FDI Ultimate Game Changer

Though investment in infrastructure is expected to touch $1,025 billion in the Twelfth Five-Year Plan (2012-17), many hurdles are choking investment inflows despite the government´s overdrive to attract funds.

The government´s recent decision to open up the railway sector to Foreign Direct Investment (FDI) has also brought to fore various issues related to the role of FDI in the infrastructure sector. India´s high population growth, urbanisation and its booming economy necessitated expansion and modernisation of the country crumbling infrastructure. This in turn required large capital investments which could not be met by domestic resources alone. Hence, FDI was the only option left to boost infrastructure development and step up the growth of other industries and the rate of the economy. The Indian government´s liberal policies between 1991 and 2000 opened the doors to FDI inflows in the infrastructure sector.

FDI has no doubt been a game changer for infrastructure, as it has enhanced quality and producti¡vity in several sectors where it has been allowed like highways, airports, telecom, ports, etc. FDI, apart from easing financial constraints, is also associated with multiple benefits like technology transfer coupled with knowledge diffusion, managerial skills, access to marketing networks, apart from opening up inter¡national markets for Indian players.

¨FDI has enabled private players to tap the existing potential in the sectors, increased competitiveness among domestic players, assisted the industry in upgrading its technology quotient and provided the much needed financial assistance,¨ states DS Rawat, National Secretary General, the Associated Chambers of Commerce and Industry of India (ASSOCHAM).

Seconds SGK Kishore, Chief Executive Officer, GMR Hyderabad International Airport Ltd (GHIAL), ¨The FDI inflows have been crucial in developing the infrastructure, transfer of technical and managerial knowhow. It has also boosted the confidence of the Indian business groups to venture outside India. As per data published by the Department of Industrial Policy and Promotion (DIPP), India received cumulative FDI inflows of $332 bn over 2000-2014. Of this, close to 30 per cent went to infrastructure and related sectors comprising transportation, water, telecommunications, energy, airports, etc.¨

Now the railways is also set to jump on board with the introduction of 100 per cent FDI in this sector. Arunendra Kumar, Chairman, Indian Railway Board, elaborates on the railway-specific FDI norms: ¨ Hundred per cent FDI is permissible in all areas except railway operations. However, FDI in construction, maintenance and operations is permissible in the following areas: suburban corridor projects through PPP, high speed train projects, dedicated freight lines, rolling stock including train sets and locomotives/coaches manufacturing and maintenance facilities, railway electrification, signaling systems, freight terminals, passenger terminals, infrastructure in industrial parks pertaining to railway line/sidings including electrified railway lines and connectivity to main railway line and MRTS (Mass Rapid Transit System).¨

The move is expected to help the railways generate much-needed resources to upgrade and expand its outdated railways infrastructure as evinced by Sidharth Birla, President, Federation of Indian Chambers of Commerce & Industry (FICCI): ¨The FDI will help the railways in mobilising investments required for introducing high-speed trains, suburban corridors and dedicated freight line projects through PPP (Public Private Partnership). This measure has been taken at the time when the existing rail network requires funds to modernise and expand capacity to serve fast-growing needs of the economy.¨

Several Indian companies manufacturing equipment for the Indian Railways are also slated to benefit from the policy and the overall benefits will be enormous, avers Kumar: ¨The advantages of opening the rail sector to FDI will be immense in the long run. Foreign investors can bid for any of the railway projects. The companies in the rail sector will have access to foreign investments thereby reducing the cost of funds. The Ministry of Railways is planning to identify certain projects which can attract domestic and foreign investments and also has plans to launch model concession agreements for private line model, joint venture and BOT soon.¨

The projected spending for railways during the 12th Five-Year Plan period is Rs 5.19 lakh crore. Out of this approximately Rs 2 lakh crore is estimated to be raised from Extra Budgetary Resources including PPP. No doubt, opening up the rail sector to FDI has been a move in the right direction and with this FDI is now permissible in most of the infrastructure sectors. The Indian government had identified the need for an investment to the tune of $1 trillion in infrastructure in the 12th Plan period.

The slowdown
The FDI inflow into India however has not lived up to expectations. In fact, the inflow of FDI into India in general, including infrastructure, has been declining since 2009.

