Strategist | Feb 16 | Infrastructure

2

S T R AT E G I S T

We have always aimed to provide our members consulting projects and challenges that will equip them to tackle future assignments confidently and competitively. We also aim for facilitating in growth of collective knowledge of the entire student community interested in the Consulting and Strategy domain. This magazine says it all. In this issue of Strategist we have emphasized on Infrastructure, which is one of the important industry going to prop up our nation’s economy in coming years. We hope you enjoy this issue of Strategist as much as we enjoy creating it.

-Team ConQuest

Strategist | February 2016

CONQUEST

3

CO N T E N T S MAGAZINE 1 Introduction As economies develop from low, to middle, to upper income, the infrastructure of the nation becomes paramount and as such, the spending evolves

2 Infrastructure around the world Global infrastructure is a subject too vast to be explored in the manner of a brief summary. However, with the population worldwide expected to cross 9 billion by 2050 and other issues such as saturated existing urban regions and the growing need for renewable practices; the significance of developments in the infrastructure sector become inevitably significant.

3 Infrastructure Industry in India The Indian economy grew at 7.3 percent in the 2014-15 fiscal. One of the major reasons behind this development, apart from the increasing focus on manufacturing sector, is the array of initiatives taken in infrastructure industry

4 REIT in India: Present Status and Future Trajectory REITs or Real Estate Investment Trusts were first introduced by the US Congress in 1960. The basic underlying concept behind REITs was similar to that of buying stocks or mutual funds – giving a boost to the real estate sector by channelling investments into it.

5 Improving Indian Railways Infrastructure The Indian Railways is one of the largest transportation and logistics networks of the world. Improving it will surely affect our economy in positive way read this article to find out more

6 Interview with Mr. MS Nageshwar Rao

Sales Management, Head of the Company Real eT matrix Pvt. Ltd

Strategist | February 2016

4

S T R AT E G I S T

Introduction INDUSTRY OVERVIEW As economies develop from low, to middle, to upper income, the infrastructure of the nation becomes paramount and as such, the spending evolves. The low-income groups face difficulty in providing basic amenities to their citizens due to lack of proper infrastructure. As the income level rises, individual and social needs like sanitation, hospitals, and schools gain importance. At the higher levels of income, smart cities with sophisticated and modernized infrastructure become the norm.

Over the past decade, infrastructure in India has been plagued by policy paralysis and not been given the adequate attention it deserves to foster the country’s growth.

However, that is not to say that the sector has been neglected by the government and the private sector. During the period 2002-2012, the private sector has invested approximately US$ 250 billion in various infrastructure projects.

Over the past decade, infrastructure in India has been plagued by policy paralysis and not been given the adequate attention it deserves to foster the country’s growth.

However, that is not to say that the sector has been neglected by the government and the private sector.

Strategist | February 2016

CONQUEST But the country needs further INR 31 trillion (US$ 465 billion) to be spent on infrastructure development over the next five years, with 70 per cent of funds needed for power, roads and urban infrastructure segments. These figures highlight the magnitude of the problem that faces the infrastructure sector. Realising the massive investments needed, the government has adopted a new approach with Public-Private-Partnership (PPP) as the cornerstone of its policy framework.

The current policy framework allows 100% Foreign Direct Investment (FDI) in most infrastructure sectors with no restric tion on repatriation of profit.

The infrastructure sector consists of power, bridges, dams, roads, railways, and urban infrastructure development. India’s railway network is recognised as one of the largest railway systems in the world under single management; however, it has

always seen the monopoly of the Central Government, with operation and finances under the purview of the Railways Ministry. The government has been focussing on improving the rail infrastructure but the same cannot be successful without the presence of an independent regulatory authority. The railways infrastructure has been touched upon in a subsequent article.

In the power segment, India ranks 4th in the world in terms of energy consumption but only 5th in generation capacity. India’s power sector is one of the most diversified in the world. Sources of power generation range from conventional sources such as coal, lignite, natural gas, oil, hydro and nuclear power to viable non-conventional sources such as wind, solar, and agricultural and domestic waste.

The Planning Commission’s 12th Five-Year Plan estimates total domestic energy production to reach 669.6 million tonnes of oil equivalent (MTOE) by 2016–17 and

5

844 MTOE by 2021–22. By 2030–35, energy demand in India is projected to be the highest among all countries according to the 2014 energy outlook report by British oil giant, BP. In terms of investment, the power sector has seen around 293 global and domestic companies committing to generate 266 GW of solar, wind, mini-hydel and biomass-based power in India over the next 5–10 years. The initiative would entail an investment of about US$ 310–350 billion. Between April 2000 and September 2015, the industry attracted US$ 9.97 billion in FDIs. As PPP models have become norms for the infrastructure sector, the government appointed the Kelkar Panel to suggest improved funding and reforms. The proposals include a provision for monetisation of projects, revamp of the model concession agreement and creation of a new institutional mechanism.

