Infrastructure spend to accelerate in 12th Plan; critical for 9% GDP growth:: Motilal oswal,

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


Roads: Project award momentum to continue; key challenges being addressed
Infrastructure spend to accelerate in 12th Plan; critical for 9% GDP growth
 We attended the conference on "Public Private Partnership (PPP) in National Highways: Challenges and
Opportunities" organized by the Ministry of Road Transport and Highways (MoRTH).
 MoRTH reiterated target to construct 20km of road projects per day and commitment to address challenges
to attain the same.
 Planning Commission emphasized the need to double the investment in Infrastructure sector to USD1t for
achieving 9% GDP growth in 12th Plan.


Project award momentum to continue
For FY12, 60 highway projects (7,994km, INR644b) have
been identified for awards and NHAI has invited bids for
4,600km YTD (2,338km already awarded). All project awards
in FY12 would be on PPP model and private sector bids
have been fairly aggressive in the initial round. MoRTH plans
to enhance the scope of NHDP by covering the entire length
of national highways and upgrading certain state highways
to national highways.
Financing could be challenging, long-term funding
avenues inevitable
The share of Infrastructure in gross bank credit has
increased from 2.2% in FY01 to 13.4% in FY11. The Roads
sector alone accounts for 15% of total Infrastructure lending.
Higher dependence on commercial banks has led to hitting
sectoral caps, group exposure norms, etc. Also,
infrastructure project funding is long term in nature, creating
asset-liability mismatch for commercial banks. Thus, there
is a need for long-term funding avenues, refinancing options
for banks/developers, etc to boost large scale PPP projects.
Need to scale up infrastructure investment; private
sector role vital
Infrastructure in India continues to face a pertinent deficit
despite doubling of infrastructure spending in the 11th Plan
to USD500b from USD227b in the 10th Plan. This is reflected
in continued high deficits in the power sector, mere 20% of
national highways being 4-laned, capacity bottlenecks in
ports/airports/railways, etc.
In its approach to the 12th Plan period, the Planning
Commission has placed the GDP growth target at 9% and
targets infrastructure investment of USD1t. Infrastructure
investment is, thus, pegged to reach 10.8% of GDP by
FY17, up from 7.8% in FY12E and 4.8% in FY03.
The role of the private sector is critical - while the Planning
Commission has assumed 9% growth in investment by the
central/state sector, it has assumed 25% growth in
investment by the private sector. Investment by the private
sector in the 12th Plan period is estimated at 50% (v/s
38% in 11th Plan and 25% in 10th Plan).
Excerpts from speeches by keynote speakers