¨In most of infrastructure sectors FDI inflow has slowed down since March 2009, after reaching its peak between August 1991 and March 2009,¨ concedes Rawat, while enumerating some of the reasons behind this phenomenon: ¨The slow pace of policy reform and delays in framing a new land acquisition act, which would ease availability of land for industry, has also hurt FDI flows. FDI flows in construction development, construction infrastructure and power fell as regulatory restrictions and strong domestic investment squeezed out some foreign bidders for high-return projects.¨ The decreasing FDI inflow has affected several PPP projects, as the government has been relying largely on private sector investment through PPP. ¨Among the PPP projects only the power sector is on track, achieving 100 per cent of planned capacity, the airport sector is at 75 per cent and road sector at 50 per cent including National Highway Development Programme (NHDP) that has achieved only 10 per cent of the planned capacity. This is largely due to the low foreign investments in the infrastructure sector,¨ says M Murali, Director General, National Highways Builders Federation (NHBF).

India has also slipped to the fourth position in the latest ranking of most favoured destinations for investment by transnational corporations, as per the United Nations Conference on Trade and Development´s (UNCTAD) World Investment Report 2014. India which was the second most favoured investment destination between 2005 and 2010 went down to the third position in 2013 .

However, according to the report, inflows into India grew by 17 per cent to $28 billion in 2013, with India ranking 14th among the top 20 global economies, receiving the maximum FDI in 2013.

The Opportunities
No doubt India still remains as one of the top global destinations for foreign investments, the main drivers being the country´s lucrative domestic market, skilled workforce and competitive labour. Almost all the infrastructure sectors present excellent opportunities, with roads/ highways, ports and airports, power and railways leading the list.

¨The 100 per cent FDI has attracted some of the biggest private Terminal Operators from around the world propelling the container terminal industry on a growth trajectory,¨ states Anil Singh, Senior Vice President and Managing Director, DP World India Subcontinent. ¨The foreign players brought in state-of-the-art technology, technical expertise and operational processes that pushed the envelope for the Industry. Nhava Sheva International Container Terminal (NSICT) was the first container terminal project that was built under the PPP model in 1997. The terminal rejuvenated the container trade at Jawaharlal Nehru Port (JNP) and put the port on the global map. Today it is handling over 50 per cent of India´s container trade. Apart from the technology and expertise this FDI has fostered intense competition between the operators and has kept them at their highest level of efficiency,¨ he explains. DP World, which operates a number of terminals in India, has recently won the concession for a new 330m terminal at JNPT.

The airport sector too has its own opportunities, says Kishore: ¨Airport sector provides a sizable investment opportunity as India allows 100 per cent FDI under the automatic route for greenfield airports and 100 per cent FDI for existing airports, subject to government approval for FDI beyond 74 per cent. As a result, several international players like Malaysian Airports, Frankfurt Airport, Zurich Airports among others have entered the airport sector. The involvement of foreign partners has brought in technical and operational expertise. The exposure that Indian airport developers have got through these partnerships has enabled Indian developers to emerge as the best in the world.¨ GMR Group owns and operates Delhi International Airport (DIAL) and Hyderabad International Airport (GHIAL) developed in collaboration with foreign players Fraport AG & Malaysia Airports and Malaysia Airports Holdings Berhad respectively.

Murali elaborates on the opportunities in the roads/highway sector too. ¨Investment opportunities in this sector are mainly offered by National Highways Authorities of India (NHAI) for executing the upcoming phases of National Highways Development Project (NHDP). Recently, the Indian government approved nine road projects worth $2 billion to be implemented by State governments under PPP. Indian Finance Ministry is ready to meet 20 per cent of the financial requirement, while another 20 per cent would come from Ministry of Road Transport and Highways. Foreign investment may be invited in order to make all the projects financially feasible,¨ he reveals. The Planning Commission has also projected that investment in infrastructure would almost double at $1,025 billion in the Twelfth Five-Year Plan (2012-17), of which 50 per cent is expected to come from the private sector.

So, the opportunities are galore for foreign investors and they are surely interested . But it is the restrictive operative environment that is playing spoilsport.

The Barriers
Despite several positive measures taken by the Indian government, some barriers to investment con¡tinue to exist. Lack of consistent policy, legal framework that meets international benchmarks, standardised concession agreements and single regulator for all infrastructure projects, delays in government approvals, land acquisition disputes, tariff regulation, subsidised prices in certain sectors, etc., are cited as major barriers.