Strategist | February 2016

6

S T R AT E G I S T

Infrastructure

around

the world INDUSTRY OVERVIEW

Activities in aviation sector internationally are on rise, with 340 new airports identified in 2015 by the month of July costing investment of about US$ 157 Billion. In the context of ports and shipping, the congestion at US West Coast ports has led to suppliers diversifying cargo to more efficient ports that exist in the east and gulf region. The journal of commerce has recognized Shanghai, Singapore, Shenzen, Hong Kong and Busan (Korea) to be the top 5 international ports.

Global infrastructure is a subject too vast to be explored in the manner of a brief summary.

However, with the population worldwide expected to cross 9 billion by 2050 and other issues such as saturated existing urban regions and the growing need for renewable practices; the significance of developments in the infrastructure sector become inevitably significant. According to PwC report Outlook to 2025, worldwide infrastructure spending will grow from $4 trillion per year in 2012 to more than $9 trillion per year by 2025. Overall, close to $78 trillion is expected to be spent globally between 2014 and 2025.TheAsia-Pacific market, driven by China’s growth, will represent nearly 60% of global infrastructure spending by 2025. In Strategist | February 2016

contrast, Western Europe’s share will shrink to less than 10% from twice as much just a few years ago. Developed economies, while continuing to grow, will see their infrastructure spending shrink from nearly half of the global total today to about one-third by 2025.

Developing economies, most notably China and other parts of Asia, account for nearly half of all infrastructure spending, up more than 10% from 2006. In contrast, Western Europe, which isn’t expected to reach pre-financial crisis levels until 2018 or later, accounts for only 12% of global spending now, down from about 20% in 2006, and is projected to generate less than 10% by 2025.

Activities in aviation sector

internationally are on rise, with 340 new airports identified in 2015 by the month of July costing investment of about US$ 157 Billion. In the context of ports and shipping, the congestion at US West Coast ports has led to suppliers diversifying cargo to more efficient ports that exist in the east and gulf region. The journal of commerce has recognized Shanghai, Singapore, Shenzen, Hong Kong and Busan (Korea) to be the top 5 international ports. It is encouraging to see that the Indian government has initiated similar efforts with ‘sagarmala’ programme to develop the Indian ports. Brazil, another emerging economy has undertaken a massive water infrastructure project of the tune of US$ 6.4 Billion as well, dedicated to Sao Francisco River Irrigation.

China also on the other hand has about 20% of the world’s population but only 7% of the total freshwater reserves. Simply put, it is fast running out of water. The ‘South to North Water Transfer Project’ looks to divert about 44.8 billion cubic meters of water per year from the Yangtze River in southern China to the Yellow River Basin in arid northern China, where water shortages are more frequent.

CONQUEST

7

On the urban housing and development landscape, the McKinsey Global Institute has estimated that between now and 2025, the world’s urban population will grow by 65 million people per year, or by almost 179,000 every day. In an attempt to build new urban powerhouses, Kazan Smart City in Russia (US$ 10 Billion) is constructed with the objective of being a sustainable base of international business and a pleasant environment for its residents. The Morar Carioca Sustainable Community Programme in Rio De Janerio (US$ 4 Billion) hopes to upgrade the slums of the capital.

To improve the existing connectivity, China has decided to increase its National Trunk Highway System by 83,000 Km which would link at least 90% of the cities and population. Already having the most advanced highspeed railways and even driverless trains; there are ambitious plans for China-Russia-CanadaAmerica route of 13,000 Km, passing through Siberia. The Moscow Central Ring Road with its circumference of 529 Km intends to become a link in the pan-European highway, between London and China, through Berlin and Moscow. Promised to be operational by the year 2018, the total investment in this road encircling Moscow is in the range of US$ 4.2 Billion.

On the urban housing and development landscape, the McKinsey Global Institute has estimated that between now and 2025, the world’s urban population will grow by 65 million people per year, or by almost 179,000 every day. In an attempt to build new urban powerhouses, Kazan Smart City in Russia (US$ 10 Billion) is constructed with the objective of being a sustainable base of international business and a pleasant environment

for its residents. The Morar Carioca Sustainable Community Programme in Rio De Janerio (US$ 4 Billion) hopes to upgrade the slums of the capital.

