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Infrastructure: New catalyst in the equation

Infrastructure: New catalyst in the equation

Canada's steady and ongoing investment in India means that the confidence and basic market understanding are pre-eminent among Canadian companies. Jai Mavani explains what the entry points, facilitations and barriers are to invest in India's infrastructure.

Though not widely known, Indo-Canadian ties are historical and have been consistent since Sikh refugees escaping colo­nialism sought refuge in Vancouver early last century to the peaceful nuclear co-operation of mid-1950s (culminating in India's CIRUS reactor) and the current Blackberry revolution, Canada has always had a close ties with India.

That said, Canada and India trade less than one per cent of their respective total trade volumes with each other. A bulk of the current trade and investment co-operation is around agro-produce, commodities and fertilisers with high-technology, services and manufact­uring constituting a much tinier percentage. Infrast­ruc­ture figures in an even smaller way.

The tech-leading edge

As widely acknowledged, Canadian companies are technology leaders in mining and oil & gas (O&G) extraction. Construction and real estate groups like Brook­field stand tall in the global infrastructure space. Newer technology hubs in Toronto, Waterloo and Vancouver are undertaking path-breaking work around internet technologies and renewable energy.

Meanwhile, India is witnessing a transformation of its own. It is expected that India's urban pop­ulation will increase to 600 million by 2030. The resultantly booming inf­rastructure sectors, however, are confronted with sho­rt­ages and inefficiencies. Nearly 40 per cent of the farm produce is lost due to inadequate storage and transport infrastructure. Many parts of India still face double-digit peak-period power deficits.

The synergy opportunity

Some gaps can be filled with better planning, needing value infusions in the form of glo­bal management best practices, capital and technologies. Some main areas are energy, manufacturing, transport and finance.

Energy: India's energy-deficient situation is unlikely to improve in the near future. Currently, India relies on expensive imported commo­dities, be it coal, crude oil or natural gas for almost a third of its energy needs. This is expected to rise to over half by 2030.

India imported nearly 160 million tonnes of crude in 2009-10, 80 per cent of its total crude requirements. Similarly, several thousand megawatts of thermal capa­city addition is being planned over the next few years, requiring millions of tonnes of additional coal annually. India realises the need to augment its current crude and coal production quickly and efficiently.

Canada can add a significant value here. The Calgary region of Canada is home to some of the most advanced technology companies in O&G extraction and for shale gas, considered by many as the next wave of energy security. Unfortunately, not many Canadian upstream companies are active in India. From a long term pers­pective, this is one sector that will continue to witness sustained activity. The opportunity for partnering is immense, not only for the exploration and production (E&P) companies but also for the service providers and the equipment suppliers.

Similarly, in many progressive Indian states like Gujarat, successful and focussed renewable energy pro­grammes are already underway. However, despite a wid­ely acknowledged pot­ential, India has not fully exploited its solar and wind energy potential. Synergies are possible with several Canadian provinces including Ontario, which has been aggressive in solar generation.

With a long coastline, India provides similar oppor­tunities for wind power as well.

Manufacturing: India is a large domestic market. With several natural ports both on the east and west coasts, it also provides an ideal access to the Asia Pacific and the Middle East / North African markets.

Several global industry leaders particularly in the automotive sector are now actively using India as a sour­cing base for other markets. In addition, India provides a large domestic market as well.

Currently, the share of manufacturing in India's GDP is approximately 16 per cent, intended to be raised to 25 per cent by 2020. Keeping this objective in per­spective, recently the Cabinet approved a new National Manufacturing Policy. This Policy envisages the creation of National Investment and Manufacturing Zones (NIMZs) of a minimum area of 5,000 hectare each with fiscal benefits and relatively flexible labour laws.

Establishing units in the NIMZ would only require a single-window clearance. In addition, seven speciali­sed investment regions are notified along the Delhi-Mumbai Industrial Corridor. Portions of this corridor, such as the Ahmedabad-Dholera region, spread over 900 sq km, already have several operational industries and offer port access.

Canadian companies can actively consider establi­shing their manufacturing base in India. Another aspect which can serve as a great enabler is India's legal system that has strong common law influences and provides protection for patents and copyrights, an area which has proved to be a sore point for western companies in cer­tain other Asian manufacturing jurisdictions.

Transport: India has embarked on an aggressive road building programme with the target of adding almost 20 km of additional capacity every day. Most of this is under Public-Private Partnership (PPP). Although in a limited way, freight and cargo movement over rail has started opening up for foreign investment.

Canadian companies such as Bombardier already have manufacturing centres in India. As a few of the newer Metro rail projects opt for PPP, there are oppo­rtunities for collaboration for both the assemblers as well as service providers.

Financing: Ironically, and contrary to perception, India is not suffering from lack of funds, but suitable credit enhancement and a liquid financial ecosystem. Land acquisition issues, environmental clearances and fuel supply arrangements often play havoc with otherwise completely viable projects.

While some of these require a strong political will to address, many issues can be solved relatively easier. For example, India does not currently have a market for sta­bilised income yielding assets. Also, securities issued on the back of cash flows of infrastructure assets are neither very common nor actively traded.

Currently, several Canadian pension funds and insti­tutional investors are investing in India, mostly indire­ctly through investment in third-party managed funds. Globally, with the interest rates at extremely low levels, investments in fixed income products yield little. With capitalisation rates in India at 10-12 per cent, there is significant scope for interest arbitrage even after factoring currency hedging costs.

Besides, many infrastructure projects such as toll roads are getting completed in India and therefore de-risked of project execution and land / environment issues. Some of these are on a pure annuity basis or have a reasonable visibility of traffic: Clearly, an investment opportunity worth considering.

India is also in the process of implementing Infrastructure Debt Funds (see Cover Story section in this issue), which would be listed in the stock exchanges and therefore provide liquidity to investors. For indirect investors or fund managers, especially early entrants, this could provide interesting returns.

Shared expertise

Besides this, a roll-out of such a significant scale will require sophisticated project management and con­struction skills. Some large Canadian groups such as Brookfield and SNC Lavalin have already been operating in India.

In addition, under the flagship schemes such as Jawaharlal Nehru Urban Renewal Programme (JNNURM), the government is investing heavily in urban infrastructure such as water treatment, waste management etc. Capacity building measures and pol­icy reforms in education, healthcare with the active parti­cipation from the private sector (some funded
by multi-lateral agencies such as ADB, World Bank etc) are also underway. The scale of opportunity is clearly significant.

Benchmarked against the potential, the current scale of investments and co-operation is sub-optimal. Perhaps Canadian companies would do well to start with infra­structure, allied financial services and technology.

The author is Executive Director and Leader, Infrastructure & Real Estate Tax Practice, PwC India.

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