Dr Manmohan Singh, Prime Minister
Excerpts from speeches by keynote speakers
 Draft approach for the 12th Five Year Plan aims at a GDP growth of 9% per year for 2012-17. This is
impossible without doubling the investment in the Infrastructure sector from USD500b in the 11th Plan
to USD1t in the 12th Plan.
 The task is daunting, but the inherent strength of our nation, emerging private sector investment along
with growth in central/state sector would help attain the goal. However, large scale participation by the
private sector in Infrastructure would necessitate large fund mobilization by financial institutions.
 Good roads are an essential element of Infrastructure for providing industry and agriculture with
connectivity to markets for growth in production and trade, and more generally for improving the quality
of life of citizens. They are crucial not only for accelerating the growth rate, but also for making the
whole growth process more socially and economically inclusive.
 Contract awards exceeded about 4,800km in the last financial year, and MoRTH is well poised to award
7,994km this year, to fulfill the government's resolve to build 20km a day.
 Efficiency, economy, competition and transparency are vital touchstones that should be used for
judging our level of success when we deal with the private sector.
 Emphasis on transparency and competition in the award of PPP projects in the roads sector has led to
a very robust and competitive bidding that has saved very large sums for the exchequer by limiting the
capital subsidy or enhancing the revenue share.
 Success of Infrastructure development in the 12th Plan would entirely depend on implementation, both
at the center and state level, and strengthening of implementation capabilities.
 Infrastructure projects face financing constraints, especially with regard to longer tenor debt. India
Infrastructure Finance Company is a vehicle for promoting the flow of long-term funds. The Finance
Ministry is also taking the initiative to set up Infrastructure Debt Fund to enhance the flow of much
needed long-term debt in infrastructure projects, while a High Level Committee is constituted to suggest
measures necessary for financing the ambitious program in infrastructure development.
 The PPP initiative by MoRTH through NHAI for highways is the largest in the world and toll rates are
among the lowest in the world. India has taken great strides from rural roads to national highways.
 PPP projects in the sector have attracted strong interest from the private sector and these projects are
the favored destinations for both domestic and overseas investors.
 During FY12, bids for ~4,600km of projects have already been invited and the target for project awards
for the year remains at 7,994km. This will entail private investment of over INR500b.
 Positively, a large part of the projects has yielded better than expected revenues for NHAI / received
lower capital subsidy. NHAI is expected to garner additional revenues of INR100b+ only from grant/
revenue sharing quoted in the last few projects.
 India has a national highway network of 71,000km, of which projects of ~16,000km are complete, while
~15,000km are in different stages of implementation and award. Balance 40,000km needs attention and
scale-up to provide better infrastructure access across the country.
 In particular, 20,000km comprises of single lane roads in less developed regions, where the government
is committed to developing all these roads to 2-lane standards. MoRTH has taken up the planning and
initial work to build these roads through turnkey EPC contracts and targets to complete a sizable part of
awards/work in the 12th Plan.
 The government is also taking steps to initiate expressway projects in selected high density corridors.
It is in advanced stages of dialogue with potential investors and the concerned state governments to
find innovative ways of financing these expressways.
 A number of states have adopted the PPP mode for developing their state highways. So far, 77 projects
for a length of 7,801km have been taken up.
Dr CP Joshi, Minister - Roads, Transport and Highways
Ms Chanda Kochar, MD and CEO - ICICI Bank
 Private investment in Infrastructure development has increased from 24% in the 10th plan to ~30% in
the 11th Plan and is now envisaged at 50% in the 12th Plan. The share of Infrastructure in gross bank
credit has reached 13.4% in FY11 v/s 2.2% in FY01. The Roads sector accounts for 15% of the total
Infrastructure lending.
 Total exposure of the banking system to the Roads sector stands at INR926b and has grown at a CAGR
of 37% over the last five years. Banks remain the single largest funding source for road projects.
However, banks would not be able to provide higher debt to Infrastructure projects, more so given the
need for long-term financing. Banks do not have the resources for such long-term lending. Creation of
a large pool of Infrastructure dedicated long-term funds is required.