TheRussia-ChinaGasPipeline contributes on two fronts, geopolitically strengthening ties between two superpowers and as a major development on the global energy front. The USAlaska LNG Project would create a pipeline of length 13,000 Km from north to south Alaska, making available the controversial Arctic reserves to the market at large. The Libra Pré-Sal Oil Field Exploration is another upcoming game changer for Brazil, led by PETROBRASanditspartners.The UHV Power Transmission Project in China would build eight ultrahigh voltage transmission lines, reducing electricity lost when transmitted over long distances.

identified; some of which include Bahrain Airport Expansion, WestConnex Transportation project in Australia, Canakkale Suspension Bridge in Turkey and Atlantic Coast Pipeline in USA amongst others.

It is evident that most of the ground-breaking projects are underway in USA, Russia, China and the like. But growing urbanization in emerging markets such as China, Indonesia, and Nigeria should boost spending for such vital infrastructure sectors as water, power, and transportation. The PwC report also states that Demographic changes will vary by region and country, affecting both the amount and type of infrastructure spending.

Aging populations in Western Europe and Japan, for instance, will require additional healthcare facilities, while countries in SubNumerous initiatives such Saharan Africa, the Middle East, as the Global Infrastructure and many parts of Asia-Pacific will Leadership Forum, backed by need more schools for their youth. multinational giants such as BCG, aim to identify crucial infrastructure projects around the globe that would revitalize economic competitiveness and lead to opportunity creation. Under these ‘Strategic Top 100’ US$ 406 Billion worth of projects in 47 countries and 10 sectors have been Strategist | February 2016

8

S T R AT E G I S T

Strategist | February 2016

Infrastructure

CONQUEST

9

industry in india INDUSTRY OVERVIEW

The Indian economy grew at 7.3 percent in the 2014-15 fiscal. The World Bank has forecasted a similar growth rate of 7.5 percent for year 2015-16 as well. One of the major reasons behind this development, apart from the increasing focus on manufacturing sector, is the array of initiatives taken in infrastructure industry. For example: The cabinet has approved in June 2015 the Bangladesh, Bhutan, India and Nepal (BBIN) Motor Vehicle Agreement for the Regulation of Passenger, Personal and Cargo Vehicular Traffic among BBIN. This agreement aims to promote safe, economical efficient and environmentally sound road transport in the sub-continent and to further help each of the countries in creating a mechanism for regional integration.

According to the research by Infrastructure Development Finance Co., the infrastructure sector contributes approximately 8% to the country’s total GDP. This number is expected to reach 10% by 2017 so as to meet the growth objectives that we have set for ourselves. In order to achieve this, the country requires about INR 31 lac crores over the next five years, where 70% of this investment would be dedicated to roads, power and urban infrastructure. And to generate funds of such a significant scale, the central government

has targeted an increased FDI in the sector; for example: 100% FDI permitted under automatic route in infrastructure related to petroleum products, natural gas pipelines and petroleum refining by private sector.

Recent developments in the Indian infrastructure scenario: •

France has announced a commitment of € 2 billion (US$ 2.17 billion) to convert Chandigarh, Nagpur and Puducherry into smart cities.

•

The Construction Industry Development Board of Malaysia has proposed to invest US$ 30 billion in urban development and housing projects in India, one of them being the Ganga cleaning project.

•

Japan has offered loan at less than 1% interest rate for India’s first bullet train between Mumbai and Ahmedabad estimated to cost approximately US$ 15 billion, on the condition that India would buy 305 of equipment from Japanese firms.

•

The Government will be spending INR 850,000 crore (US$ 127.62 billion) over the next five years to modernize Indian Railways, aided by a 30 year loan from the LIC.

Strategist | February 2016

10

S T R AT E G I S T

• Air traffic in India is expected to triple, from 190 million passengers at present to 570 million by 2025. With such projections, US$ 40-50 Billion are estimated to be necessary for the expansion of existing airport infrastructure as well as construction of new airports.

• The government has established a goal of investing INR 70,000 crore (US$ 10.5 billion) in 12 major ports in the next five years under ‘Sagarmala’ initiative; low-cost, small ports to be set up around major ones as well to facilitate quicker movement of cargo.

• In the next 10 years, over 90 million jobs would be generated in India, creating a need for more than 8 million square feet of office space.

Strategist | February 2016

This is a major opportunity for foreign and domestic players looking to invest in industrial infrastructure.

