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View from the US: Giant awakening

View from the US: Giant awakening

Political and policy issues have been a deterrent to the United States' investment in Indian infrastructure projects. But will a shift in US policy from seeing India as a business partner and market, rather than an outsourcing resource, result in much-needed investments in our infrastructure? Pratap Vijay Padode in New York and Shashidhar Nanjundaiah in Mumbai find out.


“It's showtime,” declared Gautam Bhandari, Managing Director, Infrastructure, Morgan Stanley, seated in the conference room of his company's New York headquarters. He wasn't referring to a Broadway show but to an emerging market play which was threatening to show signs of flagging interest in an otherwise no-brainer destination for infrastructure investments.


Bhandari is part of the $4 billion fund formed to invest in infrastructure, of which 75 per cent has been invested. In India, his fund has made investments in power and road sectors. “Infrastructure space is attractive and the verdict is currently in its favour but, it is too early to call it a firm trend that is fully established,” cautioned Bhandari. “Money can leave as quickly as it came. There is no free ride and a fair process needs to be run to establish a stable market.” He added that at every stage the funds need to evaluate the attractiveness of the investment opportunity in relative terms.


The current Indian Five Year Plan calls for $514 billion in upgrades, while the next one outlines $1.7 trillion in infrastructure spending. As the price tag for this infrastructure will exceed India's budget, the balance of the financing will come from financial institutions. “This creates a major upside,” says Nik Khanna of the US-India Business Council (USIBC), “for American banks, insurance companies and pension funds, not to mention the construction companies, the equipment suppliers, and the US engineering firms sought after by India to implement these projects.”


Burgeoning interest?


As India embarks on the largest infrastructure build-out in modern history, and both the US industry and organisations such as the USIBC that help the two countries cooperate in business and trade, remain extremely excited about the prospects— especially with a perceived shift in interest of US investors in favour of India's infrastructure projects. After all, the US industry boasts of some of the finest qualities in heavy engineering, EPC and programme management.


“The USIBC is at the vanguard of cooperating on all these fronts,” Khanna says. “On hard infrastructure, new roads, bridges, railways, ports and airports, power generation, water treatment and new business parks are in the design phase and inching their way towards project financing. On soft infrastructure, the Government has committed to transform education, particularly higher education, to create a skilled workforce that will help drive global economic growth in the 21st century.”


The United States' involvement in Indian infrastructure building has been fairly low. “Despite the Government of India's allocation of more funds for infrastructure development, US company participation has been choppy, and inefficiencies continue to plague the sector, creating a drag on the country's overall economic growth,” Khanna says.


Recent collaborations such as the Punj Lloyd-Thorium agreement in thorium-based nuclear power technology are significant. Airport development is an area that US industry has been heavily involved in. CH2M Hill has provided programme management on the Delhi and Bangalore airports, United Technologies and Honeywell have provided most of the security architecture, airport and terminal solutions, lighting, etc. US-based Parsons Brinkerhoff was the lead contractor in Delhi airport's famed Terminal 3 project. The Indian Railways will soon look to replace their diesel locomotives in a tender expected to be around $5 billion—Caterpillar (Electro Motive Diesel) and General Electric are the prime bidders.


US-based trade organisations, most significantly the USIBC, have led trade missions, some sector-specific, and not all of them have romped home in gleeful success. Although there is no disincentive for US businesses to enter the market, many investors are not accustomed to, and therefore wary of, India's protectionist policies (eg, solar panels must be manufactured domestically). However, during his visit to India, Suresh Kumar, Assistant Commerce Secretary and Director General of the US Foreign Commercial Service, had indicated that it's all set to change, as his country's policy on outsourcing will give way—albeit gradually—to seeking trade and business markets in potent countries such as India. “Ninety-five per cent of our customers are outside the US, of which nearly a third are in China and India. The US enterprises have realised that they need to enhance their engagement with their customers.”


President Barack Obama's government has altered the way the country will do international business. The shift from the outsourcing model, under fire domestically for the jobs lost, to a more traditional model using other countries as markets. Obama has announced a National Export Initiative (NEI), which aims at doubling exports in five years to support five million jobs. Kumar terms the Initiative “a critical new effort that will lead to long-term, sustainable economic growth of the United States”.


The US-India CEO Forum has recommended that India should implement the Infrastructure Fund identified during the President's visit to India. USIBC, along with its members, will continue to press for a streamlining of the project clearance process for major infrastructure projects, especially relative to land acquisition and rehabilitation of displaced persons.


Do US investors see India as a favoured market yet? Experts are careful: “Let me think about this some more,” quips Khanna.


Private sector participation and foreign direct investment will be essential for India to meet its infrastructure targets. To bolster US company participation in this sector, USIBC plans to highlight the comparative advantages of American companies and to engage government officials on central, state and local levels in order to streamline the tendering process, review and provide targeted critiques of the PPP concession agreements that guide industry participation, and to continue to press for greater transparency in the tendering and award process of company selection.