Dr Montek Singh Ahluwalia, Deputy Chairman - Planning Commission
 The global economy is yet to stabilize following the recent economic shock and the Indian economy
faces several near-term challenges. In the long run, however, there is unlikely to be any bearing on
India's economic growth, and GDP growth of 9% per year in the 12th Plan period is achievable.
 Infrastructure remains a key driver of both social development as well as capital formation in the
economy, and is crucial for attaining the GDP growth target.
 Participation of the private sector is also vital, more so looking at the targeted share of 50% in 12th Plan
infrastructure investment. In the 11th Plan, the private sector accounted for 30% of the infrastructure
investment of USD500b. The 12th Plan would call for a similar investment by the private sector alone.
 The path to growth and infrastructure development is marked with several challenges, including
urbanization, energy and water management, land acquisition policy, environment protection framework,
etc. A systematic coordinated approach is called for.
Mr Pratip Chaudhari, Chairman - SBI
 Long-term funding is a key to Infrastructure development in the 12th Plan.
 Of the total investment of ~INR926b in the Roads sector by banking sector, SBI has the lion's share.
Mr BK Chaturvedi, Member - Planning Commission
 Over the last few years, NHAI has streamlined the entire process of appraising and awarding projects
in a transparent manner.
 NHAI has adopted standardized bidding, project award documents, which have eased procedural
bottlenecks (time duration from project bid to award reduced to 18-20 months from 45-50 months).
Mr AK Upadhyay, Secretary - Roads, Transport and Highways
 Infrastructure development remains the center point for attaining the projected GDP growth of 9% in the
12th Plan. The Roads sector has been at the forefront of Infrastructure development in India.
 Road construction should pick up once again in FY12, with project awards of over 7,000km. Road
construction in FY12 could surpass the peak of 2,693km project construction in FY10. NHDP is likely to
be completed by 2016-17, benefiting from higher participation from and superior execution capabilities
of the private sector.
 During YTD FY12, NHAI has already invited bids for projects of 4,600km. Of these, 1,480km of projects
have already been awarded. Additionally, bids are under evaluation for projects of 1,781km and
projects of 1,408km are under tendering stage.
 Land acquisition is the most critical challenge for timely completion of NHDP and NHAI has taken several
initiatives including setting up land acquisition cells to expedite project award, completion. NHAI has
acquired 11,193 hectares for road development projects in YTD FY12.


NHAI: Targets 7,994km awards in FY12, private role vital
Project awards picking up, private sector interest overwhelming
 During FY12, 60 national highway projects (7,994km, INR644b) have been identified
for award. Of these, 46 projects (6,412km, INR502b) are planned under NHDP phase
IV and V. Phase IV projects entail two-laning and generally have poor traffic density.
 We understand that NHAI has called for total bids of ~4,600km and has already
awarded 2,238km of road projects in YTD FY12. This indicates meaningful acceleration
compared to project awards of 3,357km in FY10 and 5,068km in FY11, driven by: (i)
annual prequalification norms cutting down procedural delays, (ii) land acquisition cells
enabling ready land bank of ~20,000km projects, where critical milestones have been
achieved, (iii) monthly program and monitoring for project awards, etc.
 The response to the bidding in YTDFY12 has been very encouraging, with better than
expected revenue sharing / grant / lower capital subsidy from private sector developers.
NHAI is likely to garner additional revenue of INR100b+, largely from the past few
project awards. This has also addressed the funding issue for NHAI, to a large extent.
 Looking at the trend, many states too have adopted the PPP model for developing
state highway projects. So far, 77 projects for a length of 7,801km have been taken up
and the trend is expected to accelerate.


Aim to significantly boost national highway network in the country
 The national highway network is spread over ~71,000km, of which ~50,000km is covered
under NHDP. MoRTH aims to upgrade and extend the network of national highways
across the entire country, more so in far-flung areas like the North East, Naxalite
prone areas, etc. MoRTH plans to upgrade 20,000km of single-lane national highways
to two-lane, with paved shoulders in remote areas. A time-bound program would be
taken up through turnkey contracts to ensure speedy and cost-effective outcome.
 Development of this scale would require significant participation from the private
sector as well. Already, India stands second amongst developing countries in attracting
private investment for Infrastructure projects. This is facilitated by use of standard
documents and processes to streamline and expedite decision-making by authorities