• After the Coal Mines Special Provisions Bill (2015), the government has been auctioning several coal blocks by either auction or nomination to state entities; in the second phase, the centre would also assign such blocks to private corporations.

• The shift in focus, to renewable energy, is clearly visible with US company SunEdison wining a contract to provide 500 MW solar energy at a rate as economical as INR 4.63 per unit; helping India’s US$ 160 billion clean energy drive.

CONQUEST

REIT

11

i n i n d i a : p r e s e n t s tat u s

and future tra jec tory BY: DIGANTA SARKAR, SREEKANTH K N (IIFT, DELHI) REITs – A Brief Introduction REITs or Real Estate Investment Trusts were first introduced by the US Congress in 1960. The basic underlying concept behind REITs was similar to that of buying stocks or mutual funds – giving a boost to the real estate sector by channelling investments into it.

Though the idea has been around for the last 56 years, it gained traction only in the last two decades. Starting from the end of 1992 through the end of 2010, the size of the REIT industry has grown constantly and progressively from just under $16 billion to $389 billion .

Why REITs? • A land or a property can generate revenue in two ways – the income earned through rent, or the income earned through mortgage interest rates. Based on this classification, REITs are classified into two major types. The former is called an Equity REIT and the latter, a Mortgage REIT. • Additionally, the REITs may also be publicly listed and traded on major stock exchanges.

• The biggest advantage of this instrument, unlike equities, is that it acts as a natural hedge against inflation risks, as there is lower correlation. As commercial real estate is a distinct business class, there would be a fairly low correlation with other securities over longer time periods.

Strategist | February 2016

12

S T R AT E G I S T

The companies that carry out an REIT listing, distribute most of its income as dividends, just like stocks; and the asset class has higher cash flows, leading to more dividends in the future.

Most of the countries which issue REITs have to distribute at least 90% of the taxable income as dividends to shareholders Even during Bear Markets, the REIT securities fared better compared to other equity indices as can be seen from the following comparative chart.

REIT in India: The Story so Far The REIT journey in India began with its introduction into the maide¬¬n budget, by Finance Minister Arun Jaitley.

The following timeline depicts its slow transition across the months. Presently, it has been a year and a half since the budget was construed, and the following pointers are noteworthy: • In spite of the various facilitators implemented, bottlenecks in the form of removal of Strategist | February 2016

DDT and other minor tax regulations still remain • The public are yet to be made fully conscious of the product; and subsequently, there are quite a few lingering doubts about its acceptability • Projects are riddled with the trademark red-tapism and cronyism of Indian bureaucracy

REIT in India: Our Opinion on the Future Trajectory

REITs provide a simplistic way for investment in one of the most burgeoning fields of present times – Commercial Real Estate; and that too while doing away with the opportunity cost or illiquidity of the qualm of having to own property directly.

To bypass these pitfalls, Since its introduction in the US, SEBI has put in place a few countries like the Netherlands regulations: (1969) and Australia (1971) fol• All REITs are to register lowed up very soon; while the themselves in prior with SEBI US itself went on to legislate tax • Certain investment sanc- reforms in the 1980s that made tions have been imposed – 80% the new structure more appealin the case of completed prop- ing to both companies and indierty, 90% for dividend pay-out, vidual investors. etc.

• They will have to invest Currently, most developed in at least two projects; coupled countries and many developwith the fact that not more than ing countries in the world (South 60% value of net assets would Africa, Brazil, etc.) have adopted be assigned to one single REITs; while it remains under conproject sideration in China.

• The Minimum Asset Size required to start off the process The global real estate secuis INR 500 Cr. In an additional rities market has a significant testament, 25% of the total market cap of approx. $1.8 initial corpus is to be invested Tn., spread across 487 comby sponsors panies around the globe. (As of 9/30/2015).

However, REITs took some time to gain a proper foothold in The Indian Real Estate the United States as well, since Market has the inherent potenits introduction in the 1960s. In tial to grow and blossom into India, DLF – India’s largest real one of the top five markets in estate developer, is the first to Asia by market cap, accordannounce REIT listing by mid- ing to a study by Cushman & 2016. In a first-of-its-kind act Wakefield. Below is an analogy in this country, it is supposed to the Singaporean REIT; and to monetise commercial assets our two cents for transforming adding up to almost 30 million the present status of REIT in square feet. Presently, DLF is the country into something preawaiting final clarifications on dominantly more conducive for the tax reforms and foreign business. investments; post which it should engage the market.

