IILM Management Review

VOLUME 1 ISSUE 2 OCTOBER 2012

R IM THE JOURNAL OF IILM INSTITUTE FOR HIGHER EDUCATION

VOLUME 1 ISSUE 2

Management Review

OCTOBER 2012 200

Innovation

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Role Of Innovation In A Nation's Development

By Soumitra Dutta, Anne and Elmer Lindseth Dean and Professor of Management, Samuel Curtis Johnson Graduate School of Management, Cornell University, USA

Theme

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Developing A Culture Of Innovation: The Tata Experience

By Sukanya Patwardhan, Rajiv Narvekar (Senior Practice Consultants) & Shambhu Kumar (Researcher), Tata Management Training Centre)

Re-inventing Industries Inside Out ?

Indian Telecom: Opportunities And Challenges Go Hand-in-Hand

By Rajan S. Mathews, Director General, Cellular Operators Association of India

Spotlight

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Managing The Mega Concerns Of India's Power Sector

By Ashok Khurana, Director General, Association Of Power Producers

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Lessons From The Golden Age of Private Equity

By Ashish Dhawan, Founder and CEO, Central Square Foundation & Former Senior Managing Director, ChrysCapital ?

Financial Reporting: What India Should Do

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By Dolphy D'Souza, Partner and National Leader, Member Firm of Ernst & Young Global

Research@Work

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A New Prescription For Healthcare Delivery

By J. Jacob, Chief People Officer, Apollo Hospitals Enterprise

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Board of Editors ANJAN ROY Economist & Corporate Advisor New Delhi.

BHASKAR DUTTA Professor of Economics University of Warwick United Kingdom.

KIRANKUMAR.S.MOMAYA Professor of Strategic Management Shailesh.J.Mehta School of Management Mumbai.

P.K.JAIN Professor of Finance Indian Institute of Technology (IIT) New Delhi.

P. MALARVIZHI Co-Chair, Research & Professor, Accounting & Finance, IILM RAKESH CHAUDHARY Professor of Strategic Management, IILM RANJANI MATTA Associate Professor - Finance, IILM SUJIT SENGUPTA Area Chair - Sales & Marketing Associate Professor, IILM SUJATA SHAHI Area Chair & Professor - OB/HR, IILM VANDANA SRIVASTAVA Area Chair & Associate Professor - Information Technology, IILM EDITOR: GEORGE SKARIA Research Associate : Shipra Jain Design by: Cream Group

Printed & Published by: Rajiv Kumar on behalf of IILM Institute for Higher Education and Printed at: Pushpak Press Pvt Ltd., 153, DSIDC Complex, Okhla Industrial Area - I, New Delhi and Published at: IILM Institute for Higher Education, 3, Lodhi Institutional Area, Lodhi Road, New Delhi Editor: George Skaria Copyright © 2012 IILM. All Rights Reserved

Contents Theme ?

Role Of Innovation In A Nation's Development

By Soumitra Dutta, Anne and Elmer Lindseth Dean and Professor of Management, Samuel Curtis Johnson Graduate School of Management, Cornell University, USA 11 ?

Developing A Culture Of Innovation: The Tata

Experience

By Sukanya Patwardhan, Rajiv Narvekar (Senior Practice Consultants) & Shambhu Kumar (Researcher), Tata Management Training Centre

25

Spotlight ?

Indian Telecom: Opportunities And Challenges Go

Hand-in-Hand

By Rajan S. Mathews, Director General, Cellular Operators Association of India

42

?

Managing The Mega Concerns Of India's Power

Sector

By Ashok Khurana, Director General, Association Of Power Producers 48 Research@Work ?

Lessons From The Golden Age of Private Equity

By Ashish Dhawan, Founder and CEO, Central Square Foundation & Former Senior Managing Director, ChrysCapital 57 ?

Financial Reporting: What India Should Do

By Dolphy D'Souza, Partner and National Leader, Member Firm of Ernst & Young Global

63

?

A New Prescription For Healthcare Delivery

By J. Jacob, Chief People Officer, Apollo Hospitals Enterprise

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The Editorial Mission Statement IILM Management Review (IMR), the bi-annual journal of the IILM Institute for Higher Education is intended to be research-oriented, scholarly in nature with editorial contributions from the fields of management, business and economics. The primary target of readers are professional managers. Another yardstick for potential papers or articles in IMR would be whether they could be taught to a group of business or management students. In a broad sense, IMR seeks to reach out to thought leaders who influence leadership, management and practice through teaching, consulting, managing and other professional activities.

Ideally, articles should be based on research evidence, either quantitive or qualitative. Papers could include what we already know about academic literature but advance our knowledge in the areas of business, management and economics, be they reviews of themes of particular topics, those that have implications for society or public policy and from areas that have been neglected largely in prior research.

India is increasingly becoming a global engine of growth and a lot of this growth is being driven by Indian corporations. The country has several well-acclaimed business schools, great managers and reasonably good academic research, but so far, there is no single publication that captures this growing dynamism to disseminate lessons from success and failure. Further, research from the business side is far and few between. At another level, India is also grappling with issues of poverty and corruption. This calls for greater focus on social sector management and governance.

Through the Journal, in course of time, we hope to:

! provide a thought leadership platform for Indian business and non-business managers, academics, policy makers and students of management.

! create a world-class management publication to record, understand and disseminate research and knowledge on best practices in Indian business and nonbusiness organisations.

! create a forum for discussing and validating new research, ideas and management innovation across the country and possibly in the future, in emerging economies.

! build a knowledge network involving business schools, academic researchers, business managers, government and other social institutions.

! develop in part a global Indian view of management theory, research and practice.

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Pioneering A New Genre of Journals IILM Management Review (IMR) was concieved as a bi-annual Journal that will publish contributions with a strong research orientation from practising top managers. In its genre, it was a pioneer in India among those journals published from a business school. Our faith and vision in such a product was vindicated not only by the contributions we received for the first edition, but also in the responses we got from our reader community.

We are therefore pleased to present the second edition of IMR, with greater confidence. Early on, while planning the content structure of the Journal, we had decided that every issue will have a main theme that could be a major trend of the times. While in the first edition, we looked back at “Two Decades of Reforms in India”, this time, we have focused on “Innovation.” A world recovering from the economic crisis needs innovation at every level. India as a country also needs this more than ever. While we have some strengths, specially at the bottom of the pyramid, there is much more that needs to be done. Professor Soumitra Dutta who recently took over as the Dean of the Samuel Curtis Johnson School of Management at Cornell University, USA (formerly with INSEAD, France) and who is also the main author of the Global Innovation Index and Report has written the first of the two articles in this theme package. The second article analyses innovation case studies of the Tata Group which has a rich tradition of innovation at the group and individual corporate levels.

There are two other sections in this edition. The Spotlight section takes a deep dive into two sectors that have witnessed rapid liberalisation and changes in the last two decades: telecom and power. But although both these sectors have been those that saw early entrants from the private sector, they have been witnessing significant challenges in moving forward. These are also two industries that have been reinvented inside out. What are the management lessons to be learnt in such transformations?

The final section, Research@Work has contributions from three senior managers in the areas of private equity, financial reporting and healthcare. They hold rich lessons for companies and managers in these sectors.

We hope you find this edition useful. Do write to us with your feedback at editor.imr@iilm.edu

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Profile of Authors

Soumitra Dutta

Professor Dutta took over as the eleventh dean of the Samuel Curtis Johnson Graduate School of Management at Cornell University effective July 1, 2012.

Prior to that he served as the Roland Berger Chaired Professor of Business and Technology and founder and academic director of the eLab at INSEAD, a topranked graduate business school in Fontainebleau, France. Previous roles Dutta has held during his 22-year tenure at INSEAD include dean of external relations; dean of executive education; and dean of technology and e-learning. He has served as a visiting professor in the Haas School at Berkeley, Oxford Internet Institute at University of Oxford, and Judge School at University of Cambridge in England. He has lived and worked in the U.S., Europe, and Asia, including stints as an engineer with GE in the U.S. and Schlumberger in Japan. Dutta is an authority on the impact of new technology on the business world, especially social media and social networking, and on strategies for driving growth and innovation by embracing the digital economy. He is the co-editor and author respectively of two influential reports in technology and innovation the Global Information Technology Report (co-published with the World Economic Forum) and the Global Innovation Index (co-published with the World Intellectual Property Organization). Both reports have been used by several governments around the world in assessing and planning their technology and innovation policies. His work has been widely published in the Harvard Business Review, European Management Journal, Management Science, IEEE Transactions on Engineering Management, Decision Support Systems, Journal of Strategic Information Systems, and other journals. Dutta and his ideas have been featured in myriad business magazines, newspapers, and blogs, including Global Intelligence for the CIO, Information Week, Brasil, BusinessWorld India, Chief Executive, Finance & Management, Chief Executive Magazine, Forbes, and The McKinsey Quarterly.

Dutta is a member of the Davos Circle, an association of long-time participants in the Annual Davos meeting of the World Economic Forum and has engaged in a number of multi-stakeholder initiatives to shape global, regional and industry agendas. He is on the advisory boards of several international business schools.

He has co-founded two firms and is on the board of several startups. He received the European Case of the Year from the European Case Clearing House in 2002, 2000, 1998, and 1997. Dutta received a B.Tech. in electrical engineering and computer science from the Indian Institute of Technology, New Delhi. He received an MS in business administration, an MS in computer science, and a PhD in computer science from the University of California at Berkeley.

He is married to Lourdes Casanova, a native of Spain. The couple has a daughter, currently studying at Oxford University.

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Sukanya Patwardhan

Rajiv Narvekar

Sukanya is a Senior Pactice Consultant at the Tata Management Training Centre and is a Human Capital Management professional with a rich practising experience in various sectors. Her extensive experience spans across HR strategic planning, organisational development, learning design, development and deployment for behavioural skills, leadership development, values & vision, Business and technical vitality and technical leadership at a large scale. She has a unique combination of scientific approach and genuine liking for people to bring out the best in people and capability building for business results. She is known for her thought leadership and innovative approach to the challenges of modern organisations. She has been recipient of several international awards and scholarships. Formerly, Sukanya has worked with SKF Bearings, Cummins India Ltd and in various leadership roles in IBM India for 10 years. Her last assignment with IBM before joining TMTC, was a global role in the area of Capability Development in growth markets for five countries.

Rajiv is a Senior Practice Consultant at the Tata Management Training Centre (TMTC) in the area of Innovation and Strategy. His research aims to conceptualize, design and deliver learning experiences in technology & innovation management, service science and business strategy. He is currently engaged in assignments from the information technology, agriculture and the services sector. Rajiv helps organisations develop Innovation and Technology Management systems that are customer focused with necessary organisational structures and systems.

He has expertise in areas such as New Product and Service Development, R&D Management, Technology Road Mapping and Strategic Management of Technology. Rajiv is also an expert at applying Multivariate Statistical Techniques for decision making. Prior to joining TMTC, he led R&D strategy, planning and operations at Infosys. Through innovation workshops, he engaged internal and external stakeholders, co-creating business value for Fortune 500 clients.

Shambhu works in the research department at TMTC. He is responsible for developing case studies from the various Tata group of companies. In his present role he has developed around 50 case studies in the area of innovation. He is also responsible for designing and developing training programmes on Innovation and Strategy such as Spurring Innovation.

He was instrumental in designing the programme for the Singapore Government officials named India Executive Management Programme (IEMP).

Shambhu Kumar

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He is currently Director General of the Cellular Operators Association of India.

Rajan S. Mathews

Prior to joining COAI as DG, Rajan served as COO of US operations and corp.