¨One of the main reasons behind the decreased inflow of investment into infrastructure is the regulatory environment,¨ avers Murali. ¨Once we move from State investments to transnational corporations, we need a legal framework that would meet international benchmarks. Lack of strategic long-term planning, delay in taking policy decisions, changing political environment with elections and consequent policy changes, labour unrest, hostile measures of acquiring land, high project delays, lack of single window clearance and lack of coordination between various government departments are the other reasons adversely affecting the foreign inflow,¨ he recounts.

The government is well appraised of the situation and has taken several bold measures, like the UMPP (Ultra Mega Power Projects) scheme in the power sector, 10-year tax holiday to infrastructure projects, issuance of tax-free bonds to the companies that are engaged in infrastructure development, etc. Rawat elaborates: ¨Under the UMPP scheme, power projects of 4,000 MW capacity with an estimated investment of Rs 16,000 crore are awarded to private players on tariff-based competitive bidding. Project-specific shell companies have been set up as wholly-owned subsidiaries of Power Finance Corporation, to facilitate tie-up of inputs and clearances. The government has also introduced the concept of ´take-out financing´, which will enable banks to enhance lending to infrastructure projects while at the same time manage the asset-liability mismatch. Here banks have an understanding with another specialised institution (like IIFCL) to take over their loans after a fixed period of time. Further, as the tenure of debt is a significant issue in financing and the bond markets continue to remain shallow, the government is also considering allowing insurance and pension funds to use a part of their corpus to fund long gestation infrastructure projects. In fact, very recently the first infrastructure debt fund was set up in the country to channelise long term insurance and pension funds through credit enhancement.¨ However these are not sufficient and many more reforms are required, say industry pundits.

The Reforms
Some of the major measures put forward by industry professionals include developing a strong and stable regulatory framework, single window clearance system, mitigating political and regulatory risks and coordi¡nation between Centre and State governments for better implementation of policies.

¨ Some of the prerequisites to attracting private and foreign investments are ensuring policy stability, adhering to government assurances in project agreements and ensuring financial viability and fair return for existing PPP projects,¨ states Kishore. Expeditious approval process to reduce the turn¡around time for approvals, review of the model concession agreements to make them more equitable are some of the measures suggested by Singh who also puts forward some ports-specific measures: ¨Greater connecting infrastructure at major ports, greater road connectivity, dredging at the ports to widen the channels leading to the container terminal berths, corporatisation of ports to increase their efficiency, moving to a market determined tariff are some of the measures to boost FDI in the ports sector. Development of a few large projects than many small ones will serve the economy better,¨ he opines.

Setting up a one-stop shop for handling PPP projects, one single agency within the Central government to be responsible for all the policies and project advocacies are some of the suggestions put forward by Birla.

¨This agency would also act as a single window for time-bound approvals for PPP projects. Moreover, 100 per cent of the land must be acquired before awarding the contract for reducing execution risk and increasing the pace of development. Easy exit norms should allow private developers to exit immediately after the project is completed. Such matured projects can be bundled and offered as high return and relatively risk free investment to investors. A quasi-judicial authority for dispute resolution with adequate statutory powers should be set up to speed up the dispute resolution process. A mechanism should be developed for time-bound reviews of MCAs and incorporating the best practices from international PPP experiences and lessons learned while implementing PPP projects in the country,¨ he explains.

Murali on the other hand opines that the government should ensure capacity building within the domestic industry, allow market price for technology transfer, get its tax policies right and adopt stable fiscal policy, simplify business regulations to restore foreign investors´ confidence.

The Future
Today India has a liberal regime for FDI in terms of entry norms. However, there are evidently several barriers that require special attention of the government and policymakers. The infrastructure policies in short must have a long-term perspective and provide a clear and lucrative roadmap to attract foreign investors and consequently propel the infrastructure sector to a new horizon.

Measures to attract more infra FDI

a.Regulatory

• Expedite land acquisition and environmental clearance
• Improve project bidding process
• Establish a rapid dispute resolution mechanism
• Labour reforms

b.Operational

• Robust project planning
• Balanced risk allocation between the authority and private developers

c.Financing

• Creation of sector-specific funding institutions
• Development of a deep corporate bond market.

– Janaki Krishnamoorthi