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Indian infrastructure: Industry experts discuss road ahead

Discussion in 'World Economy' started by Naren1987, Nov 13, 2010.

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  1. Naren1987

    Naren1987 Captain SENIOR MEMBER

    May 30, 2010
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    The Indian infrastructure industry is in an early phase of investment and the government is paving the way for greater private participation in the sector. We have witnessed in the past that wherever government has moved out and private sector has come in tremendous wealth has been created.

    Examples abound. Telecom is one sector where we have seen private players now dominate and not just dominate they create a significant market cap for investors. The other sector is banking and insurance where private sector has now come in a large way. The private sector market cap is today close to, if not larger than the market cap of the public sector banks. Insurance is another area where private sector has come in, in a very significant manner.

    Q: On the roadside there was in between a lull about a few years when there was no new major roads come up. You have been an early entrant, you have done several firsts including building roads on nomination basis working with state governments, central governments and NHAI across the board. Are you seeing that the lull which happened in between is the thing of the past and the opportunities are growing bigger and larger or you think that this is going to be an issue going forward as well?

    Excerpts from Reporter's Diary on CNBC-TV18 Watch the full show »

    Ramchand: Let me start off by saying that I think the road sector also follows some form of an economic cycle. We will have a lull and we will have the boom. We had a boom in the last year; we have seen a lull in the last 6 months. But I think that’s a process that is continuously followed in this country.

    There are 2–3 reasons why this happening. One is that I think we are still in the early days in this sector. I don’t think there are any gurus in this sector so far. Therefore, there is a lot of discussion which takes place and the debate which takes place even on basic concession agreement models. We also have large number of debates whether the type of structure that you want to put in place for BoT projects whether it should be annuity, whether the government is funding it at a higher cost by doing an annuity model or are they actually getting efficiencies of the private sector.

    So I think this is part of a business cycle that we will have to live with. I don’t see this changing even if we have the most dynamic of people governing this sector. However what we have seen is that while there could be a lull in one sector which is maybe at the national highway authority or the central level, there are state governments which are actually moving this initiative forward. If you average both of these out then you can actually get a portfolio which is significant than you can actually also derive value from each of these.

    I think there are some issues still pending. One is of course that we still have not a very clear policy on how we want to acquire land and this seems to be one large issue which keeps coming up in our projects.

    The second issue is I think when there are fewer projects that are large and the number of people bidding for them is the same, so we see margins crashing at that point of time. But I think when with the portfolio that the government of India has today announced 11,000 kilometres – 12,000 kilometres that they want to put in place. I think there is enough scope for everybody to make sufficient increase in their volumes and in the sizes that they want to put up for themselves.

    I think the sector will continue to grow because I don’t see an end to this sector. While we all think that 15,000 kilometres or 30,000 kilometres is the end of this sector. We already see four laning becoming six laning, expressways coming into the act. So I think the road sector is something that will continue at least for another 50 to 75 years.

    Q: You have been pioneering the passive infrastructure in energy assets and very interesting, do you see significant scope here given that for the first time we are seeing oil companies willing to not to own assets but give out assets outside?

    Bhuyan: Worldwide our promoter Oiltanking GmbH, a German company who have tied up with IOC for this company in India they are second largest terminalling company operating in 21 countries and four continents. In India when we started this was a brand new concept and the independent terminalling or common user terminals provide tremendous economic advantage because from the same terminal you can serve multiple customers.

    For example our terminal in Bombay which we set up in 1998, we serve all the top public sector companies IOC, BPC, HPC, ONGC the private sector companies like Reliance, Essar, Shell. Thereby as we do worldwide we bring tremendous economy of scale both in terms of capital costs as well as in terms of operating cost.

    The same story we repeated successfully in Goa when we setup a terminal there to serve Zuari Industries for their Naphtha requirements and also BPC and HPC for their retail requirements and they were convinced about the economics. Now more so we are pleased to see that the government of India has recognized that and have advised the oil companies to go for this option which brings the best interest of the customers as well as the oil companies to the fore.

    In terms of standards what happens is for oil companies the core business is refining and marketing and not running terminals. Whereas worldwide as a terminalling company we focus on operating standards, HSAC standards, quality standards, operational standards, training standards in a manner where the best standards are continuously achieved and exceeded.

    I am happy to say that in India we have created similar standards which have enabled us now to convince the public sector and the government that outsourcing to a top quality service provider is a good option.

    Traditionally, marketing and distribution terminals have been the only terminals in India. But as we all know now India is now a hub for refining and huge surpluses are being created in refining capacity as well as product available in the country. Simultaneously, we have the concept of special economic zones coming up. For example the Mundra port is a special economic zone. Where the free economic zones are there and where you have the opportunity of bringing in and taking out products and crude oil without payment of import duty or customs duty freely on a global basis, there is tremendous scope for creating trading hubs.

    Mundra, for example, could be a trading hub as big as Singapore or Amsterdam or Antwerp or Houston. Right now we are talking to the Adani Group as to how to create such a possibility at Mundra. Similar possibilities also exist on the west coast where new ports are coming up in the private sector whether it is Gangavaram or Krishnapatnam or Cuddalore or Paradip.

    India has a tremendous advantage in terms of location. So for both on the Asia-Pacific site, as well as the Europe and US site, we see going forward in the next 3 to 5 years a tremendous opportunity for growth in terminals both from a marketing and distribution point of view and also from a trading hub point of view.