CFO and VP of Telargo Inc, (a Joint Venture of NTT DoCoMo), overseeing all of the company’s Strategic Planning, Business Development, Financial, Treasury, Accounting, Tax, Administrative and Human Resource functions. Prior to joining Telargo, Rajan was President of Afghan Wireless Communications Company, establishing it as Afghanistan’s largest and most profitable telecommunications company. Before this, Rajan served as VP and CFO of Call Sciences Inc., a premier provider of Unified Communications Services (a Soros/Chatterjee Group Company). Immediately before this, he was at A T & T Wireless, where he held a number of senior executive leadership positions, including Divisional CFO, Corporate Controller, President and CEO of one of its largest international joint ventures – Birla-AT&T in India (now IDEA). Earlier in his career, Rajan was a finance executive at such companies as Beatrice International, TriStar/Columbia Motion Pictures and senior consultant at Pricewaterhouse Coopers. Rajan served on the boards of several for-profit and non-profit organisations. He earned both his Master of Business Administration (Finance & Accounting) and Master of Arts (Economics) degrees from Rutgers University (USA) and is a CPA from the State of New Jersey, USA.

Ashok Khurana joined the Association of Power Producers (APP) in January 2011 as its first Director General. He joined the Indian Administrative Service ( IAS ) in 1976, and took voluntary retirement from service in Decemeber 2007. At that time he was working as Additional Secretary, Goverment of India, Ministry of Power, During the service period, he has had wide ranging experience in Power, Finance and Economic policy across institutions. His experience ranges: a] Across institutions- The World Bank, DFID ( UK ), Government of India, State Governments and PSUs.

Ashok Khurana

b] Across competencies-in Power, Finance, and Economic Policy – Design and facilitation of Public policy, Power Sector reform management, Financial restructuring of public utilities, Project financing, structuring (PPP mode) infrastructure projects for accessing long term funds and shaping regulation. c] Across processes-managing the complex Structural Adjustment Operation of the government, reform process in UP, AP, MP and Orissa.

Considering his extensive experience in areas of design and facilitation of public policy and implementation of reforms, shaping of regulations, facilitating privatisation and institutional development of public utilities, his appointment as the first Director General of APP is expected to play a pivotal role in the Association’s efforts towards the growth of the private sector participation in the power sectors.

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Ashish Dhawan

Ashish is the Founder and CEO of Central Square Foundation. He is an entrepreneur and philanthropist who guides the Foundation with his strategic vision, values and fresh approach to philanthropy. At present Ashish is transitioning from his role as Sr. Managing Director, ChrysCapital, a private equity firm that he co-founded in 1999. He joins Central Square full time starting July 2012 to pursue his goal of creating social impact via philanthropic investments in the K-12 education space. Ashish serves on the board of several non-profits including Teach For India, Centre for Civil Society, Janaagraha and GiveLife. He is also a member of the HBS India Advisory Board. Previously Ashish has worked with leading investment institutions such as ChrysCapital, Goldman Sachs, GP Investments and MDC Partners. He is an MBA with distinction from Harvard University and a dual bachelor's (BS/BA) holder in applied mathematics and economics with Magna Cum Laude honours from Yale University.

Dolphy is a leading figure in the accounting profession, and expert on Indian GAAP and International Financial Reporting Standards (IFRS). He is a Chartered Accountant, Cost Accountant and Company Secretary from the Indian Institutes and a Management Accountant from the London Institute. He is a partner and National leader IFRS in Ernst & Young and also heads EY’s Assurance Technical department. A prolific author and speaker, he has authored the famous book, “Indian GAAP – Interpretation, Issues and Practical Application” and writes the famous series for BCA titled “GAPs in GAAP’. He is a member of various regulatory and accounting standard committee’s. He is a member of the Ernst & Young global IFRS Policy Committee, the apex EY IFRS body on a global basis.

Dolphy D’Souza He currently serves as the Chief People Officer of Apollo Hospitals Enterprises Ltd. Jacob has over 16 years of experience and his experience is varied across HR Consulting, International HR & Start Up HR. Jacob’s core strengths lie in the areas of Change Management, Performance Management, Competency mapping & its applications, HR strategy & Organisational Design.

Jacob Jacob

Jacob has worked with Organisations such as Feedback Ventures, Emirates Airline in Dubai & Oberoi Realty. At Feedback, Jacob has worked on multiple HR assignments across the domain of HR with clients ranging from MNCs (across industries), Indian Corporates, NGOs & Governmental Organisations. Some of the key assignments include HR Strategy & Design for a pharmaceutical organization, Organisation culture assessment & design of effective HR systems, Development & implementation of a Performance Management System, 360 Degree feedback design and implementation.

Theme Innovation As A Competitive Strategy Role Of Innovation In A Nation's Development

By Soumitra Dutta, Anne and Elmer Lindseth Dean and Professor of Management, Samuel Curtis Johnson Graduate School of Management, Cornell University, USA

Developing A Culture Of Innovation: The Tata Experience

By Sukanya Patwardhan, Rajiv Narvekar (Senior Practice Consultants) & Shambhu Kumar (Researcher), Tata Management Training Centre

IILM MANAGEMENT REVIEW

Role Of Innovation In A Nation's Development

By Soumitra Dutta, Anne and Elmer Lindseth Dean and Professor of Management, Samuel Curtis Johnson Graduate School of Management, Cornell University, USA

Executive Overview In recent years, the world has witnessed the power of innovation and its various constituents in revolutionising the business and economic landscape.

Therefore, more than ever, in the current global economic situation, policy makers and business leaders recognise the need to create an enabling environment to support the adoption of innovation and spread their benefits across all sectors of society. The importance of innovation-readiness, especially at the national level, has achieved prominence on the public policy agenda, with the realisation that the right policies, inputs and enabling environment can help countries fulfill their national potential and enable a better quality of life for their citizens.

Since 2007, INSEAD's eLab has been producing the Global Innovation Index (GII), recognising the key role of innovation as a driver of economic growth and prosperity and acknowledging the need for a broad horizontal vision of innovation that is applicable to both developed and emerging economies.

Where does India stand in the global innovation sweepstakes? Where is the potental and what are its limitations?

I

n recent years, innovation has pushed itself to the very top of policy-making and senior executive agendas. What has put it there can be summed up in one word: globalisation.

With the global economy forecasted to grow at a rate of more than 4 per cent, innovation is coming into its own as an essential element of resilience as economies aim to sustain their growth while creating new jobs for their citizens. But the global economic recovery is fragile and uneven across different regions. Most current economic forecasts by leading international economic institutions predict a slowdown of gross domestic product (GDP) growth throughout 2012 and an uncertain recovery in 2013.

Despite some setbacks, growth remains relatively strong in most emerging market economies. The situation in high-income economies, however, is more precarious. Unemployment is high and growing in many of these countries. Full crisis recovery will take its time, and there are risks of a renewed degradation of the economic climate resulting in a prolonged state of uncertainty.

In the current scanario, the economic crisis is affecting not only investments but also the climate for innovation. Many governments across the world have pledged to avoid cutbacks in science and R&D or even increase spending. Ideally, spending measures decided by governments need to marry short-term demand stimulus with longer-lasting growth objectives. Most governments have also identified financial or structural policies to foster new employment and growth in areas such as research, the health sector, transport, and the environment.

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In recent years, the world has witnessed the power of innovation and its various constituents in revolutionising the business and economic landscape. With the advancement of the knowledge economy, the world is also seeing how innovation empowers individuals, communities and countries with profound impact on business, politics, and society. What is equally evident is the increasing role that innovation plays in accelerating economic growth and promoting development.

Therefore, more than ever, in the current global economic situation, policy makers and business leaders recognise the need to create an enabling environment to support the adoption of innovation and spread their benefits across all sectors of society.

The importance of innovation-readiness, especially at the national level, has achieved prominence on the public policy agenda, with the realisation that the right policies, inputs and enabling environment can help countries fulfill their national potential and enable a better quality of life for their citizens.

Since 2007, INSEAD's eLab has been producing the Global Innovation Index (GII), recognising the key role of innovation as a driver of economic growth and prosperity and acknowledging the need for a broad horizontal vision of innovation that is applicable to both developed and emerging economies. A key goal of the GII has been to find metrics and approaches to better capture the richness of innovation in society and go beyond the traditional measures of innovation such as the number of PhDs, research articles produced, research centres created, patents issued, and R&D expenditures.

The importance of innovation-readiness, especially at the national level, has achieved

So who is doing it best? What are the best conditions for it? How can we better understand the circumstances that breed innovative thoughts and their application, leading to the generation of social and economic value in economies?

The Global Innovation Index and innovation Understanding the new facets of innovation is important for a variety of reasons.

First, innovation is important for driving economic progress and competitiveness— both for developed and developing economies. Many governments are putting innovation at the centre of their growth strategies.

Second, there is awareness that the definition of innovation has broadened— it is no longer restricted to R&D laboratories and to published scientific papers.

Innovation could be and is more general and horizontal in nature, and includes social innovations and business model innovations as well.

Last but not least, recognising and celebrating innovation in emerging markets is seen as critical for inspiring people especially the next generation of entrepreneurs and innovators.

Although the end results take the form of several rankings, the GII is more concerned with improving the ‘ journey’ to better measuring and understanding innovation, and with identifying targeted policies, good practices, and other levers to foster innovation.

The rich metrics can be used by individual countries— either at the level of the index and sub indices or at the level of individual variables, such as ‘the number of patent applications by resident’—to monitor performance over time and to benchmark developments against other countries in the same region or of the same income group.

prominence on the public policy agenda, with the realisation that the right policies, inputs and enabling environment can help countries fulfill their national potential and enable a better quality of life for their citizens.

Over the years, there has been research on the many factors enabling national economies to achieve sustained and higher innovation capabilities. The goal has been to provide benchmarking tools for business leaders and policymakers to identify obstacles to

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Innovation is the amalgamation of invention and creativity that leads to the generation of social and economic value. In the developing world, there are many instances where innovation has occurred, and is occurring. This is a mere beginning.

improved innovation and competitiveness and stimulate discussion on strategies to overcome them.

A country’s innovation readiness is linked to its ability to garner the best from leading-edge technologies, expanded human capacities, better organizational and operational capabilities and improved institutional performance. Using the GII framework, the world’s best-and worst-performing economies are ranked on their innovation capabilities, which provide insights into the strengths and weaknesses of countries in innovation-related policies and practices.

In this new milieu, it is important to understand that innovation is not just about generating new ideas. It is about translating these ideas into value-added products and services. This requires flexibility of attitude and a willingness to adapt and welcome unprecedented levels of change on the part of all stakeholders involved: individuals, organisations and society. And there has to be the correct environment for this innovation to flourish. This includes institutions, laws, infrastructure, mindsets, incentives and culture. It’s important to provide a safety net to innovators. They must be empowered to experiment and fail. A `succeed or perish’ environment often kills innovative ideas in the nascent stages as people will be too intimidated to take creative risks that could fail. Any society must therefore institute adequate measures to shield unsuccessful innovators from the enormous social and economic costs of failure.

Innovation takes many forms. A decade ago, companies saw survival and growth in terms of restructuring,

lowering costs and raising the quality of their goods and services. Since then, commoditisation, privatisation and deregulation have swept the world — from the advanced economies of the United States, Japan and Europe to the rapidly emerging markets of the Asia-Pacific rim and Latin America.

Innovation is the amalgamation of invention and creativity that leads to the generation of social and economic value. In the developing world, there are many instances where innovation has occurred, and is occurring. This is a mere beginning. The global economy is large and there are considerable opportunities as the world embarks on a path of rapid, sustainable and inclusive growth.

The GII adopts a broad notion of innovation, originally presented in the Oslo Manual developed by the European Communities and the OECD: An innovation is the implementation of a new or significantly improved product (good or service), a new process, a new marketing method, or a new organisational method in business practices, workplace organisation, or external relations.

The GII aims to move beyond the mere measurement of such simple innovation metrics. This requires the integration of new variables, with a trade-off between the quality of the variable on the one hand and achieving good country coverage on the other hand.