CONQUEST

Recommendations Singapore REITs or S-REITs are one of the best performing REIT markets in Asia. The first REIT in Singapore was only 80% subscribed and eventually had to be scrapped . Then, certain reforms were introduced, such as: • filing tax exemption, • increasing in gearing limit, and • stamp duty recession; all of which combined together to result in a better performance of the REITs. When converting these changes to the Indian perspective, we believe that the following variations could be made: • Minimum outlay for

trading is Rs 1 Lakh. This might limit the volume traded on the exchanges. Being a fledgling idea in the Indian real estate market, this limit could be decreased to lure small investors into this.

• Taxing norms should be relaxed. Currently, if the special purpose vehicles have a fair value of Rs.10 and the value on transfer to REIT is INR Rs.50, resulting in a gain of Rs.40. If the REIT units are sold finally for Rs.80, only the gain of Rs.40 should be taxed and not the remaining Rs.30. Currently entire Rs.70 could be taxed.

• Holding Period for REITs to qualify as a long term capital asset could be reduced from the current 36 months to 12 months, as in the case of listed equity shares, to make it lucrative to investors.

13

• There are significant unsold inventories, belonging to vacated offices and spaces in malls. Though this provides opportunities for REITs to acquire assets at an attractive price, there is a lot of illiquidity which makes the exit difficult.

Strategist | February 2016

14

S T R AT E G I S T

Improving

i n d i a n r a i lway s

infrastructure BY: DEBROOP BANERJEE, NEERAV MAHAJAN (NMIMS) The Indian Railways is one of the largest transportation and logistics networks of the world. It runs about 12,000 trains, carries over 23 million passengers per day and connects about 8,000 stations spread across the sub-continent. Currently, Indian Railways runs more than 7,000 freight trains per day carrying about 3 million tonnes of freight every day.

Railway traffic growth is positively correlated with rise in index for industrial production (IIP). However, Indian Railways has not been able to capture this growth due to unavailability of wagons and lack of infrastructure, consequently losing share steadily to roads.

To increase its market share in the transportation of bulk and non-bulk freight, the Central government has been steadily increasing investments in railway infrastructure.

The budget allocation was increased to Rs 643 billion in 201415 from Rs 593.6 billion in 2013-14.

Strategist | February 2016

CONQUEST

Infrastructure Investments To increase its market share in the transportation of bulk and nonbulk freight, the Central government has been steadily increasing investments in railway infrastructure. The budget allocation was increased to Rs 643 billion in 2014-15 from Rs 593.6 billion in 2013-14. Presently, the focus is on finishing the capacity-augmentation projects which have the highest rates of return. There are 154 New Line, 42 Gauge Conversion, 166 Doubling and 54 Railway Electrification projects across the country at a cost of Rs 285,652 crore (US$ 42.87 billion).

For Railway Electrification projects, the cost as on April 1, 2014 is estimated to be Rs 6,692 crore (US$ 1.0 billion).

In August 2014, The Department of Industrial Policy and Promotion (DIPP) introduced and permitted 100% FDI in certain sub-sectors of the Indian Railways. The revised FDI policy allows FDI in the construction, operation and maintenance of only the following: • Suburban corridors through public private partnership (PPP) • High speed train projects • Dedicated freight lines • Rolling stock including trains sets and locomotive/coaches manufacturing and maintenance facilities • Railway electrification • Signalling system • Freight terminals • Passenger terminals • Testing facilities and laboratories • Non-conventional sources of energy • Railways technical training institute • Concession of standalone

• • • • •

passenger corridors (branch lines, hill railways etc.

Mechanised laundry Rolling stock procurement Bio-toilets Technological solution for manned and unmanned level crossings Technological solutions to improve safety and reduce accidents

Some of the major developments and investments in the railway sector are:1. Japan International Cooperation Agency (JICA) granted the Madhya Pradesh Government a loan of Rs 12,000 crore for Indore and Bhopal metro rail projects 2.

Japan will finance India’s first bullet train between Mumbai and Ahmedabad at less than 1% interest rate, on the condition that India buys 30% of equipment from Japanese firms. The cost of the project is almost Rs. 98000 crores.

3.

Indian Railways issued a Letter of Award to US-based General Electric (GE) for a Rs 14,656 crore (US$ 2.2 billion) diesel locomotive factory project at Marhowra, and to French transport major Alstom for Rs 20,000 crore (US$ 3 billion) electric locomotive project in Madhepura, both in Bihar.

4. A MoU was signed between the Ministry of Railways in India and the Czech Railways (Ceske Drahy) and Association of Czech Railway Industry (ACRI) of the Czech Republic on technical cooperation in the field of the railways sector.

15

Government Initiatives 1.

