Significant infrastructure opportunities

India’s extensive infrastructure needs are well documented. Historical underinvestment over the last few decades has left the country in urgent need for infrastructure development. In recognition, the government has called for $1 trillion in infrastructure spending in the five years through 2017. The Ministry of Road Transport alone has outlined plans for $120 billion worth of road-widening projects, with 65% of this money targeted to come from the private sector. The government has also set ambitious goals for the renewable sector (predominantly wind and solar energy), all of which will be needed to supplement power from coal and gas.

The need to upgrade infrastructure is particularly acute in Tier 1 cities such as Mumbai, New Delhi, Kolkata and Bangalore. The country’s urban population of around 375 million is projected to reach 500 million by 2017 according to the Milken Institute Report. Such a rate of urbanization means that massive investment will be required in every sector of the economy from clean water to transport and electricity generation.
In the World Economic Forum’s Global Competitiveness Report for 2015, India ranked 81th out of 142 countries for its infrastructure, an improvement over the last 5 years when it was ranked 87th. Nonetheless, the report highlighted transport, ICT and energy as sectors of concern noting that infrastructure continues to remain a major growth bottleneck for continued economic growth.

Overcoming Hurdles

Hurdles to foreign investment remain. The current legal and regulatory environment can at times act as an obstacle to the necessary injections of foreign private capital into India’s infrastructure. The country’s difficult business environment has sapped the enthusiasm of many foreign investors including from the Gulf region. Among other things, they complain about unpredictable regulations; corruption, bureaucratic delays in approving projects; endless struggles to secure land rights; and the government’s stalled attempts at reform. Furthermore, there is no standardization in the concession agreements across the different infrastructure sectors that can plague PPP projects.

Not surprisingly, some investors have retreated. According to Reuters, private equity investments in Indian infrastructure sank to $183 million in the first quarter of 2012, down from $459 million in the same period of 2011.

Tapping Middle East Capital

India needs around $1 trillion worth of infrastructure investment over next five years - at least 48% of which is expected to come from the private sector. A significant portion of these investments is expected to be in the form of equity, where FDI from countries such as those from the GCC region would be targeted. The $75 billion infrastructure deal agreed between the UAE and India in August of this year has been welcomed by industry players who believe more such deals need to be signed and implemented. Although a deal of this size will not transform overall infrastructure development, it will signal the country’s serious intent in attracting foreign direct investment.

There is an estimated US$8 billion of UAE investment in India of which around US$3.01 billion (Jan 2015 Indian Embassy in UAE) is in the form of foreign direct investment, while the remaining is portfolio investment. UAE is the tenth biggest investor in India in terms of FDI. UAE’s investments in India are concentrated mainly in five sectors: Construction Development (15.52%), Power (13.09%), Metallurgical Industries (9.90%), Services Sector (9.58%), and Computer Software & Hardware (4.90%). These inflows could, however, be much greater.

Gulf investment flows, however, are held back by the business environment. A recent study by Credit Analysis and Research Ratings stated that only 8.4% of the funds committed to investment in India during the five years to May 2015 have actually been invested. This has been due to land issues, complex tax system and bureaucracy. The investment reform pledged by the new administration will thus be critical to supporting GCC investment into India.

The most obvious untapped pool of capital that exists in the GCC and Malaysia is the Islamic capital markets and institutions. The Indian authorities need to find ways to attract this capital by opening up regulations and amending tax rules so as to avoid the double stamp duty that are inherent in Islamic transactions. This will help tap into one of the fastest growing sectors of the global financial market.

A lot of Gulf investors have had bad experiences investing in India especially into the real estate and infrastructure sector. Consequently, institutional investors are now moving away from blind pooled funds and demanding direct investments or seeking a co-investment model so that they have a clear line of sight to the underlying assets, greater control and the manager has their capital at stake alongside the investors. The Gulf is an important region for tapping capital so it’s important to address their concerns. Conditions must therefore be created that will allow them to once again invest into infrastructure opportunities with confidence and help unlock the bottlenecks to growth.



As shared with IFIN Panorama Editorial Team

Mr Mazhar Alam

IL&FS Global Financial Services, ME Ltd. - Dubai

 







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