So who is doing it best? What are the conditions for doing so? Can we pin down the catch-all notion of innovation in ways that can be quantified and normalised to generate meaningful comparisons? When you look at traditional measures of scientific capability, like the number of researchers divided by total population, for example, we realised that it’s not very accurate for many emerging economies where large segments of the population are not well educated, or are illiterate in many cases.

So which are countries are performing better at innovation? What are the conditions for doing so? Can we pin down the catch-all notion of innovation in ways that can be quantified and normalised to generate meaningful comparisons?

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Key trends in innovation worldwide The world economy is going through difficult times.

The economies of Europe and the U.S. have been suffering considerably, and comparing these powerhouse economies with emerging economies in India, the Middle East, and China, you can see the differences.

The world is being divided into two tracks, but they’re interconnected. People believe that China, India, and the Middle East will help the world recover. Over the last five years, the Middle East stands out as the region that has made the highest relative jump in its economy.

Today, innovation is driven by a combination of people, markets, and capital. The region needs to attract talent from outside to sustain its economic gains; especially since much of the region’s human talent is lost to migration.

The GII conceptual framework The GII is an evolving project that builds upon previous editions of the index while incorporating newly available data and that is inspired by the latest research on the measurement of innovation. This year the GII model includes 141 economies, which represent 94.9 per cent of the world’s population and 99.4 per cent of the world’s GDP (in current US dollars). The GII relies on two subindices: the Innovation Input Sub-Index and the Innovation Output Sub-Index, each built around pillars. Four measures are calculated: 1. Innovation Input Sub-Index: Five input pillars capture elements of the national economy that enable innovative activities: (1) Institutions, (2) Human capital and research, (3) Infrastructure, (4) Market sophistication, and (5) Business sophistication. The Innovation Input Sub-Index is the simple average of the first five pillar scores.

2. Innovation Output Sub-Index: Innovation outputs are the results of innovative activities within the economy. There are two output pillars: (6) Knowledge and technology outputs and (7) Creative outputs. The Innovation Output Sub-Index is the simple average of the last two pillar scores. Although the Output SubIndex includes only two pillars, it has the same weight

in calculating the overall GII scores as the Input SubIndex.

3. The overall GII score is the simple average of the Input and Output Sub-Indices.

4. The Innovation Efficiency Index is the ratio of the Output Sub-Index over the Input Sub-Index. It shows how much innovation output a given country is getting for its inputs, and is a sense of efficiency of sorts. Each pillar is divided into three sub-pillars and each subpillar is composed of individual indicators, for a total of 84 indicators.

The GII model is revised every year in a transparent exercise to improve the way innovation is measured.

This year, for example, the Infrastructure pillar was reorganized to single out ecological sustainability in a new sub-pillar. In addition, a sub-pillar on online creativity was added to the Creative outputs pillar.

The top innovators The top 10 countries in the GII 2012 edition are Switzerland, Singapore, Sweden, Finland, the UK, the Netherlands, Denmark, Hong Kong (China), Ireland, and the United States of America (USA). In contrast to current worries in the policy debate, which focuses largely on the crisis of the euro, Europe stands out with 7 out of 10 countries. While nine out the top 10 countries were already in this top league in 2011, Ireland joins the top group for the first time. Canada is the only country leaving the top 10. Switzerland maintains its 2011 position as number 1. It makes it to the top 10 on all four indices and on all pillars except Institutions (13th),

The top 10 countries in the GII 2012 edition are Switzerland, Singapore, Sweden, Finland, the UK , the Netherlands, Denmark, Hong Kong (China), Ireland, and the United States of America (USA).

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where it shows relative weaknesses in its business environment, as captured by its relatively poor showing in the ease of starting a business and of resolving insolvency. A knowledge-based economy of 7.8 million people with one of the highest GDP per capita, its high degree of innovation efficiency (5th) allows Switzerland to translate its robust innovation capabilities into innovation outputs. Switzerland ranks 1st on the Output Sub-Index and its two pillars, Knowledge and technology outputs and Creative outputs. The quality of its scientific and research institutions, coupled with numerous scientific and technical publications, good linkages between academia and firms, and a skilled labour force stand out.

Switzerland also ranks 1st in national patent applications by residents and through the Patent Cooperation Treaty (PCT).

The runner-up, Sweden, retains its 2011 position and comes in 1st among Nordic and European Union (EU) countries in the GII and its two sub-indices. It ranks 3rd on inputs and 2nd on outputs, with strengths on all seven pillars. The country ranks 1st in Infrastructure, demonstrating a vigorous use of information and communication technologies (ICT) and coming in at 2nd place in ecological sustainability, with the highest score on ISO 14001 environmental certificates issued in 2011. It also ranks 7th in R&D and 2nd in Knowledge and technology outputs—1st among EU countries—with scientific research institutions of quality, a high level of gross expenditure on R&D (3.6 per cent of GDP), and a high rate of patenting and scientific publications.

Singapore comes in 3rd on the GII this year, maintaining its 2011 position and leading the rankings among Asian economies. Its innovation capabilities rank 1st in the world, with a well-trained student body, a robust research community, a skilled labour force, sophisticated financial and commercial markets, and a business community proactive at adopting the latest technologies (1st on knowledge absorption). This year, in addition, Singapore reaches 3rd place on the Knowledge and technological outputs pillar, up from position 15 in 2011, with clear improvements on two

The United Kingdom (UK) occupies the 5th rank in 2012. Although its performance has improved since last year, when it ranked 10th, the UK benefited to a large extent from adjustments made to the GII framework.

main indicators: growth rate of labour productivity (2nd) and FDI net outf lows (4th). It also tops the rankings at position 1 in 10 indicators: government effectiveness, cost of redundancy dismissal, government’s online service, applied tariff rate, imports and exports of goods and services, employment in knowledge-intensive services, royalty and license fees payments, high-tech exports, and ICT and organisational models creation.

Finland reaches 4th position this year, up one position from 5th in 2011. Finland has strengths across the board, with a particularly strong institutional framework (6th) and a skilled labour force (1st in the EU, 3rd globally) engaged in research and patenting. Finland tops the rankings in political environment and five indicators, notably the state of cluster development, royalty and license fees receipts, and computer and communications service exports. Finland’s relative weakness is in Market sophistication, where it ranks 26th.

The United Kingdom (UK) occupies the 5th rank in 2012. Although its performance has improved since last year, when it ranked 10th, the UK benefitted to a large extent from adjustments made to the GII framework. It gained 11 positions in Infrastructure because of its excellent 10th position in ecological sustainability (a pillar introduced this year) and it tops the rankings in three indicators that are also new this year: cost of redundancy dismissal, ease of getting credit, and generic top-level domains (TLDs). It also has strong institutions and sophisticated financial markets

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The United States of America (USA) ranks 10th, down from 7th place in 2011. Its drop in the rankings is the result of a relatively poorer performance on the output side, where it comes in at 16th in 2012, down from 5th in 2011. Its bright areas are in Market (2nd) and Business sophistication (9th).

(ranking 1st on credit and 3rd on investment). Its excellent 8th position in Knowledge and technology outputs is the result of a good balance between the creation of knowledge through patenting and scientific and technical research (13th), the economic impact of these activities in the domestic economy (11th, although labour productivity has still not fully recovered from the crisis), and diffusion abroad of the latest technologies (16th). While it ranks 3rd in Market sophistication, its 57th rank in trade and competition is of concern.

The Netherlands ranks 6th, up from 9th in 2011, and with a clear relative advantage in outputs, where it is ranked 3rd. The country does less well in inputs, however, achieving a 15th position resulting in a 9th place in innovation efficiency.

The Netherlands has made particularly strong use of ICT, with top 10 rankings in press freedom, ICT access, government’s online service, online e-participation, computer software spending, and all four indicators included in online creativity, a sub-pillar introduced this year to Creative outputs: generic top-level domains (TLDs), country-code top-level domains (ccTLDs), edits on Wikipedia, and video uploads on YouTube. One area where there is room for improvement is Human capital and research (34th), and more specifically a 66th rank in tertiary education. In spite of a relatively good level of enrolment (ranked 24th, at 62.7 per cent), its scores in the remaining indicators are rather low: 14.0 per cent of graduates in science and engineering (83rd), 3.8 per cent of inbound mobility

(37th), and a 1.1 per cent of gross tertiary outbound enrolment (69th).

Denmark ranks 7th, down from 6th in 2011. Its institutions are assessed as the most transparent and business friendly in the world (1st). A prepared and well-funded research community (the country ranks 5th on R&D) leads to high degrees of patenting via the PCT and of publishing in scientific and technical journals. An area that deserves attention is its 38th position in tertiary education, a poor result pointing up several areas of concern: with only 19.6 per cent of tertiary graduates in science and engineering and a gross tertiary outbound enrolment of 1.6 per cent, Denmark ranks 57th and 55th globally. With a high level of ICT use (6th), it is one of the leading economies in terms of registrations of Internet TLDs (6th for generic and 3rd for countrycode TLDs).

One alarming sign, however, is that Denmark is one of the 15 economies in the sample with scores going down on all four indices. Hong Kong (China) is ranked 8th, a drop of four places from its 4th position in 2011. Its main strength is still on the input side (2nd). Its rank in innovation outputs (25th) is lower than it was in 2011 because of a relatively low ranking in Knowledge and technology outputs (34th), which echoes a relatively low ranking in Human capital and research (26th). In all remaining Input pillars, Hong Kong (China) is ranked among the top 10, with a record of 14 indicators in the very top positions in a range of domains, but notably in a series of indicators showing an extremely dynamic economy: ICT access, efficiency in energy use, market capitalization, value of stocks traded, imports and exports of goods and services, high-tech imports, FDI net inf lows and outf lows, and new businesses creation.

Ireland is ranked 9th, up four positions from 13th place in 2011. Ireland has been particularly good at prioritizing those areas that convert it into an attractive destination for investments. With good scores in Institutions (4th), Human capital and research (7th), access to credit (4th) and investor’s protection (5th), it ranks 4th in venture capital deals, and 1st in exports of 16

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goods and services. Ireland is also particularly good at both assimilating and disseminating knowledge through top 10 positions in all eight indicators included in sub-pillars knowledge absorption and knowledge creation (ranking 2nd in both sub-pillars), and is the only country in that situation: royalty and license fees payments/receipts, high tech imports/exports, communication and computer services exports/imports, and FDI net inf lows/outf lows. On a less positive note, Ireland is in dire need of investments in infrastructure (35th), particularly in ICT (43rd) and general infrastructure (49th), less so in ecological sustainability (22nd). Its ranking in Creative outputs is also relatively low (38th).

The United States of America (USA) ranks 10th, down from 7th place in 2011. Its drop in the rankings is the result of a relatively poorer performance on the output side, where it comes in at 16th in 2012, down from 5th in 2011. Its bright areas are in Market (2nd) and Business sophistication (9th).

In Knowledge and technology outputs, the USA has improved its ranking only in FDI net outflows (from position 27 to 22, with an increase from 1.90% to 2.41% of GDP), maintaining its positions in PCT applications (14th), computer software spending (7th), and royalty & license fees receipts (9th), with deteriorating positions in the remaining five indicators. The USA position fell to 84th in creative intangibles (trademark registrations, ICT in organisational models) and to 27th in creative goods and services. Yet its 33rd ranking in Creative outputs (down from 24th in 2011) is sustained by its 20th position in online creativity, a sub-pillar introduced this year to the GII framework. The major area of concern for the USA, however, is a relatively lower ranking in Human capital and research (22nd, down from 13th in 2011). Gross tertiary enrolment increased from 82.9 to 94.8 per cent (ranked 2nd), but the USA is ranked 74th in graduates in science and engineering, 42nd in tertiary inbound mobility, and 119th in gross tertiary outbound enrolment— a weakness revealed only this year (last year the data were not available). This result is very topical in the light of current discussions on the dropping openness of the USA to outside students and workforce talent.