The Ministry of Railways has sanctioned implementation of Eastern Dedicated Freight Corridor (EDFC) and Western Dedicated Freight Corridor (WDFC) with freight train speeds of maximum 100 Kmph.

2.

The Government of India plans to spend Rs 850,000 crore (US$ 127.62 billion) over the next 5 years to modernize Indian Railways for which they have received a 30 year loan from LIC. The Cabinet also cleared the Rs 82,000 crore (US$ 12.3 billion) dedicated freight corridor for decongesting existing network.

3. Encouraging private sector participation in Railways, Mr Suresh Prabhu, in his maiden Railway Budget, amalgamated public welfare with private investment. While investment through public-private partnerships (PPP) was increased to Rs 5,781 crore (US$ 867.94 million), several schemes for improving efficiency of the Railways were kept under this head.

4.

To cut energy costs, the Indian Railways signed a bilateral power procurement agreement with the Damodar Valley Corporation (DVC), under which railways will buy 50 MW of power from DVC at Auraiya Grid Substation facilitated by Railways Energy Management Co. Ltd, a joint venture of the Indian RailwaysandRITES,apublicsector unit of the Ministry of Railways.

5.

The Government of India sanctioned Rs 1,000 crore (US$ 150.14 million) for a 15 km railway project connecting India and Bangladesh linking Agartala in Tripura and Akhaura in Bangladesh.

Strategist | February 2016

16

S T R AT E G I S T

6.

The Maharashtra government has planned to set up a Special Purpose Vehicle (SPV), Maharashtra Railway Infrastructure Development Company, with a view to ensure timely completion of various development projects.

7.

A memorandum of understanding (MoU) and an Action Plan have been signed between the Government of India and the Government of China to improve technical cooperation in the railways sector.

8.

The Union Cabinet has given its approval for establishing a new rail coach manufacturing unit at Kolar, Karnataka. The unit will produce 500 coaches per annum at a projected cost of Rs 1,460.92 crore (US$ 219.34 million) with the Ministry of Railways providing 50 per cent of the finances and the Karnataka government providing land, free of cost, and the remaining 50 per cent of the project completion cost with escalation.

Public-Private-Partnerships Railway infrastructure requires large investments that cannot be undertaken out of public financing alone. Hence the Government has resorted to Public Private Partnerships (PPPs) to attract private capital and the technomanagerial efficiencies associated with it.

1.

Railways Infrastructure for Industry Initiative- This policy was announced in 2008-09 to attract private participation in rail connectivity projects so that additional rail transport capacity can be created.

2.

Private Freight Terminals (PFT) Scheme- It was launched in May 2010 in a bid to develop a network of freight terminals with Strategist | February 2016

efficient and cost effective logistic services and warehousing.

The development of PFTs is to be funded through PPP and they can be either “green field” terminals or “brown field” ones, where private sidings/container terminals can be converted into PFTs with traffic being handled by the private investors. As of 2012-13, 43 proposals had been received for development of PFTs of which 38 had been finalised.

3.

Automobile Freight Train Operator Scheme (AFTO) and Special Freight Train Operator Scheme (SFTO)- These schemes were introduced in 2010 to increase the Railways’ share in the transportation of automobiles and commodities like fertilizers, molasses, edible oil, caustic soda, chemicals, petrochemicals, alumina, bulk cement and fly ash.

These schemes are to be carried out through private participation for procurement and operation of SPWs. These schemes have been further liberalised in 2013. For AFTO, the Railways received proposals from two firms out of which one had been given approval as of 2012-13. This AFTO will manufacture a new type of automobile wagon that has been developed

by RDSO. 4.

L i b e r a l i s e d Wa g o n Investment Scheme and Wagon Leasing Scheme (WLS)- The Railways has allowed investments in Special Purpose Wagons (SPW) and High Capacity Wagons (HCW) by manufacturers and consumers of goods and their leasing by leasing companies from 2008.

To make these schemes more popular, the Ministry of Railways revised the eligibility criteria in February 2011 by reducing the minimum net worth requirement for wagon leasing companies.

The new norms also allowed for the leasing of wagons under the Automobile Freight Train Operators Scheme, Special Freight Train Operators Scheme and Container Train Operators Scheme. By 2012-13, two companies had registered as Wagon Leasing Companies.

5.

Kisan Vision Project (KVP)- To facilitate setting up of cold storage and temperature controlled perishable cargo centres through PPP mode, logistics based PSUs i.e. Container Corporation of India Ltd. and Central Warehousing Corporation Ltd. have been asked to develop perishable cargo centres with temperature controlled storage facilities at six locations in the Railways.