Financing of national highways: Need to enhance longterm
funding avenues
In a separate session on addressing financing for Infrastructure projects, particularly for
road projects, the key driving point was the need for enhancing long-term funding avenues
for the sector. Key takeaways:
Banks have seized huge opportunity in infrastructure in the past …
 The share of infrastructure sector in overall bank lending has increased from just
2.2% in FY01 to 13.4% in FY11 and banks have been the single largest funding
source for road projects.
 Overall, the Roads sector alone accounts for an exposure of INR926b, where lending
has grown at a CAGR of 37% over the last five years. The Roads sector accounts for
15% of total Infrastructure lending by banks.
… but incremental financing could become challenging
 The current environment remains challenging at the macro level, particularly looking
at the sector threshold limits, group exposure norms, need for long-term funding, etc.
In this context, bankers highlighted issues like (i) unavailability of long-term debt v/s
project concessions spanning over periods up to 30 years, and (ii) premium offered by
the developer could at times strain the initial cash flows of the project cycle, giving
less comfort to lenders. The group also recommended establishing a mechanism to
align annual premium outgo with project cash flows.
 Bankers have also expressed the challenge faced for no security during project
construction phase, particularly if the project is terminated, cancelled, developer's
default, etc. Representatives were of the opinion that a "termination clause", as NHAI
has during the project operation phase, could be introduced for construction stage.
This could also help lower the cost of financing for projects.
Need for robust framework for easy access to funding
 Given the various challenges faced by the lenders, concessionaires, developers and
others, representatives of lenders/bankers suggested several measures that could help
weed out administrative bottlenecks and expedite project construction. These include:
(i) single window clearance system, (ii) expeditious and time-bound land acquisition
proceedings, (iii) utility mapping in advance and permission for shifting, etc.
 To further ease infrastructure financing and encourage the PPP model, long-term
financing avenues need to be garnered. These could include tapping insurance and
pension funds, which also meets the return/risk criteria of these funds.
 There is also a need for relaxation in ECB guidelines, which would allow companies to
refinance rupee loans with ECB post construction phase and tap low cost funds. On
similar lines, the domestic debt market needs to be deepened through enabling
framework, policies and creation of Infrastructure Debt Fund (IDF).


Doubling infrastructure investment vital for 9% GDP
growth in 12th Plan
Mr Gajendra Haldea, Member - Planning Commission, highlighted the deficiency in
Infrastructure in India and thus, the opportunity that lies ahead. Key takeaways:
Infrastructure deficit high, despite investment pick up in last few years
India has achieved sizable progress over the years, especially in the 11th Plan, towards
Infrastructure development. Despite this, India has pertinent deficit of Infrastructure, the
key illustrations being:
 Peak deficit in Power sector stands at 13.3%, while base deficit is at 10%. T&D
losses too are high at ~27%, given inadequate competition, lack of private investment.
 Of the 70,934km of national highways, mere 20% are 4-lane and 50% are 2-lane,
while the balance 30% are single-lane.
 The Ports sector is characterized by inadequate berths, rail/road connectivity and
shallow drafts.
 For the Airports sector, growth has picked up in the last few years, but runways,
aircraft handling capacity, parking space, terminal buildings are still inadequate.
 The Railways too is facing sizable capacity issue and current capacity is bogged down
by inefficiency (lower commute speed).
Infrastructure investment in the 11th Plan is estimated at USD500b, up from USD227b in
the 10th Plan. Total infrastructure investment has grown from 4.8% of GDP in FY03 to
7.8% (estimated) in FY12. Private sector participation is encouraging - the share of the
private sector in Infrastructure investment has multiplied nearly 10x from USD5.1b in
FY03 to USD45b. Sizable private investment has come in all major sectors, except Railways.
12th Plan: Sizable push for Infrastructure vital to attain 9% GDP growth
Investment in Infrastructure needs significant push and Planning Commission estimates
doubling the investment to USD1t, up from USD500b in the 11th Plan. Thus, Infrastructure
investment would average at 9.7% of GDP in the 12th Plan and reach 10.8% of GDP in
FY17, the terminal year for the 12th Plan.
The role of the private sector is critical. While the Planning Commission has assumed 9%
growth in investment by the central/state sector, it has assumed 25% growth in private
sector investment. Investment by the private sector in the 12th Plan period is estimated at
50% (v/s 38% in 11th Plan and 25% in 10th Plan). The share of the private sector was
25% in the 10th Plan, while support from the center and states stood at 40% and 35%,
respectively. In the 11th Plan, private investment contributed 38%. In the 12th Plan, the
private sector would account for 50% of total Infrastructure investment, while the share
of the center and states would be 27% and 23%, respectively.