Stability at the top One salient feature of this year’s Global Innovation Index (GII) is the stability we can perceive at the top of the rankings. The top 3 are the same as they were in 2011: Switzerland, Sweden, and Singapore. Nine of the top 10 are repeated, with Ireland replacing Canada, which dropped from position 8 to 12. Seventeen of last year’s top 20 economies are included in that select list this year: Malta, Estonia, and Belgium joined in, while the Republic of Korea, Austria, and Japan left the top 20 to drop to positions 21, 22, and 25, respectively.

Unsurprisingly, the GII top 20 are all high-income economies. In this income group, only five economies (of a total of 44) exhibit relatively weak performances on the GII: Saudi Arabia (48th), Brunei Darussalam (53rd), Kuwait (55th), Greece (66th), and Trinidad and Tobago (81st).

Altogether, this year’s GII confirms that rankings are strongly correlated with income levels. Most importantly, on average, high-income countries outpace developing countries by a wide margin across the board in terms of scores This margin itself explains a large part of the stability at the top of the rankings.

Yet this phenomenon can be seen in a positive and encouraging light: scores at lower levels of income are more ‘concentrated’, so to speak, implying that marginal improvements in one or two domains or strengths revealed by data recently made available or by adjustments to the GII framework can have a significant impact on rankings. The major jumps in the

BRIC countries show important strengths and several persistent weaknesses.

China—ranked 34th in the Global Innovation Index (GII) this year—continues to display strong performance in Knowledge and technology outputs

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rankings this year over 2011 are in Brunei Darussalam (by 24 positions); Swaziland (by 23); Tajikistan (by 15); Zambia (by 14); Rwanda and Zimbabwe (both by 13); Oman (by 12); Serbia, Morocco, Nicaragua, and Algeria (all by 11); and Peru (by 10).

BRIC countries show important strengths and several persistent weaknesses.

China—ranked 34th in the Global Innovation Index (GII) this year—continues to display strong performance in Knowledge and technology outputs (for which its score is above the average score of the GII top 10), and in Infrastructure and Market and Business sophistication. Areas where improvements would be conducive to higher aggregate GII rankings include Institutions, Human capital and research, and Creative output.

The Russian Federation—51st overall this year—comes first among the BRIC countries (Brazil, Russian Federation, India, and China) in Human capital and research by a wide margin. In addition, the country displays good scores in Institutions, Infrastructure, Business sophistication, and Knowledge and technology outputs. Rankings are less satisfying for Market sophistication and Creative outputs.

Brazil, at 58th place, offers a distribution of strengths and weaknesses similar to that of the Russian Federation in Institutions, Infrastructure, and both Market and Business sophistication. It comes far behind in Human capital and research (at a level similar to that of China), and last among BRICs in Knowledge and technology outputs. It achieves second place among BRIC countries, after India, on Creative outputs.

India ranks 64th, below Brazil, but with the best score among BRICs in Creative outputs, and it comes second among BRICs in Market sophistication, closely behind China.

The innovation front in India continues to be penalised by deficits in Human capital and research, Infrastructure, and Business sophistication, where it comes last among BRICs, and in Knowledge and

The innovation front in India continues to be penalised by deficits in Human capital and research, Infrastructure, and Business sophistication, where it comes last among BRICs, and in Knowledge and technology outputs, where it comes in ahead of Brazil only.

technology outputs, where it comes in ahead of Brazil only.

Fine-tuning this analysis, there are seven areas in which the four BRIC countries achieve very similar performances: creative goods and services, research and development (R&D), trade and competition, innovation linkages, knowledge absorption, and, to a minor extent, regulatory environment and knowledge diffusion.

There are eight domains, however, in which scores differ substantially: knowledge creation; tertiary education, business environment, elementary education, information and communication technologies (ICT), creative intangibles, and knowledge impact.

Overall, the GII study confirms the dramatic rise of China in recent years. China is a low-middle-income country, but in the latest ranking it moved into the group of high innovative countries. If you look regionally, one interesting finding is that East Asia’s innovativeness is rising rapidly. Indeed, East Asia is closing the gap with Europe significantly. We also see that the South Asian economies are struggling, and that on the whole they are very comparable to many African economies in terms of innovativeness. It shows that many of these economies have much more to achieve in the years ahead. China continues to display strong performance in Knowledge and technology outputs, and in Infrastructure and Market and Business sophistication. Areas where improvements would be conducive to higher aggregate GII rankings include Institutions, Human capital and research, and Creative outputs.

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We’re seeing distinct relative slippage in innovation competitiveness and innovation successes. By another measure we use — innovation efficiency, or the innovation outputs divided by inputs, which discounts for the fact that different economies are at different income levels — India ranks number nine in the world, meaning it’s producing a high level of outputs compared to its level of innovation inputs. But if you look at many of the measures of innovation input, such as infrastructure and human capital issues, India doesn’t perform very well. This is hurting its overall innovation ranking. Clearly, India has clusters of excellence that are creating a disproportionately high level of innovation, but the mass of the country still has a lot of underdeveloped potential.

India ranks 64th, below Brazil, but with the best score among BRICs in Creative outputs, and it come second among BRICs in Market sophistication, closely behind China. The innovation front in India continues to be penalised by deficits in Human capital and research, infrastructure, and Business sophistication, where it comes last among BRICs, and in Knowledge and technology outputs, where it comes in ahead of Brazil only.

Key implications The innovation efficiency measure is interesting. If you look at the top 10, it includes six of the most densely populated economies in the world. In addition to India, there are Nigeria, China, Pakistan, Brazil, and Bangladesh. What this tells us is that these countries have the potential to move forward significantly in the future.

Clearly, innovation has become global. If you look at the top 20 or 30 ranks, you find economies that are successfully innovating from all parts of the world.

Singapore, Hong Kong, Israel, Korea, Japan, Estonia, Qatar, China — you see a range of economies besides the usual suspects you might have from Europe and North America.

The implications for companies are enormous.

Corporations have to have a much more global perspective about their innovation strategies. It’s no

longer enough to focus on only one market or region.

And that has a number of follow-on consequences and implications in terms of how one might design innovation hubs, and how one might think of connecting them. You need to create the today’s climate of global financial crisis, especially in Europe, where many sense a lack of leadership and are questioning the commitment of Europe to innovation.

The low rankings for South Asia should concern both corporate managers and policymakers. The question this raises is: Will these economies be able to take off like their neighboring East Asian economies, or will they get stuck in the same way that many of the economies in Africa have gotten stuck in the last several years? That question has implications both for the innovation strategies of global companies and for the strategies that policymakers in government might want to follow.

Companies have to recognise that many key innovations will be coming from markets where there are large numbers of people who are becoming consumers for the first time in their lives. These new consumers have rising demands for products, and services such as education and healthcare, but at very different price points. Multinationals will have to innovate to satisfy these new demands in a sustainable and scalable manner.

At the same time, companies will be facing new competitors in these markets that may have a better understanding of the local markets’ needs. And some of these new competitors will soon be competing with the multinationals in global markets. So multinational firms face a challenge: to innovate by rapidly integrating their global knowledge with local relevance. The whole idea that innovations right culture to support the integration of ideas from different parts of the world.

Another implication is that you see some emerging markets are moving very rapidly. The fact that China has moved into the top 30 is not trivial and many East Asian economies today have reached levels of innovation competitiveness similar to those of European 19

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countries. What this means is that European nations — and many other developed nations — will have to run hard to maintain an edge. And this is especially significant in can come from different places, that innovation can happen in different ways, and that it can move and travel in different directions is something that companies will have to adapt to, and prepare themselves for.

People are realising that innovation, collaboration, and creativity go hand-in-hand, and that the need for innovation is very high. Because technology is progressing so dramatically, he stated, it is difficult to predict where innovation is heading. The rate at which consumers adopt technologies is increasing drastically.

The World Wide Web (WWW) is an example. The WWW is an innovation which has captured the world as its audience and has evolved into more of a social network as opposed to a mere technological network.

The WWW is a global world that is much more transparent, interactive, and more real-time. These features, once combined, result in a new set of values, standards, and expectations for the average person, in terms of technology.

Innovaton at the bottom of the pyramid The best stories about innovations are often found at the bottom of the innovation pyramid. For, that’s where innovation has been spawned to benefit the maximum number of people. For example, many nonprofit institutions in Africa and India are using technology to service the poorest of the poor.

Bangladesh too has revolutionised its micro-credit and communications through innovations such as the Grameen Bank and Grameen Phone. After the success of the former where rural communities were given access to money through banks they themselves ran, the founders, Mohammed Yunus and Iqbal Qadir, created a cell phone company called Grameen Phone to revolutionise villages in Bangladesh. Here is how it worked. It gave loans to those wanting to buy a cell phone and start selling phone service. Most had never seen a telephone in their lives, but they accepted it as a good business proposition. Today, there are over one

lakh ladies all over Bangladesh, connecting it with the rest of the world.

Bangalore’s Narayana Hrudayalaya, a heart hospital, is a classic example of how innovation helps patients.

Its chairman Dr. Devi Shetty took a page out of Prahalad’s principles to benefit many in healthcare. His hospital operates a low-cost health insurance programme for farmers in the southern state of Karnataka. Each farmer contributes Rs 5 (13 US cents) monthly to this programme, while the government puts in Rs 2.50 (7cents). And guess what? Premiums from this pool of beneficiaries have had amazing spinoffs – it allowed Narayana Hrudayalaya last year to operate upon thousands of farmers and to offer free medical consultation to many more. And this year, it hopes to deliver critical healthcare services to 13 million individuals in rural areas using the world’s largest telemedicine network. This is mainly in the area of cardiac care, an area where Indians are genetically more disposed to. The innovation allows Narayana Hrudayalaya to provide these services to villages that have few doctors and little medical coverage.

This is how it works. The hospital gets the problems over phone lines and then cardiologists diagnose it and prescribe treatment. It’s an opportunity that Narayana Hrudayalaya saw. After all, Indians are three times more prone to heart attacks than Europeans. By adopting a ``portfolio approach’’, the hospital was able to deliver health services to individual farmers who wouldn’t otherwise have been able to afford it.

The best stories about innovations are often found at the bottom of the innovation pyramid.

For, that’s where innovation has been spawned to benefit the maximum number of people. For example, many non-profit institutions in Africa and India are using technology to service the poorest of the poor.

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Why healthcare alone? Innovative strategies can also be gleaned from the corporate world. Take the case of ITC, one of India’s leading private companies. It initiated an e-choupal strategy which allows villages to have computers with internet access. A choupal in Hindi, incidentally, means a gathering place. Besides being e-commerce hubs, these transformed themselves into social networking places too. It began as an effort to re-do the procurement process for soy, tobacco, wheat, shrimp, and other crops, but ended up with more success than imagined. It created a highly profitable distribution and product channel for the company and transformed the rural landscape by reducing rural isolation, creating more transparency for farmers and improving their productivity and incomes. It helped farmers in concrete terms -accurate weighing, faster processing time, prompt payment, wide access to information.

It also gave them accurate market prices and trends, which helped them decide when, where, and at what price to sell. Ofcourse, farmers selling directly to ITC through e-Choupals received a higher price for crops than if they sold their produce in the mandi (market). In fact, on an average, they got about 2.5 per cent higher (about US$6 per ton) rates.

Th ere have been other innovations all over the world which seem quite daring and futuristic. And when propelled by IT companies, they can indeed make quite a difference. Here’s how, earlier this year, for example, the non-profit One Laptop Per Child programme unveiled the second version of its XO laptop. This is meant to bring affordable, modern technology to children in developing countries. In April, Intel announced its next-generation Classmate PC, targeting the same market. Microsoft too has been tweaking its Windows XP operating system for these educational devices, which also run on the open source Linux operating system. In fact, developing and underdeveloped markets will be the next frontier for technology companies and non-profit organisations. That’s the only way to bridge the global digital divide between wealthy and poor countries. Of course, for these companies too it’s a win-win situation considering the billions of potential customers they will get.