6.

Rail Connectivity to Coal and Iron Ore Mines (R2CI) - This scheme was announced on February 21, 2011 to overcome the constraints of rail-road connectivity to coal blocks and iron ore mines which is not provided in the R3i policy. Proposals of only those new lines, which are either 20 km or more in distance, shall be eligible under this policy.

Conclusion Turning around the cash strapped Indian railways is a herculean task.

A lot of investment, research and time are required to put it back on track. Though the present government in its election manifesto spoke a lot about improving the railways infrastructure and have placed a qualified and experienced minister at the helm of affairs. However it can be safely concluded that their efforts will bear fruits when the changes promised will be visible.

CONQUEST

17

I n t e r v i e w w i t h m r . MS N a g e s h wa r R a o S A L E S M A N A G E M E N T, H E A D O F T H E CO M PA N Y R E A L E T M AT R I X P V T. LT D

INTERVIEW

Q1) White Paper on Infra Financing by ASSOCHAM and CRISIL estimates that INR 31 lakh crore investment is needed in the infrastructure sector. How could the government look to finance this need?

Viability Gap Funding, Toll Collection Mechanisms and opportunity for more profitable real estate developments across these corridors.

Some of these high visibility & high potential projects are funded by World Bank, Asian Development Large infrastructure proj- Bank, Engagements with agenects are normally government cies like Japanese International funded through budgetary pro- CooperationAgency (JICA), Japan visions spread across multi- International Bank (JIBA), which ple fiscal periods. In the recent offer long term loans (30-40 years India has been following a years) at nominal interest rates multi prong approach to execute 0.5% interest per annum. The Infrastructure projects. These other important funding mechpredominantly could be through anism these projects are also central allocations, in partner- funded through Foreign Direct ship with the states, treading the investments.

PPP path and through the SPV routes involving centre, state Q2) Bank lending to infrastruc& private enterprise, through ture sector has grown at a CAGR setting up of independent state of 28 percent from 2005-2015, corporations like Delhi Metro higher than the overall credit Corporation (DMIC) or Delhi growth. However, this poses a Mumbai Infrastructure Corridor risk of asset-liability mismatch Development Corporations as the infrastructure loans have ( D M I C D C ) . T r a n s p o r t a period of 10-15 years. How do Infrastructure projects are exe- you see this trend affecting the cuted by involving private enter- credit availability in the future, prises like Yamuna Expressway, particularly with the NPAs of Dwarka Expressway, and Nandi banks rising fast?

Infrastructure Corridor. These projects are carried out on Build RBI’s cap on funding infrastrucOperate Transfer (BOT), Build ture companies have strengthOwn Operate Transfer (BOOT). ened the due diligence mechThese private funded proj- anisms of funding agencies. ects will have the safety nets The policy paralysis prevailing like Concession Agreements, during the previous dispensation

appears to be addressed and many projects, which were stuck, are back in the reckoning. There is now higher competition & closer scrutiny of execution companies vying for the limited funds that are available.

The assessment of execution capabilities and risks associated. If developers can adopt honest demand estimation methods and be conservative in their profitability predictions with laser sharp focus on operations, we shall witness more & more successful projects. This will in turn address the Asset Liability mismatch and bring back the confidence of funding agencies to extend credit to this all important nation building activity.

Q3) With the government announcing the smart cities project, what steps need to be taken to speed up clearances for PPP projects?

Smart City Initiative seems to be heading in the right direction. With the announcement of the top 20 cities, there is traction and urgency in rolling out the scheme. It is good to note that cities are vying for the top spots by submitting well thought out proposals and action plans.

This would definitely create a healthy competition among cities to attract investment, Strategist | February 2016

18

S T R AT E G I S T

create urban infrastructure and more importantly jobs for our burgeoning working age population. Though the naysayers are crying foul about the political intervention in the selection process, a beginning has been made. The focus now shifts to enabling policy formulation and stringent implementation of the proposed redevelopment, brown and green field developments to make our cities smarter in letter and spirit. Speeding up of the stuck PPP projects, at least in the selected cities will be inevitable and also a great opportunity to boost confidence among investors and build deeper relationships with them to embark on the new infrastructure development journey.

Q4) With the government focussing on bullet trains, what is the viability of the project in India? How much impact will this have on the infrastructure development?

Grandiose infrastructure projects have been used as a means to achieve higher growth by many nations across the globe. These projects when announced are bound to draw sharp criticism from certain quarters of the polity and society.