    Q: SKIL group has been a pioneer investing into the infrastructure space, much before many people came in and you have been through the thick and thin of what's happened. How do you see the environment today compared to when you guys started more than a decade ago and the opportunities and challenges today? Are they different and how exciting is it today?

    Krishnamurthy: I don’t think today you need to sell infrastructure to anybody, nor do you need to sell infrastructure in India to anybody. But I think when it started in 1990 as SKIL Group is concerned; I think private sector participation itself was unknown. The entire infrastructure space was in the government sector. So I think biggest change is the Indian government has done a great thing in recognizing that private sector participation is critical to let this sector grow. I think that has changed completely. So private sector is in the lead.

    Clearly, you need some kind of a PPP model in almost any sector because infrastructure is such a space where you need public space and public utilities. So there needs to be a combination. But conception, development, and execution by the private sector in a congenial environment, I am not saying it’s all congenial, I think we are going to talk about land and other issues later. I think it’s a sea change, I think it augurs well.

    But given the gaps we all know that, there is no need to repeat. I think whatever we do is not enough in one way and therefore everything we do is to speed up the process and I think there is a lot to be done in that area.
    Excerpts from Reporter's Diary on CNBC-TV18 Watch the full show »

    Today we are talking about infrastructure not in telecom, not in insurance but hard and soft infrastructure.

    In a discussion on CNBC-TV18, an eminent panel including Devang Desai, ED, Adani Enterprises, and Group CFO, Adani Group; Jayanta Bhuyan, MD, IOT Infrastructure; A Subba Rao, Group CFO, GMR Infrastructure, K Ramchand, MD, IL&FS Transportation; and P Krishnamurthy, Vice Chairman, SKIL Group spoke on the opportunities and the challenges facing the Indian infrastructure industry.

    Below is a verbatim transcript of the discussion. Also watch the accompanying video.

    Q: You have revolutionized the port sector and the focus now on the power sector. What kind of investment opportunities are you seeing in both of these sectors?

    Desai: At Adani what we have done is after the focus on the ports where we have a large investment, we have put Mundra port on a very different level of growth. Today almost about 100 million tonne of capacities have already been created.

    We see that as a very integral part of our entire value chain structure that we have created. What we have done is that while being the largest coal importer, we do almost about 30 million tonne every year; we have gone into the entire domain of the energy from coal to power and used the infrastructure, the leverage, the ports extensively. Mundra Port has been a great success both from economic point of view and from acquiring large competencies for us.

    With that, we started off with the largest power unit being put up at Mundra, 4620 megawatt and it’s been a great experience of execution there, four units have already been executed of 330 megawatt, 1320 megawatt will be fully operational and by 2012 we will do almost about 6600 megawatt going up to by 2014 almost 9250 megawatt.

    For power, the domain came from our coal understanding, our infrastructure understanding and also in the entire value change where all these components play a very important role. So we’ve structured this not only at Mundra but also in Maharashtra and various other parts. Our target is to go almost to about 20,000 megawatt of power in the next 5 years.

    In terms of ports, we have three other ports that we have at various stages of development on the west coast. We have got Dahej, we have got Hajira and we have got the Marmagoa and we are looking at some more initiatives on the east coast to take care of our entire integrated structure.

    We have two more initiatives, one in Indonesia where we are doing a terminal built up there in Sumatra, and there is also one in Australia where we have a participation interest in Dudgeon port. That takes us from an Indian context as well as overseas and a very important focus we have in this sector.

    Q: With two domestic airports already under your belt what are the challenges you foresee in growing your investments here in India or on the airport side you have to go the Sabiha Gokcen way going abroad?

    Subba Rao: let me just begin by saying infra assets are both commercial assets as well as economic assets. They are economic assets because they promote the well being of an economy. They promote the growth of an economy.

    From that perspective, airport presents the best example. Airport is an example that promotes all-round well being of an economy, that promotes the image of a country. From this perspective, the two domestic airports that we have built we have kept in mind not only the commercial aspect of the asset which gives returns to the stakeholders, but also the overall well-being of the economy around the airports.

    If you compare it with the western countries or any other developed countries, the number of airports we have and the penetration that we have in the country is very small. The opportunity is enormous in the country. But as we have seen it is taking time for us to have more and more airports of the kind of quality and the class that we have seen in the recent past.

    After Delhi and Mumbai airports privatization, we have not seen any other airports being privatized. Hence though the opportunity is there in the country but the pace is getting slower. Therefore, it is not only the economic focus but we also have to focus on the commercial aspects for the shareholders and the investors. You cannot be satisfied if the growth is not coming here, and you have to necessarily look out where the growth is possible.

    From this perspective again we have started looking when the opportunities were not coming here for other incremental airports. We had to look outside India and that search yielded the Turkey airport. Turkey airport again we have established it. It is possible to build an airport of Turkey airport’s size in just 18 months, creating a record, and the kind of construction technology that is available there.

    One objective of going outside the country is not just to promote the growth for the shareholders and to get the return for the shareholders but also learn newer technologies that are available outside. The prefabrication technology that is available in those countries enabled us to build the airport at such a fast pace.

    We would like to bring that technology, those techniques back to India to augment the speed of the construction and the quality that our airports can have. Continuing in this space, since the domestic opportunities have not been coming, we recently bid for one more airport in Maldives.

    So on the one hand though we have huge opportunity in India in the interim term before those opportunities materialize here we have to pursue the opportunities outside the country.
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