Latin America too has numerous examples, the most prominent being Mexico’s domestic cement major CEMEX. Over the last decade, it transformed itself into a global multinational by lowering costs and using innovations in processes which targeted the bottom of the pyramid markets.

Like Yunus of Grameen Bank, there has been another trail-blazer in Mozambique - Blaise Judja-Sato. He started a venture, Village Reach, which based in Seattle however trucks medicines to rural clinics in the poorest and most remote parts of Mozambique. Judja-Sato likens his non-profit venture to a computer operating system which helps in delivering the right inputs. In this case, the inputs are a logistics infrastructure in poor countries that can help deliver services such as medicines. He says the eventual goal is to enable those interested in helping the poor, concentrate on providing those services and not worry about logistics or infrastructure, which he will take care of.

There are other examples of innovation at the bottom of the pyramid. Botswana, has one of the highest rates of HIV/AIDS infection in the world. In a country with a population of 1.56 million, an estimated 3,50,000 have this illness, the largest segment being between 15-49 age group.

In order to tackle this menace, the Botswana government is developing comprehensive programmes to help it cope with the disease as well as meet the shortage of physicians and medical personnel. In partnership with Harvey Friedman, chief of the Division of Infectious Diseases at Penn Medical School in Botswana, the Ministry of Health developed a more efficient system to manage HIV/AIDS therapy and monitor these patients. Some of the soft ware monitoring programmes will, in the long run, enable nurses to deliver diagnostic and prescriptive services to many more HIV patients than currently possible.

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Latin America too has numerous examples, the most prominent being Mexico’s domestic cement major CEMEX. Over the last decade, it transformed itself into a global multinational by lowering costs and using innovations in processes which targeted the bottom of the pyramid markets. Many of these initiatives find an echo in Professor C.K. Prahalad’s ‘Th e Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profi t’.

Despite its recent troubles, CEMEX, Mexico’s largest cement manufacturer has had a history of innovation and ingenuity to reduce losses and build competitiveness. This technologically sophisticated firm got a head-start over its competitors through an innovative distribution infrastructure. This monitored the movement of every truck to insure on-time delivery of cement. It sells cement to two distinct markets: the construction industry and the “do-it-yourself” customer.

During the Mexican economic crisis in 1994 and 1995, CEMEX found that its sales to the construction industry tumbled as much as 50 per cent while those to the do-it-yourself market fell only between 10-20 per cent.

It innovated here and reduced its reliance on the cyclical construction industry by placing more emphasis on the do-it-yourself market. It realised the key difference between both markets was the average revenue per customer. Small but steady sales to individuals earning less than $5 a day could produce fantastic results. And sure it did.

The India way At the 64th position in the latest GII rankings, it could well have been a wake-up call for India to get its innovation act in order. Apart from pockets of excellence in corporate, academic and science institutions, the traditional policy of the Indian government in recent times has been particularly to encourage innovation at the bottom of the pyramid and in rural areas. Today, it seems to be taking greater cognizance of the emerging global realities and in the process create a uniquely Indian environment for innovation to flourish.

After having drawn up the draft National Innovation Act, 2008, the Government will convert it into a formal Act for supporting public, private or public-private initiatives, which will facilitate and encourage innovation, especially low cost technologies, products and services for the benefit of the common man whether in urban or rural India.

The range of new plans and initiatives in the Act also include fiscal incentives, setting of Special Innovation Parks and Zones, investments in universities, setting up more centres of excellence and institutions engaged in sciences, technologies, mathematics and engineering or finance, management, law, and legal services.

The Government also plans the establishment of an electronic exchange or a physical market place for commercialisation of information on innovation, including any statutory or non statutory rights in intellectual property. Additionally, a special focus group for support by the Government on the innovation front will be small and medium scale enterprises.

Th e-government is also putting special focus on knowledge based employment by creating a knowledge map of the best practices in villages in respect of areas like agriculture, animal husbandry, herbal medicines, environment upkeep, handloom and craftsmanship. The government wants to replicate this model in the 600, 000 villages of the country which have a number of good practices in agriculture, forestry, fisheries and traditional medicine. Incubation centres like the Grassroots Innovation Augmentation Network (GIAN) has been set up and is being to more states. NIF is also trying to engage slum dwellers, artisans, school

Over the last few years, the National Innovation Foundation has identified over 65,000 innovative practices and has registered 102 patents including 3 international ones. Clearly, marrying global and local innovation practices seem to be the way of the future for India.

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year’s GII puts a spotlight on these important future measurement goals.

The economic crisis is affecting not only investments but also the climate for innovation. The governments have pledged to avoid cutbacks in science and R&D or even increase spending.

dropouts and prison inmates to come up with innovative practices in various traditional areas.

Over the last few years, the NIF has identified over 65,000 innovative practices and has registered 102 patents including 3 international ones. Clearly, marrying global and local innovation practices seem to be the way of the future for India.

Challenges to global innovation linkages While there is broad agreement that linkages among innovation actors are key, we face two interrelated challenges: First, experiences and lessons in designing effective policies that foster innovation linkages are still scarce. Modern innovation policies aim to support science industry collaboration, the formation of innovation clusters, and knowledge diffusion, for example. Yet creating innovation linkages is perhaps the most complex innovation policy area, and there are no easy recipes for achieving tangible outcomes and benefits. For years, many economies have sought to foster collaboration between universities and firms, or to create successful technology clusters—often to no avail.

Second, measuring the existence and impact of innovation linkages remains dauntingly difficult. This is why the GII puts particular emphasis on measuring not only innovation inputs and outputs, but innovation linkages as well. For instance, it includes measures of the number of joint ventures, or patents filed jointly by a domestic and foreign inventor. Preface variables capture innovation linkages only imperfectly, and improved metrics are sorely needed. The theme of this

The global economic recovery is fragile and uneven across different regions. Most current economic forecasts by leading international economic institutions predict a slowdown of gross domestic product (GDP) growth throughout 2012 and an uncertain recovery in 2013.

Despite some setbacks, growth remains relatively strong in most emerging market economies. The situation in high-income economies, however, is more precarious. Unemployment is high and growing in many of these countries. Full crisis recovery will take its time, and there are risks of a renewed degradation of the economic climate resulting in a prolonged state of uncertainty.

In this context, the economic policy debate is placing renewed emphasis on achieving an appropriate policy framework that fosters growth and employment while promoting sustainable public finances. olicies that promote innovation and structural policies fostering long-term output growth should feature prominently in these discussions. Although innovation cannot cure the most immediate financial difficulties, it is a crucial element of sustainable growth. Forward looking measures are needed to lay the foundations for future prosperity.

The economic crisis is affecting not only investments but also the climate for innovation. The governments have pledged to avoid cutbacks in science and R&D or even increase spending. Ideally, spending measures decided by governments need to marry short-term demand stimulus with longer-lasting growth objectives. Most governments have also identified financial or structural policies to foster new employment and growth in areas such as research, the health sector, transport, and the environment.

There is now a need to monitor and assess how and whether these stimulus measures have been implemented and to determine the impacts on short-term demand and longer-term economic foundations and the society more broadly.

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References Archibugi, D., and A. Filippetti. 2011. ‘Is the Economic Crisis Impairing Convergence inInnovation Performance across Europe?’ Journal of Common Market Studies 49 (6): 1153–82.

Athreye S., and Y. Yang. 2011. ‘Disembodied Knowledge Flows in the World Economy’.

WIPO Economics Research Working Papers No. 4. Geneva: World Intellectual Property Organization.

OECD (Organisation for Economic Co-operation and Development). 2009. Policy Responses to the Economic Crisis: Investing in Innovation for Long-Term Growth.

Paris: OECD. Available at http://www.oecd.org/ dataoecd/59/45/42983414.pdf.

2010. The OECD Innovation Strategy: Getting a Head Start on Tomorrow. Paris: OECD. 2011. OECD Science, Technology and Industry Scoreboard 2011. Paris: OECD.

EC (European Commission). 2011. The 2011 EU

2012. OECD Economic Outlook, No. 91, May 2012. Paris: OECD.

Industrial R&D Scoreboard. Brussels: European Commission.

2012, forthcoming. Science, Technology and Industry Outlook. Paris: OECD.

Eurostat and OECD. 2005. Oslo Manual: Guidelines for Collecting and Interpreting Innovation Data.

Ray, P. K., and S. Ray. 2010. ‘Resource Constrained Innovation for Emerging Economies: The Case of the Indian Telecommunications Industry’. IEEE Transactions on Engineering Management 57 (1): 144–56.

3rd edition. Paris: OECD. Filippetti, A., and D. Archibugi. 2011. ‘Innovation in Times of Crisis: National Systems of Innovation, Structure, and Demand’. Research Policy 40 (2): 179–92.

2010. World Intellectual Property Indicators 2011. Economics and Statistics Division, December 2011.

Geneva: WIPO.

Freeman, C., and L. Soete. 2007. ‘Science, Technology and Innovation Indicators: The Twenty-First Century Challenges’. In Science, Technology and Innovation Indicators in a Changing World: Responding to Policy Needs, Chapter 15. Paris: OECD.

2011a. Survey on Patenting Strategies in 2009 and 2010 to Better Understand How Users of the PCT System Responded to the Economic Crisis. Economics and Statistics Division, January 2011, Geneva: WIPO.

IMF (International Monetary Fund). 2012. World Economic Outlook (WEO): Growth Resuming, Dangers Remain. April 2012. Washington, DC: IMF.

2011b. ‘The Changing Nature of Innovation and Intellectual Property’. In World Intellectual Property Report 2011: The Changing Face of Innovation, Chapter 1. Geneva: WIPO.

INSEAD. 2011. The Global Innovation Index 2011: Accelerating Growth and Development. Fountainebleau: INSEAD.

Available at http://www.wio.int/econ_stat/ en/economics/publications.html.

The Global Innovation Report can be downloaded at www.globalinnovationindex.org

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Developing A Culture Of Innovation: The Tata Experience

By Sukanya Patwardhan, Rajiv Narvekar (Senior Practice Consultants) & Shambhu Kumar (Researcher), Tata Management Training Centre

Executive Overview The Tata Group, one of the oldest business groups in he country, has been one of the pioneers of innovation in India, indeed across the world. As part of the Tata Group's efforts to create an innovation culture, it employs a set of unique and proprietary tools, techniques and strategies. The three ‘innocases’ featured in this paper are a sampling of the innovations created by the Tata group. Irrespective of whether the innovations have been incremental or disruptive, all of them have been distinctive in their times and contexts.

“No success or achievements in material terms is worthwhile unless it serves the needs or interests of the country and its people and is achieved by fair and honest means”.

– JRD Tata, Chairman, Tata Sons (from 1938-1991)

I

nnovation has always been part of the Tata DNA and has in recent years taken on a fresh impetus with the Tata group’s effort to democratise it and make it a continuous and ongoing process.

In order to support Tata companies through the journey of innovation, the executive committee of Tata Quality Management Services (TQMS) formed the Tata Group Innovation Forum (TGIF) in 2007 under the leadership of R. Gopalakrishnan, director, Tata Sons.

The objective of the TGIF is to encourage, inspire and help create a culture that promotes innovation in Tata companies. Over the past five years, TQMS, under the banner of TGIF, has been connecting Tata companies all over the world, stimulating innovative thinking and encouraging collaborative research.

TGIF is guided by a 15-member core team that includes senior Tata leaders and innovation champion from different Tata companies. TGIF meets every two months to intensify its efforts towards creating an innovative ecosystem.

The inspiration for the movement came from Tata Sons Chairman Ratan Tata who at the JRD QV Award function in 2007 said, “I would like to see us creating the environment that allows our people to dream, giving those people the encouragement to convert that

dream into reality… Great innovation has been built on questioning the unquestioned and dwelleing in areas which others had considered impossible. I have really come to believe that, given the right circumstances, nothing really is impossible.”

