70
acres in Mohali for the campus of International School of Business (ISB) at a token price of Re 1 per acre
in 2007, while industrialists with roots in that region had pledged Rs 200 crore for infrastructure.
Similarly, Hyderabad had given land at concessional rates for ISB’s flagship institute.

The running cost of an institute depends on the kind of services and facilities provided and the level of
faculty hired. The 100-acre L.N. Mittal Institute of Information Technology (LNMIIT) with 600 students
and 35 faculty members has a running expenses bill of Rs 7.5 crore per annum, says the institute’s
director, Dheeraj Sanghi. “Of this, more than two-thirds goes towards faculty salary,” he says.

Public-Private Partnerships
From only 91 institutes in 2001, the number of technical institutes increased to 8,568 by 2008, according
to the HRD ministry’s latest annual report. The increase in access was important but the deterioration in
the quality of the students graduating from most of these institutes led to concerns over mismatch in
employability and skill shortage.

The Bihar government has given 25 acres to Birla Institute of Technology, Mesra, to set up a campus in
Patna. It has also given a one-time seed capital of Rs 23 crore for the project. P.K. Barhai, the institute’s
vice-chancellor, says, “MoUs such as these help institutes build up their reputation and also assist in
R&D work.” On a bigger scale, the Rajasthan government — which is doing fast work in this sector and
has seen a number of universities come up recently, the latest being the 100-acre campus of the NIIT
university offering B.Tech and M.Tech courses, and that of the Apeejay group being in the pipeline —
has given 100 acres of land to LNMIIT free of cost. Sanghi says, “The state government also gave Rs 15
crore as initial money and has representation on the board.”

In Sikkim, the state government did something similar for the Manipal group, which set up the Sikkim
Manipal University in the state in 1995, the first PPP in the region. Anand Sudarshan, CEO and managing
director of Manipal Education, says, “While the government’s thrust has been on conveying to the world
that India is ready for change, things will really change only after there is clarity on the Foreign
Education Providers’ Bill.”
FINANCING EDUCATIONEasy availability of bank finance for higher education has led to more students
opting for private institutes. Public sector banks lend up to Rs 10 lakh for a course in India and up to Rs
20 lakh for studies abroad. Nationalised banks disbursed loans worth Rs 20,000 crore to 1.25 million
students in 2007-08 while private banks lent Rs 500 crore. Last year, the portfolio of education loans of
banks grew 40 per cent. The ministry of human resource development has recently notified a scheme of
interest-free education loans for children from poor families.

ACUTE SHORTAGE
India has a poor score in higher education
The gross enrolment ratio in higher education in India is a low 12 per cent, compared to nearly
70 per cent in developed nations and 33 per cent in BRIC countries

 Public sector expenditure on higher education has been declining in real terms

 Average student-faculty ratio in India is 26:1, against a global average of 15:1

 Over 57 per cent faculty members do not have PhDs or M.Phil degrees

 Roughly 300,000 students compete every year for the 1,800 seats in IIMs

Developed countries such as the US allow educational institutes to make profits, but there are strict
controls. There are for-profit universities such as Apollo University of Phoenix, Laureate Education and
Corinthian Colleges in California, but none of them are top-notch institutes or centres of excellence.
Premier-league institutes such as Yale have been not-for-profit PPPs with the state providing land and
corporates pooling in resources for services and endowment, much like the ISB and IMI model here.

Urban Attractiveness