Practical analysis for investment professionals
26 January 2015

India’s Infrastructure Investments: Huge Opportunities but No Takers

It’s no secret that big economies poised for rapid growth need robust infrastructure. Without the latter’s proper support, expansion will slow or worse, stall.

More factories will lap up more electricity from power stations. The goods they churn out will need to be shipped through a wider network of roads, railways, ports, and airports. Growing cities with global aspirations cannot run without power, clean water, telecommunications, and efficient public transport such as metro systems and buses to service burgeoning urban populations.

This need is especially acute in India, where infrastructure development has lagged woefully behind that of the economy. In the World Economic Forum’s Global Competitiveness Report 2013–2014, the country’s overall infrastructure ranked 85th out of 148 countries. In comparison, China ranked 74thneighboring Sri Lanka clinched the 54th spot, nearby Thailand came in 61st, and even Iran ranked higher at 76th.

In a country where 65% of all freight is still transported by road, the average speed of trucks and buses is a crawling pace of 30–40 kilometers per hour. That’s on a good day.

In recent years, the government has made public its target for US$1 trillion in infrastructure spending for the Twelfth Five Year Plan period running from 2012 to 2017. It has repeatedly called on the private sector to fund half of these infrastructure investments through what is known as public-private partnerships (PPP). The priorities identified include three airports, two ports, an elevated rail corridor in Mumbai, and about 9,500 kilometers of new roads.

With such pressing demand, there have been plenty of projects up for bidding. But investors are not biting.

Four experts at the recent India Investment Conference debated this conundrum during the panel “Financing Infrastructure to Reignite Growth.” It is an issue that’s becoming ever more critical for India to resolve if it is serious about realizing its true economic potential.


India Investment Conference Panel

Panelists (from left to right) Apurva Shah, Shri Rajnish Kumar, Rahul Mody, and Parthasarathi Mukherjee discuss infrastructure investment in India with moderator Saurabh Mukherjea, CFA.


Shri Rajnish Kumar, managing director and CEO of SBI Capital Markets, notes that investments from the private sector have dried up since 2011. “There have been no new investments . . . We haven’t received any requests for financing new projects. Most of the work is around refinancing or restructuring of existing loans.”

One major reason why investors are staying on the sidelines: the perceived risk-reward relationship is not in their favor, reckons Rahul Mody, managing director of Ambit Corporate Finance.

To put it simply, the returns one might reap are simply not worth the trouble in the Indian environment. A gamut of obstacles, from land disputes to sheer bureaucracy and red tape, have made project delays almost inevitable, increasing costs even as banks cut financing.

To make matters worse, the economic downturn in recent years has depressed traffic projections, which would in turn affect cash flow and income projections for road projects, says SBI Capital Markets’ Rajnish Kumar.

Another problem is the fact that road projects are asset heavy, he adds. Many existing developers are already weighed down by existing assets and have no capacity for big new projects. After all, balance sheet capacity is finite.

To resolve this, Parthasarathi Mukherjee, Axis Bank’s group executive for corporate relationships and international business, suggests that the PPP model would need to be tweaked. The Indian government might have to take on more balance sheet risk. In the case of road projects, the state could take on the building phase, while the private sector focuses on operating these projects once they’re up and ready.

Ambit’s Rahul Mody agrees. Even cash-rich foreign investors, such as sovereign wealth funds and pension funds, are staying away from “under construction” projects. Infrastructure investors are not looking for alpha returns. “They want stable returns,” he explains. This means operational — and proven — assets rather than new projects.

So what is the way forward? Apurva Shah, managing director in investment banking coverage and advisory at Deutsche Bank, India, suggests that the government could do more. It’s already heading in the right direction with recent reforms to the Land Acquisition Act that would make it easier for private companies and developers to buy land — especially critical in road building and widening projects. But more could be done to reduce inefficiencies, and these efforts would have to be driven by the government.

Finally, even as India marches ahead, it should take a longer-term view and ensure sustainable development. Or as Deutsche Bank’s Shah puts it, “improving the environmental impact” of building power and transport capacity. This can be done by introducing subsidies or incentives for renewables and cleaner energy, he suggests.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Top photo credit: ©iStockphoto.com/Xavier Arnau

About the Author(s)
Laurel Teo, CFA

Laurel Teo, CFA, was director of society advocacy engagement at CFA Institute. She worked with member societies in the Asia-Pacific region to advance awareness and adoption of CFA Institute ethics and standards, as well as policy positions on financial market integrity issues.

5 thoughts on “India’s Infrastructure Investments: Huge Opportunities but No Takers”

  1. Savio Cardozo says:

    Hello Laurel, an excellent article. I was involved in trying to put together a consortium of buyers for a toll road project in India so I can confirm from my experience that the institutional investors we were in discussions with were reluctant to invest in the construction phase for all of the reasons you indicate. An additional missing but attractive ingredient is an active secondary market for projects in the operating phase. Best wishes Savio

  2. dan cherian says:

    I agree with the findings in this article but a shout out to other investors that they should not follow the modi bandwagon.

  3. David Haarmeyer says:

    India suffers from weak institutions—credible and predictable rules of the game—that are crucial to provide investors comfort that if they investment their capital over long periods of time and operate within the rules they will receive a fair return on their investment. This is normal operations in a ‘market’ economy of voluntary exchange and open competition.

    Sadly, in much of the world—both developing and developed—the large sunk investments that characterize investment in infrastructure make it vulnerable to being ‘held up’ by governments. Hence, political and regulatory uncertainty is diverting trillions of dollars in long-term institutional capital from making a big difference around the world. This is not just funding much need new roads, ports, water/wastewater infrastructure, etc. but with the right regulatory structure, ensuring it is properly maintained.

    A good start is for countries to replicate the proven special-purpose public-private sector units set up in UK (UK Infrastructure), Australia (Partnerships Victoria), and Canada (Partnerships Columbia). These institutions have a track record of increasing transparency, ensuring competition, and generally sheltering infrastructure procurement from politics. A good first step.

  4. S.K.BOHRA says:

    politics ,strikes ,salary increase population corruption non productivity wastage of resources and inflation all are required to abolish .
    INDIA had 5 years plan for gradual growth as per funds.
    Running and crying blindly for TOP GEAR PROGRESS with limited available sources.
    This government can engage 1000 farmers with or without land on job and profit sharing basis for bulk farming of 1000 hectares.own equipments ,warehouses with all modern facilities of good seeds, fertilizer, canal, water pipe supply, bagging transport ROAD, Rail or water links etc .
    1 million army besides safety can help us in developing textile mill, power looms, dairy,shoe ,furniture,paper industry,defence equipments.

  5. Denise says:

    In our experience, Indian companies are limited to how much money they bring in and out of the country, until the Governments lightens on the restrictions, it won’t be easy funding large projects.

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