We also believe that there is a symbiotic relationship between entrepreneurship and innovation. Jamsetji Tata helped pave the path to industrialisation in India by seeding pioneering businesses in sectors such as steel, energy, textiles and hospitality. An innovation culture is the shared set of assumptons, beliefs and values that drive an organisation's mindset towards innovation. Entrepreneurs get motivated and excited when asked to help solve challenges and create new business opportunities. They do so because they: !

Exhibit uninhibited intellectual freedom !

Demonstrate a strong sense of integrity !

Discover solutions to overcome obstacles !

Reflect and execute on multiple challenging situa-

tions simultaneously As part of the Tata Group's efforts to create an innovation culture, it employs a set of unique and proprietary set of tools, techniques and strategies.

These include the Tata InnoVista, Tata InnoMeter, Tata InnoVerse, Tata InnoCluster and Tata InnoLearning.

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Tata InnoVista is a pan-Tata group competition where most innovative ideas are celebrated. Tata InnoMeter is a world-class system that measures the health of innovation ecosystem in terms of the robustness of the process, conduciveness of ambience (Culture) and benchmarks 121 companies across geographies and sectors. InnoVerse is a Web 2.0 enabled collective ingenuity of the employees by sourcing and reviewing ideas leading to engaged emlpoyees. This is a forum where most innovations are made by people working outside of the discipline for which they are trained.

Here, innovation occurs at the boundaries of viewpoints, not within the provincial territory of one knowledge. The purpose of InnoCluster is to enhance technological innovations by systematically leveraging the diversity in the Tata group by creating collaborative ecosystems across Tata companies. Finally, the Tata InnoLearning includes Open and Customised Programmes that are conducted by the Tata Management Training Centre, Pune.

The ‘innocases’ (to coin a simpler word for case studies on innovation) featured in this paper are a sampling of the innovations created by the Tata group. Inovation in the group started in the era when Queen Victoria was the empress of India. The rich variety of innovations, covering products, processes, business models and social applications, make one wonder if innovation has somehow been embedded within the genetic code of the organisation – an interesting idea, which is elusive and difficult to establish.

These examples are from different Tata companies, which have historically worked with a great deal of autonomy, though united by unique and strong values.

Irrespective of whether the innovations have been incremental or disruptive (radical), all of them have been distinctive in their times and contexts.

American evolutionary biologist Stephen Jay Gould had pointed out that in nature, change occurs discretely, not continuously. He called it ‘punctuated equilibrium’. In the Tata group too, it appears that innovations have demonstrated such punctuated equilibrium. Some of these examples confirm the

influence of an individual, for example, a visionary leader. However, there also seems to be at play a democratised form of innovation through which groups of operating level managers have innovated.

Democratized environments are those in which many employees fee a sense of involvement and are motivated enough to contribute their best. Such environments lead to valuable and continuous innovations, often not written too much about and achieved in an apparently effortless way. Leader-driven innovations bear the mark of individual brilliance and are the ones written about and eulogized.

INNOCASE-I The Reclaiming Of A Chemical Wasteland How Tata Chemicals transformed its solid waste dumpsite into a green belt Responsible Manufacturing is a trend that is now slowly evolving into the corporate culture in Indian and global companies. Today, corporates are also realising that it adds to their competitive strategy.

However, for Tata Chemicals, this responsibility and consciousness has been part of its group corporate culture for many decades. Based on this cultural foundation of doing what is best for the society, when the problem of waste disposal came about, it was quick to identify the problem and second, to innovate a solution.

Around the world, soda ash manufacturers dispose of solid waste in sedimentation basins called settling ponds that remains barren for years. This unsustainable practice of disposing of solid waste poses a severe environmental hazard and leads to difficulties in continuing soda ash manufacturing operations. This is why no new soda ash plant have been built in the developed world over the last 12-15 years. The issue of safe disposal of soda ash wastes was a matter of concern at Tata Chemicals Ltd (TCL) as well. Through innovation and perseverance, TCL, in association with The Energy and Resource Institute (TERI), succeeded in solving the problem by growing a green cover on such a wasteland with the help of special microorganisms that support plant life even in saline conditions.

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Background Soda ash, also known as washing soda or sodium carbonate, is extensively used by pharmaceutical, food and glass industries. One of more common methods of producing synthetic soda ash is the ammonia soda process (also called as the Solvay process). This process, based on a 150–year old technology, generates a very large amount of solid waste – about 250 – 350 kg of solid waste per tonne of soda ash- during the ammonia recovery and brine purification stages.

The subsequent waste stream generated is highly alkaline, chloride–rich and carries suspended solids.

Traditionally, this waste has been either discharged into a nearby water body (river or sea) or stored in stockpiles that rise to heights of 7 to 40 m. These waste piles keep growing in size and number, turning the landscape into a barren wasteland that supports neither plant nor animal life, and is a hazard to human health.

The TCL story Established in 1939, TCL is the second largest producer of soda ash in the world, with manfacturing facilities in India, the UK, Kenya and the US. TCL’s journey as a manufacturer of synthetic soda ash began in Mithapur, on the Okhamandal coast of Gujarat in western India.

Apart from soda ash, the Mithapur plant also produces other products such as vacuum evaporated salt, caustic soda, chlorine, hydrochloric acid, and cement.

For many years, Mithapur accounted for all of TCL’s soda ash manufacturing business. The soda ash was produced using the ammonia soda process. Over the years, the production volume grew from 80 tonnes a day in 1944 to 2,400 tonnes a day in 2010 and the volume of waste generated increased proportionately.

As a result, solid waste disposal grew to become one of TCL’s biggest concerns.

TCL used to store this solid waste on a barren and unpopulated 30 acre plot of land at Malara, where it was treated in industrial sedimentation basins. Due to continuous sedimentation, the basins filed up and were eventually abandoned.

In the meantime, following a policy of sustainable development, Tata Chemicals devised a greener solution for its solid wastes treatment whereby the solid wastes were used as raw material to make cement.

In 1993, a cement plant was commissioned, and the company marketed and sold its own brand of cement called Tata Shudh. This demonstrated the company’s commitment to its policy of ‘reduce, reuse and recycle’.

Winds of dust The problems of the Malara dumpsite, however, needed attention. As the years passed, housing came up around the waste storage areas in Malara. During the summers, strong winds blew the dry waste dust towards human settlements, a health hazard for the residents and the community. In 1999–2000, the company even considered relocating the entire site to another area, but the cost of doing so was estimated at Rs. 120 million. In the years that followed, the company made several efforts to tackle the dust. It sprayed seawater on the waste pile to dampen it and thus prevent the dust from rising. The method helped for a while, but it was not a permanent solution. Other ideas were tried, using fresh soil and fertilizers to rejuvenate the land, providing fresh water, planting shrubs and grasses, etc. nothing worked.

N.S Subrahmanyan, manager (environment management systems), who supervised the operations, explains: “the alkaline and saline sediments do not support plant life and the only way to hold dust down permanently is to grow thick plants which need soil

TCL used to store this solid waste on a barren and unpopulated 30 acre plot of land at Malara, where it was treated in industrial sedimentation basins. Due to continuous sedimentation, the basins filled up and were eventually abandoned.

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and water – both of which are scarce in Malara”.

These several issues that needed to be addressed: high level of dust, storage of fresh water in the area, responsible disposal of effluents and the requirement of large land parcels to dispose of the solid waste. To address all these concerns, TCL initiated the Malara Green Cap project. The project had the following objectives:

The team observed that a special group of microorganisms thrived on the root system, helping the plants to extract soil nutrients and survive in the region’s harsh conditions.

To reclaim the inorganic solid waste dumping site by developing a green cover.

To prevent dust emission along the area bordering the lime dust heaps.

To select local plant species for the green cover and establish a nursery near the green cap site.

To use sea water, domestic waste treatment plant residues and suitable microorganisms to enable sustainable plant growth.

The innovation The adage ‘Nature is the best teacher’ proved true in this project. It was observed that certain plants and grasses had managed to survive in saline and alkaline sediments in certain pockets at Mithapur. However, they were sparsely distributed. In order to find solution based on this observation, a special team was constituted in 2002. The team included people from TCL and from the Centre for Mycorrhizal Research, Biotechnology and Management of Bioresources Division TERI, New Delhi. The teams studied the microbiology of the plant roots in order to identify and isolate the microorganisms. A pure culture was developed in the laboratory for further examination.

Nature’s answer The team observed that a special group of microorganisms thrived on the root system, helping the plants to extract soil nutrients and survive in the region’s harsh conditions. The microorganisms and the plants had a symbiotic relationship; the team came up with an innovate solution – to use bio-fertilizers and bioremediation techniques to develop a green cover on

the solid waste. The team realised that this bioremediation technique could rejuvenate the solid waste site and allow plants to grow, thus improving the environment.

Try, try again In early 2009, the team worked on a 2.5 – acre pilot site.

Normal plantations are grown in soil where th electrical conductivity (EC) is near 0 or 1, and pH is about 6.

The challenge in this project was to grow plants in high EC and high pH conditions. Organic carbon provides the energy source for microorganism to survive. The soda ash sediment was inorganic in nature with inadequate organic carbon that could not support any microorganisms.

The second trial showed some success, since the team members were able to ground the sediment in the absence of soil support. The sediment bed was raised by two feet and provided with drip irrigation; as the plants matured, the roots penetrated into deeper sediment and survived with the help of the mycorrhizae. It was in the third attempt, however that the Malara Green Cap project achieved success. A majority of the plants survived.

Success story A mixture of the most compatible bacterial and mycorrhizal organisms was used to inoculate the plants root systems while they were still saplings. The

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sediment was treated in a similar manner, and plantation was carried out.

The innovation was seen as a small biotechnological miracle – one that could be replicated at soda ash plants the world over. With new confidence, the team expanded the exercise to about 22 acres, generating oxygen and green cover where earlier there had been whirlwinds of dust.

The dry, barren dump site has now been transformed into a lush green plantation consisting of about six varieties of plants and three varieties of grasses. About 22,000 plants are grown there now, requiring little support and enabling a whole chain of biodiversity.

The new plantation grew in the same sterile, inorganic chemical solid medium that lay there for 20 years. The plants are irrigated not with fresh water, but with saline water. The analysis of the sediment has shown that, with each passing year, it becomes more like normal soil.

While no species of plant or animal could survive there earlier, the area is now home to plants, ants, frogs, snakes, insects, butterflies and a variety of birds. The sediment, once considered waste, has turned into a substratum over which cash crops like vegetables can be cultivated in favourable seasons. Says Mr. Subramanyam, “there is no dust any more, and the local community is very happy. Besides solving the dust problem, the project has created 12–15 jobs, with workers being employed in the nursery. They raise the saplings and maintain the plantation”. By 2010, the second generation of plants started growing from fallen seeds.

Growing plantation or inorganic chemical sediment without using soil and with saline water for irrigation, was considered impossible by horticulturists. Today, the Malara Green Cap project has demonstrated a viable and green solution for treating and reviving barren wastelands. It is possible now for other industrial solid waste sites to find similar solutions. This project also shows the way for reclaiming saline affected soil along India’s long coastline.

Growing plantation or inorganic chemical sediment without using soil and with saline water for irrigation, was considered impossible by horticulturists. Today, the Malara Green Cap project has demonstrated a viable and green solution for treating and reviving barren wastelands.

FACTORS THAT SUPPORT INNOVATION Spotting opportunities There were several factors that triggered TCL’s search for a more sustainable solution to the solid waste site: the loss of land as a resource, dust emissions, poor aesthetics, public discontent and regulatory pressures.

To avoid the menace of dust, man attempts were made to reclaim the dumpsite through plantations and greening (including the use of fresh soil, water and fertilizers), but all of these failed, There were no successful precedents where plants had been known to survive and grow in a highly alkaline and saline sediment. Nowhere in the world was it thought possible to convert alkaline and saline solid wastes into something useful. The Malara greening project at TCL challenged the fundamental principles of horticulture.