Stumbling blocks


Resource crunch may hit India sooner than later, going by the Indian government's frenetic plans for investment. Faster rate of spending on infrastructure may mean higher dependence on foreign funds, for more than one reason. On the one hand, domestic equity and debt finance will not be adequate to meet the requirements. On the other, the banking sector is limited by its asset-liability mismatch issues. “Even if one applies a conservative haircut to the government's estimate of $500 billion of private capital investment required over the next five years, the numbers are large. A 50 per cent haircut and a 70:30 debt-to-equity ratio would imply a capital requirement of $75 billion.” India does not currently have $75 billion of dedicated infrastructure equity capital available with infrastructure or private equity funds. Bhandari concludes, “The reality is that we need external investments. Indian infrastructure is highly dependent on overseas investment.”


Bhandari reiterated that India was having its place in the sun currently, and rather than rest on misconceptions like “there are too many infrastructure opportunities in India”, it is better to understand that “while opportunity exists, the devil is always in the details,” he concluded. On whether investor expectations may be those of quicker returns than possible, he said, “As the Indian market matures, investors will accept higher risk and slightly lower returns.”


The litmus test, though, experts agree, will be in the implementation. While he agrees with the PPP model, Bhandari also believes that the engagement of the government in a positive frame enhances the chances of the success of the project. He believes that China's key to success is its brilliant execution while in India quality of execution is still suspect despite the success of T3 airport and Delhi Metro Rail.


A lack of access to long-term financing for banks and restrictions on infrastructure investments by other long-term capital providers are hurdles in this race to India's strides in infrastructure-building. While the government is taking steps to attract capital and lay the foundation for a viable, long-term debt market to finance infrastructure, the USIBC says it will continue to make the case for creating a long-term debt market in India, one with enough depth that will be capable to finance capital intensive infrastructure projects. Also critical is the need to improve the process for vetting and approving infrastructure projects. Khanna states a now-familiar refrain that infrastructure hears from analysts and experts: “India should significantly improve project structuring, including land acquisition and rehabilitation, funding and tender process in India to foster transparency, speed and efficiency in launching major infrastructure projects.” He says the USIBC will continue to review concession agreements and recommends improvement in the tendering process to foster speed, efficiency and transparency in contractor selection and project execution.


Changing perceptions


The National Intelligence Council (NIC), a body of analysts from across the US intelligence community, has published 'Global Trends 2025', a 121-page report that says that global power will be multipolar in the next 15-20 years with the rise of India and China. Those years will be invested by both countries in infrastructure development, but the critical time for seeking international funding and technology trade is right now. Morgan Stanley's Bhandari says, “The reality is that we need external investments. Indian infra is highly dependent on overseas investment.” He adds that favourable policies and investor experiences over the next 3-4 years will be critical in order to get to the next target levels in infrastructure investment, although this has been a somewhat tough call in the context of international investments in our infrastructure, given that the world is only just recovering from the dreadful economic downturn of 2008-9.


Culturally, too, the United States may go through a change in public perception towards India, marred in recent years because of jobs lost due to outsourcing. Such perception is important for both the government and the industry to ensure they do not act against the will of the nation. The perception that India is a growing power is well-ensconced in the American mindset. Vishakha Desai, President, Asia Society, New York, agrees that the 'shift in gravity' is a definite fact. “The power of the US to influence will remain, but it will not be the only source of power and there will be others. Besides it may not remain to be as effective. The world is changing and China is creating the new world order in its favour. The 'outsourcing' brouhaha has died down and yet India is not managing to corner the attention of investors due to its preoccupation with scams.”


The NIC report also warns that “countries in Africa and South Asia may find themselves ungoverned, as states wither away under pressure from security threats and diminishing resources.”


“The perception that corruption is a big issue and that things don't happen or that quality of execution of roads, projects, etc, is poor is a stumbling block,” Desai says. “The Commonwealth Games scandal and the telecom scam have tainted our otherwise glorious opportunity. However, on the brighter side, the government is focused in building infrastructure and implementation and execution is the key.”


Not everyone is happy about US investments abroad as concerns abound on why the US is losing its pre-eminent position as a world leader. Some experts believe the United States is slipping on key investments. Like a majority of American voters, Dennis Slater, President, Association of Equipment Manufacturers (AEM), says the country is not paying enough attention to its own infrastructure while trying to be a world leader. “Emerging powers are using our model of Interstate Highways, as we neglect our own infrastructure improvements and risk losing our global advantage.” As he spoke to us exclusively on the sidelines on CONEXPO, he beamed with relief at a largely swollen participation of 144,000, 25 per cent of which is international. The back-to-pre-downturn numbers are an indicator of an upbeat mood and corporate America's impatience to get on with it.

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