Attention is drawn to other projects that need to be undertaken for the benefit of the society at large. Vehement arguments and suggestions are put across pointing out that these projects will benefit few. However we need to understand that though such projects are to the benefit of the neo rich, the effects of these developments will have far reaching consequences for the benefit of all. It signals the Strategist | February 2016

inherent capability of the nation to conceive & pursue such projects and their successful implementation will further enhance the image of the nation helping in attracting further assistance & investments to spur growth.

Q5) What are the impediments to the development of REITs as an investment opportunity in India? How will REITs develop in the country in the coming years?

Development of REITs and Invest’s are important for transparent mechanisms that can fuel the growth of cash starved Real Estate & Infrastructure Sectors. These are also mechanisms to enable retail investors to participate in the otherwise capital-intensive activity leaving out a large number of small investors. REITs are in the reckoning since 2007, but till 2014 there was not enough policy push to make it a reality. There has been a positive movement in this direction in the commercial Real Estate Sector and many development companies in partnership with funding agencies are consolidating their holding of Grade ‘A’ commercial stock. Recent investment of Blackstone Group in Bangalore based Embassy group is a case in point.

The impediments have been the lack of clarity in the policies regarding tax structures and lock in periods and more importantly the lack of title insurance, which is perceived as a major risk for investing companies as these investments could get embroiled in protracted legal disputes.

However, REIT’s & Invest’s are here to stay. This will definitely

help clean up the development processes and push more & more development companies to adopt transparent & ethical property development activities to access all important source of capital for the cash starved Real Estate & Infrastructure Sectors.

Q6) JNNURM was initiated to focus on urban infrastructure development, but the program has been a mixed success. What are the possible ways in which it could be further improved? Is there a need for a similar program for the rural areas?

JNNNURM was an important step in the Urban Infrastructure Growth trajectory that the Country has followed. Like any new initiative, it has its share of successes and failures. Urban infrastructure projects and the fund allocation are viewed as opportunities to create illegal wealth by the strong nexus prevailing among bureaucrats, politicians & developers. Lack of independent responsibility and accountability is the missing link in successful implementation of such projects. What we probably need is the technology to clone human beings in large numbers like Mr. E. A. Sreedharan of Delhi Metro fame.

Extending initiatives like 100 Smart Cities to include 500 Smart Towns, 1000 Smart Villages & also special focus on Rural – Urban (Rurban) boundaries by creating sustainable inclusive development models.

The focus here should be to redefine the word ‘Smart’ by drawing up relevant parameters for these regions.

CONQUEST

19

Q7) What are the major trends you foresee for the infrastructure sector in India? What is your forecast for the sector?

There is definitely a change in the narrative as to how India should develop from here on. Make in India, Start up India, Skill India, Clean India are clear pointer to the change in approach. These developments will take to time to portray a significant perceptible change on the ground, which

are deep-rooted anomalies exist- ing in our society. We have been successfully executing challenging world-class infrastructure projects like Konkan Railway & • http://www.ibef.org/industry/infrastructure-sector-india.aspx Kolkata Metro projects in the • http://www.oifc.in/infrastructure past. However, in the recent past • http://www.oifc.in/Uploads/MediaTypes/Documents/CII%20 projects like Delhi Metro Project, Policy%20Watch-Infrastructure.pdf Mumbai Pune Expressway have • http://www.ibef.org/industry/indian-railways.aspx been successfully executed within • http://www.ibef.org/industry/power-sector-india.aspx the estimated costs and in record • http://www.cci.in/pdfs/surveys-reports/real-estate-sector-intimes. We somehow seems to india.pdf have mastered the art of deliv- • http://rbsa.in/archives_of_research_reports/RBSA-Indianering feats which are considered Power-Industry-Analysis.pdf impossible in isolation, too far • www.mckinsey.com/~/.../india/.../powering_india_the_road_ too few. These examples need to_2017.ash... to be replicated more frequently • https://www.preqin.com/docs/reports/2015-Preqin-Globalfor India to race ahead economi- Infrastructure-Report-Sample-Pages.pdf cally. We have to transform these • https://www.pwc.com/gx/en/capital-projects-infrastructure/ flashes in the pan into to a major publications/cpi-outlook/assets/cpi-outlook-to-2025.pdf fire of desire & will to bring in glow & glory to this great nation.

FURTHER READING

We seem to know where we need to go, we are working on the means to reach our destination and there are more selfbelieving individuals who are seeing & feeling the change.

I am personally very positive about our potential and believe in our capabilities to come out trumps.

Strategist | February 2016