It was in 2001, during one of the environmental issues review meetings, that Mr. Subrahmanyam suggested the possibility of reclaiming wasteland with help of TERI’s technology of bio–inoculants (consisting of mycorrihizal and bacterial consortia).

In the conceptualisation phase, It was clear to the teams that a bio-remedial solution had wide applicability in several areas: ! soda ash industries, both domestic and international,

which face similar environmental issues. ! farmers whose fields have become less productive

due to the ingress of saline water in the groundwater -

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natural process that is accelerated by poor groundwater – resource management. The effects of seawater intrusion in the coastal aquifers have spread over about 5,000 sq.km in coastal Gujarat.

Microorganisms that would help sustainable plant growth (In an effort to learn from nature) Careful plant selection in an effort to encourage biodiversity.

! farmers who offer their agricultural fields to accom-

modate saline water aquaculture (a common phenomenon along the Indian coastal belt). Later, if they find it less profitable than expected and want to return to normal agriculture, they find it very difficult to do so because of poor soil productivity.

Aligning aspirations

Corporate sustainability (CS) is a central part of the Tata group’s vision and is strongly inherent at TCL as well. According to Mammen Jacob, vice president, Manufacturing at TCL Mithapur, “the Malara project is a good example of the Tata CS policy, which is to ! climate change concerns: sandy deserts and saline or improve the quality of life of the communities we serve. fallow lands across the world can be reclaimed and For instance, way back in 1980, TCL set up the Tata converted into green belts (depending on local Chemicals Society for Rural Development (TCSRD), climatic conditions). These lands can become huge which works to protect and nurture rural populations carbon sinks over the years and improve the bioin and around Tata Chemicals facilities and helps the diversity of the area. community to achieve self sufficiency.” ! government and non–government agencies engaged

As an organisation, TERI had been involved In the reclamation of environmentally vulnerable and uncultivable lands for more than a decade and had developed expertise in the area. Thus, in this particular ! project, both the TCL and TERI teams appreciated the other industries that face problems in handling liquid social responsibility to protect the surrounding and semi solid wastes. environment. The teams worked together for nearly Setting minimum critical rules eight years with high levels pf enthusiasm.

The core of the Malara Green cap project was that it was The solution they found is a viable option for many built on the principles of sustainability. Since this such industries. Areas with a lifeless substratum can project was the first of its kind, the team set some tough now be converted into green fields, rich in biodiversity. parameters. For the plantations, the team decided no to use: in converting waste or fallow land (due to high levels of naturally occurring alkalinity and salinity) into productive land with the help of afforestation.

Normal soil Chemical fertilizers Fresh water

Corporate Sustainability (CS) is a central part

Any external plant species (keeping biodiversity issues in mind)

inherent at TCL as well. According to

The team also decided to use:

Mammen Jacob, vice president,

of the Tata group’s vision and is strongly

Manufacturing at TCL Mithapur, “the Malara Plants and grasses that are halophytic (saline resistant) Plant and grasses that are not palatable to cattle Domestic solid waste as manure (treated STP sludge)

project is a good example of the Tata CS policy, which is to improve the quality of life of the communities we serve".

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Creating permeable boundaries

reliable results.

The TCL team closely followed various attempts undertaken by soda ash companies around the world to address the issue of solid waste management. A baseline survey on effluent management that included several soda ash manufacturing companies indicated that TCL’s attempts to reclaim such land using bioremediation were the first of their kind. The team studied the trial attempts by the TERI team on fly ash mounds and found that TERI had the expertise to help reclaim land on which alkaline and saline solid waste had been deposited.

The big question was this: is reclamation at all possible, especially as the sediments had been further degraded by the use of seawater for dust suppression?

TCL provided all the physico-chemical analysis of the sediment to TERI, whenever required. About 500 kg of sediment was sent to TERI, New Delhi, for setting up and conducting pilot scale trials. After the initial results were obtained, field trials were conducted at Mithapur.

However, they failed to yield any conclusive results.

Moisture management was found to be an important factor in reclaiming sediments and a drip irrigation system was designed. A cross–functional team, comprising people from the Civil Engineering, Analytic Laboratory, Community Development and EMS departments of TCL and TERI, worked together to design and finalise the development of the reclamation area.

Promoting flexibility and openness The challenge of growing vegetation on a lifeless substratum, without adding soil or fertilizers, was a daunting one. Coordination and trust between the TCL and TERI teams were imperative if the project was to succeed. Progress was shared in monthly review meetings, where the teams attempted to solve problems as quickly as possible. Apprehensions about the long–term success of the project were expressed, but the teams remained hopeful.

Overcoming adoption hurdles The biggest hurdles the team faced were psychological.

Initially, there was total disbelief among team members as well as sponsors on the efficacy of the project.

Efforts over a period of 20 years had not produced any

Case studies of similar attempts made on fly ash dumpsites were shared and photographs were shown.

No known soda ash company worldwide uses 100 % seawater in its manufacturing process – this generated more alkaline effluent, leading to more severe challenges in handling the solid wastes. In other parts of the world, soda ash plants use fresh water in their manufacturing process, leading to slightly more benign solids. Information on their greening and reclamation efforts was scanty and anecdotal. As a result, support for the project was half-hearted and expectations were low.

The team also encountered several significant technical issues. The first attempt at planting on the land failed because the initial attempts were made in winter by ploughing the sediment and then sowing the seeds.

Even after two months, not a single seed had germinated (because of low temperature and excess moisture). The project team left the site and decided to develop an experimental setup at TERI for lab trials before undertaking any more fieldwork.

The team then took a different approach. Instead of planting seeds, they raised saplings and transplanted then at the site. They also raised the beds, prepared furrows and used drip irrigation to improve moisture management.

Obtaining insufficient fresh water at Malara was a challenge. Low and irregular rainfall demanded prudent water management. To minimise the dependence on fresh water, the teams selected plants that could survive on minimal fresh water or a mix of seawater and freshwater.

Conclusion The success of the bio-remediation technique, using mycorrhizal microorganisms, led to several positive impacts. In terms of savings, the numbers, though not very significant, were as much as Rs. 120 million. The 31

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bigger success lay in the fact that, having overcome all hurdles, the TCL and TERI tams have successfully developed a green cover over several sites in Mithapur and Padli, near the TCL factory.

Today, the land bears testimony on the years of cooperation and research that both teams contributed to the project to make the area a better place to live. The project has set a bench mark for industries across the world striving to improve heir triple bottom lines – peoples, profit and planet.

References http: www.teriin.org – development of green cover at solid waste dumping site of a soda lime industry by mycorrhizal technology – Singh A, Singh R, and Adholeya A, 2007 Mycorrhiza News !8 (4): 24-27 Interview with NS Subrahmanyam, manager (environmental management system) Tata Chemicals INNOCASE-II The People’s Car How Tata Motors innovated outside the box to create Tata Nano, the revolutionary low-cost car To understand the genesis and relevance of Tata Nano, it is necessary to understand the global automobile industry over the last decade or more. With increasing fuel prices and escalating input costs, global automobile sales were going through a tough period. With the US and European markets in decline on falling demand and a stagnant consumer base, automakers were trying to explore newer ways to combact crisis, to stabilize markets in developed countries. This forced the auto industry to develop alternative solutions and experiment with a mix of vehicle technologies, with diesel, hybrid and electric varieties among the thrust areas.

The Tata Nano is both a result of frugal engineering that emerged from the need of the time and a disruptive business model innovation that has changed the very contours of the global automobile industry.

January 10, 2008, has gone down as a red-letter day in the annals of the Indian automobile industry, marking the stellar achievement of the Tata group in developing

a low cost personal transport solution. This was the day Ratan Tata, Chairman of Tata motors, unveiled Tata Nano, the most economically priced small car in the world, at the Indian Automobile Exhibition in New Delhi.

Tata Nano, priced at $2,500 (about Rs 100,000 at the time), is no ordinary car. Designed with the transportation needs of a family in mind, Tata Nano is a fullfledged car with contemporary styling and spacious interiors conforming to standards of emissions, mileage, acceleration, safety and performance. It has a roomy passenger compartment with generous leg space and headroom and can comfortably seat four persons. The car comes in standard, deluxe and luxury versions. All versions offer a wide range of body colours and standard accessories with a range of customisable features to suit individual preferences.

Ravi Kant, the then managing director of Tata Motors, remarked that Tata Nano was not an upgraded scooter on four wheels. “we don’t want an apology for car. We are conscious of the fact that whether it was a $2,500 car or not, it ought not to look like a $2,500 car” he said.

With its low cost assembly line, partnerships with component manufactures and an innovative business model for automobile dealership, Tata Motors has set new benchmark for the global automobile industry with Tata Nano. The car is unique in its design aspects as well. This is the first time a two–cylinder gasoline engine has been used in a car with a single balancer shaft. The lean design strategy has helped minimise weight, which helps to maximise performance per unit

Tata Nano, priced at $2,500 (about Rs. 100,000 at the time), is no ordinary car. Designed with the transportation needs of a family in mind, Tata Nano is a full fledged car with contemporary styling and spacious interiors conforming to standards of emissions, mileage, acceleration, safety and performance.

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of energy consumed and thus delivers fuel efficiency of about 20 km/l. better known as the people’s car, Tata Nano addresses the hopes and aspirations of families who want to own an affordable, all–weather four wheel transport.

The introduction of Tata Nano was compared to that of the Ford Model T, the car that completely revolutionised the automobile industry. If the reaction of the Detroit auto

Headlines and eyeballs

majors to Tata Nano was anything to go by,

Not surprisingly, Tata Nano generated a lot of interest.

The Tata Motors website registered nearly 7.9 million hits on January 10, 2008, while the Tata Nano website saw 4 million hits in 30 hours, making these sites among the busiest in the world.

Tata Nano would split the car market adding a

That Tata Nano captured the imagination of customers not only in India but also in other parts of the world is clear from the fact that it received an enthusiastic response not only at the Auto Expo in New Delhi on January 10, 2008, but also at the Detroit Auto Show on the same day.

Most competitors had been skeptical about the possibility of putting out a low–cost $2,500 car that would conform to emissions and safety norms. Within a week, reactions had changed from skepticism to acceptance and later to enthusiastic endorsement of the concept and the vision behind the car. Several former detractors announced plans entering the small car market with their own models The introduction of Tata Nano was compared to that of the Ford Model T, the car that completely revolutionized the automobile industry. If the reaction of the Detroit auto majors to Tata Nano was anything to go by, Tata Nano would split the car market adding a new distinct category – the low-cost small car.

The innovation Tata Nano is an example of a technological breakthrough that signifies a paradigm shift in the automobile industry. It brings the comfort and safety of a car within the reach of thousands of families because it is an affordable, safe and convenient all-weather transport that is also environmental–friendly and elegant.

After seeing Tata Nano at the Auto Expo in 2008, Lewis Booth, Executive vice president of Ford Motor Company, declared that Tata Nano would revolution-

new distinct category – the low-cost small car.

ize the automobile industry. “Tata Nano will cause people to think differently about the car. I have a lot of respect for Mr Tata,” he said.

Tata Nano is not just another car for Tata Motors; it is also a platform to create more high end models that will sell for higher prices and yield margins. Tata Motors also has plans to use the Tata Nano platform to build electric and hybrid cars.

Global outlook While US and European markets are in decline, automakers have identified Asia and Latin America as growth markets. Among developing countries like Brazil, China, India, Indonesia and Russia, the growth rate is more than 10 percent, indicating that Tata Motors should target these markets as well. China and India are today seen as the main emerging markets with a potential two billion-strong customer base.

Indian car buyers represent only a tiny slice of a potentially vast and growing market. India has just seven cars per 1000 people. India’s auto industry has been growing at an average rate of 12 percent for the past decade. In the year 2010, the India car industry produced 1.7 million vehicles, registering an annual growth of 14.4 percent over the previous year.

