September 22nd, 2011
| | Foreign players wary of India infrastructure risk
Foreign investment will play a secondary role in resolving India's infrastructure deficit in the near term given the complexity of completing projects, executives and officials told the Reuters India Investment Summit this week.
Power, for example, attracted $1.44 billion in foreign direct equity investment in the most recent financial year -- a pittance in the context of India's hopes for $350 billion to $400 billion of funding for power for the five years starting in 2012.
"I don't see any completely independent plants being set up by foreign companies," Bal Krishna Chaturvedi, the government Planning Commission's member in charge of energy and infrastructure, said in an interview for the Summit.
"The main entrepreneur continues to be Indian. This model we find is not a bad one because he knows the conditions here, he's able to handle it much better than a foreign partner," he said.
A lack of attractive opportunities and early-stage delays often deter investors from tying-up capital in long-term projects in India, prompting many instead to gain exposure by taking stakes in listed operators or investing through private equity.
The challenges to getting big projects completed were underscored by the chaotic preparations for the upcoming Commonwealth Games in New Delhi.
"India is competing for global capital. Even infrastructure in India has to compete for capital, so the government, Planning Commission, should remain mindful of that," Anoop Seth, co-head of Asian infrastructure at AMP Capital Investors, a unit of No. 2 Australian wealth manager AMP, told the Reuters Summit.
New Delhi is keen to increase foreign investment in projects as it targets a doubling in infrastructure spending to $1 trillion in the five years starting in 2012, half of which it hopes will be privately funded. Of a planned $11 billion infrastructure fund, half could be raised from overseas investors such as insurers and sovereign wealth funds.
The demand for capital is clear. India was by far the world's biggest market for project finance loans last year at $30 billion, according to data from Project Finance International, but funding was dominated by onshore lenders led by State Bank of India , which topped the global league table.
FDI Overall foreign direct investment in India fell by about 25 per cent in the year through July to $12.6 billion, even as FDI into China rose 21 per cent over the same period to $58.4 billion.
However, overseas funds are flooding into stocks at a record pace of $18 billion this year, driving a rally that highlights the preference many investors have for the liquidity and risk profile of listed assets in India.
Gautam Bhandari, a managing director at Morgan Stanley who heads the Wall Street bank's infrastructure fund in India, said work still needs to be done to streamline planning and permissioning to get projects to the construction stage.
"I think once that gets solved you'll get increased levels of FDI," he told the Reuters Summit.
India spends 6 per cent of its GDP on infrastructure, nearly half the 11 per cent invested by China. The shortfall is evident in the decrepit roads of Mumbai and frequent power cuts in large parts of a country whose economy is growing at 8.5 per cent.
A top official at the National Highways Authority of India, said in a Reuters Summit interview that foreign investors would probably fund up to 30 per cent of a planned $18 billion in road-building in the current financial year.
The entire construction sector, including roads and highways, attracted FDI equity in the fiscal year that ended in March of $2.86 billion, government figures show, and just $221 million in the first three months of the current year.
"I think the trend is going to be the same. There is not going to be much," G.V. Sanjay Reddy, vice chairman of infrastructure builder GVK Power & Infrastructure , said when asked during the Reuters Summit about foreign direct investment in infrastructure.
He said the technological gap that multinationals could bridge in the 1990s has largely been closed, and local players have the know-how to navigate a challenging environment.
Suneet Maheshwari, chief executive of L&T Infrastructure Finance Co, an arm of engineering conglomerate Larsen & Toubro Ltd , said foreign players who want to participate in Indian infrastructure should consider joint ventures.
"India's regulatory system -- we all expect it to behave like one country as if it's China, but it's actually more like Europe," he told the Summit. "The language changes every 500 kilometres, and the culture changes, and then you have even the law changing in certain states, or the way it is administered."
S Naren, chief investment officer for equities at ICICI Prudential Asset Management, said local knowledge is key. "More than FDI, I would say that it is private equity money which is entering the sector, because at the end of the day what is required is a local company to implement the project," he said.