During the same period about 7 million scooters and motorcycle were sold in the country, typically at prices ranging between Rs 30,000 and Rs 70, 000, ie about $675 to $1600. The lowest priced car in the Indian market at the time was Maruti 800, priced above Rs 200,000.

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FACTORS THAT SUPPORT INNOVATION Spotting opportunities In the Indian car market, there clearly existed an affordability issue, which no manufacturer seemed inclined to consider addressing. Seeing families of four precariously riding a scooter set Mr. Tata thinking of developing a safe and affordable all–weather family vehicle. The exceptional utility of a vehicle strategically priced at Rs 100,000, bridging the price gap between two-wheelers and for-wheelers, would open up a huge, high-growth market segment, which no manufacturer had considered.

In 2003, Tata Motors started with a four–member team to work on a new project. The brief they were handed was very fluid. It began as an advanced engineering project. The objective was to design and develop a very low-cost four-wheeler for family transport in towns and cities. The vehicle was not even defined as a car.

What was defined was the cost (Rs 100,000 or about $2,500), without compromising on aesthetics, value to the customer, or safety and environmental requirements.

The design team first looked at alternative ways of constructing a vehicle. Many concepts were explored and inputs were sought from various non-automotive sectors. The team also considered various aspects of design – whether doors were necessary, whether plastics could be used instead of metal, whether interiors could be cut to minimum, whether lowpowered engine would suffice and so on. The focus was always on meeting performance targets for a even cost, therefore different technologies were tried. For example, to equip the vehicle with a suitable engine, Tata Motors engineers tested several makes and models. They first used a 540cc engine that failed to deliver sufficient power. They then increased its capacity, initially by 9 percent and then more, before Mr. Tata finally settled on 624cc engine. The driving factor was always the question: what is the bare minimum a customer will accept?

project; Mr Wagh had earlier led the development of Tata Ace. The biggest challenge for the team was to maintain the right balance between cost and performance. The project team faced many setbacks and met with little success in the beginning but and never thought they would make it. They received tremendous support and guidance from Mr. Tata, Mr. Kant, Prakash Telang, then executive director of Tata Motors and the entire senior management who were aligned in their aspirations to develop the first True ‘people’s car’. This brought about not only a sense of cohesiveness, but also provided a number of vital input–information, guidance, encouragement and the motivation to keep looking at innovation.

The manufacturing planning team was joined by members drawn from other process areas – the paint shop, weld shop, press shop, assembly shop, etc.

Normally, different departments step in at different stages, but in this project, manufacturing , planning, maintenance, train-cum-chasis fitting shop, power train shop, systems group with focus areas of logistics and project palnning and control, lean initiatives and IT systems, etc were all involved from the beginning. The entire vehicle was designed and built as a collaborative effort.

Over time, a 120 member manufacturing team was created through a systematic process, through interviews and evaluations. People were included from within Tata Motors, as well as from outside. The team comprised a mix of experience and youth. Though

The biggest challenge for the team was to maintain the right balance between cost and performance. The project team faced many setbacks and met with little success in the beginning but never thought they would make it.

Next Tata Motors set up an 80–member core team with chief engineer Girish Wagh as head of the small car 34

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members came from diverse functional areas, the team worked as a unit thanks to its focus on the overriding objective. There was also a commendable degree of transparency as each person had his or her role clearly spelt out. The diversity of the team contributed to generating unique and fresh ideas, many of which were incorporated in the final product.

During th initial concept generation phase, the team, in its endeavuor to offer maximum space to the customer and at the same time maintain the most compact footprint and exterior dimensions, decided to pursue the rear engine location with rear wheel–drive layout.

Aligning aspirations Tata Nano is not a product of market research. Mr. Tata had stated that he would provide a car that would be affordable, safe and environment–friendly and he set about building it. First he constituted a team of four engineers and apprised them about his dream project – building a low cost car priced marginally higher than a two wheeler, that would revolutionise personal transport In India. Mr. Tata also told the engineers to consider him as a member of the project team. He was of the opinion that it was possible to make a low cost car only in countries like India and Pakistan. At the time of launch, when the press talked about the Rs 100,000 car, Mr. Tata said, ‘A promise is a promise’, endearing himself to millions with aspirations of owning a car.

No technological specifications were defined at that time. According to the brief, "the vehicle should be attractive to customers without compromising on quality, performance and safety". So Mr. Tata had set only internal benchmarks. The team was later expanded to 20 and ultimately to 500 people. There was very close congruence of the aspirations of the team members and Mr. Tata.

Mr. Tata worked with the team and made sure that his dream project delivered what few had thought possible. He was present during every test and he participated in all decisions. He heard everyone and gave every team member a chance to express his mind.

Mr.Tata was very focused on customers' expectations.

The main reason for the success of Tata Nano project

was the close alignment of aspirations of Mr. Tata and the team, whose members average age was less than 30 years. The team members were charged, highly motivated and full of enthusiasm for the project.

Creating permeable boundaries Quality of innovation and the speed with which it can be realized are functions of permeable boundaries, rather than the nature of interactions with the partners.

In the case of Tata Nano, 80 engineers were placed in a group and they worked and reduced the cycle time of design and development. For example, the Bosch and Tata Nano team worked together to create an engine management system for the car. Bosch also provided a petrol fuel injection system for Tata Nano. Similarly, Tata Nano team worked with FEV of Germany to develop the engine system. For styling and exterior design, the team worked with IDEA and Trilix. Sona Koyo and Rane group came up with hollow steering shafts. Sharda Motors and Emcon developed the exhaust system and MRF tweaked the tires to enable them to bear extra weight on the rear wheels.

In all these cases, it was the combination of ideas from different sources and free flow of information that helped Tata Nano to evolve as a ‘people’s car’. To create a revolutionary car, the team used ideas from different sources. For example, the window–winding concept in the initial phase was inspired from helicopters, the dashboard was redesigned based on the dashboard used in two-wheelers, as were the fuel lines and lamps.

The organisational arrangements for the development of Tata Nano were flexible. The effect of hierarchy was kept minimal. The chairman and the managing director would often interact with the project team and offer innovative ideas. Many options were assessed, with the design going through a series of iterations prior to finalisation.

One of the critical success factors of the Tata Nano project was the management of component supply.

The number of suppliers was limited so that project management would be easy. Tata Motors started working with 600 suppliers (a total of 1,800 supplier part combinations) which was eventually narrowed 35

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The organisational arrangements for the development of Tata Nano were flexible.

The effect of hierarchy was kept minimal.

The chairman and the managing director would often interact with the project team and offer innovative ideas.

Fourth was keeping costs down. “At every stage, we tried to cut costs by reducing the number of parts that went into each component,” said Mr Wagh. As the team succeeded at this they began to see the “impossible dream morph into reality”.

Lastly, there are some unique elements in this project that happened for the first time in Tata Motors. Quality systems were designed and put in place in the beginning so that the implementation was easier. Failure mode analysis was done at the planning phase itself to reduce breakdowns.

down to 100. Minimising vendors is the essence of lean development.

Promoting flexibility and openness

The most important factor that distinguished Tata Nano from others was the building of a profitable business model. Target costing was used such that the price range would not cross Rs 100,000. The management continuously reviewed the price band with vendors so that the price limit was not exceeded. Cross functional team was involved in implementing this arrangement.

One major element that helped Tata Nano evolve was the openness of the management and the flexibility that was allowed to the team. The management created an environment in which the team never had to fear failure and at times had a chance to use their creativity to the maximum. The entire vehicle was designed and built in a collaborative manner. Though there were cost and time pressures, the collective leadership kept the engineers completely insulated from these, thereby creating an open atmosphere.

Setting minimum critical rules The realisation of Mr. Tata’s vision was made possible by the adoption of certain minimum set rules for the project. These acted as think pads rather than as constraints. There were five broad minimal set rules that helped shaped Tata Nano. The first parameter was the price – Rs 100,000 (at that time smallest car was around Rs 250,000)- without compromising on aesthetics, value to the customer and safety and environment requirements. What the team was creating was a cost effective car that could meet safety, environment and performance levels as specified.

Second, Tata Nano was not to be an upgraded version of a two wheeler. It was to be built as something distinctly different.

According to Mr Tata, the exteriors define the character of the car but the interior drives the user’s experience.

Hence the work on the interiors of the car was more interesting, with maximum scope for innovation.

Overcoming adoption hurdles Overcoming adoption hurdles was one of the major concerns that needed to be managed in the Tata Nano project. There were a number of tradeoffs to be managed and each required considerable attention. A large number of hurdles had to be overcome before Tata Nano finally became a reality.

One of the major hurdles that needs to be managed when a car is assembled using multiple components and vendors, is homologation. Since the car was meant for export, it had to meet a set of criteria relating to noise, vibration, harshness and crashworthiness. When there are a number of vendors and components involved, getting the homologation certification in a short period of time is an arduous task. The crossfunctional team worked seamlessly to obtain the roadworthiness certificate for the car.

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Tata Nano may be the first car in India to display the actual fuel mileage figures it record on its windshield.

The innovatively designed Nano was put through over 100 tests at the Automotive Research Association of India over a period of four months. It conformed to Euro IV emission standards that had not yet come into force.

India at the time of the launch Target costing was practiced from the outset in all departments, ranging from design, development, purchasing, production, materials, logistics and sales.

All departments worked to ensure that the cost did not exceed the identified band. The target costing was done with respect to functionality and component value.

The final product was an innovative platform, with the engine placed at the rear. Since the weight of the engine was on the rear wheels, the steering system had much lighter specifications than otherwise needed.

The design was also aimed at minimizing the total number of components with a target of each component having a dual functionality. For example, the seat riser serves as a mounting for the seat as well as a structural part for tensional rigidity. Most of the exterior has been turned out in sheet metal.

Tata Motors chose suppliers with strong process capabilities, who could give valuable suggestions and improve on designs. Nearly everything was sourced locally; Tata Nano has 97 percent local content. Half of the 100 vendors are co–located, adjacent to the plant through a vendor park. Tata Motors suppliers were an integral part of the design and development process..

aluminum engine so that the fuel efficiency goal could be achieved. The engine had to be re-designed a number of times to meet specifications. The team started with a 524cc engine, but it failed to deliver the required power. The engine capacity was increased to 554cc, which delivered 27bhp. Even this did not suffice.

After protracted experimentation, Tata Nano team settled for a 624cc engine generating a power of 34bhp, enough to give the car a top speed of 105kph.

There was no technology roadmap to start with; it evolved with the time and was built in-house. It was an evolutionary growth path, a natural growth path arising through interactions and experimentation followed by validation.

Conclusion Tata Nano is set to define the future of the automobile industry. Several factors have contributed greatly to the success of the project: Mr. Tata’s strong desire to produce an affordable personal vehicle Motivating influence of Mr. Kant.

Support of top management.

Aspirations of team members to create the world’s most economically priced car.

Team cohesiveness.

A strong new product introduction process.

Since the design brief did not state any specifications, one of the major challenges the team had to address was to draw the correct specifications. The specifications have evolved over time and most of them came independently from the corresponding teams.

Another major reason was the quality of leadership that Mr. Waugh brought to the project. He played the role of a ‘susha’, a Japanese term made popular by Toyota Motors to signify a heavyweight project manager who makes the cross-functional team work as a cohesive unit. For the Tata Nano project, Mr. Waugh acted a technical and administrative bridge for integration between the top Management and the project team.

The next hurdle was the trade-off between weight and fuel efficiency. To reduce the weight, it was decided to use fewer parts by using multifunctional components.

After a detailed study, it was decided to select an

As stated in the Newsweek magazine, Tata Nano is one of a “new breed of 1st century cars” that embody a “philosophy of smaller, lighter, cheaper” and portend a new era in inexpensive personal transportation.

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REFERENCES Douglas A Boldac, Steven Wingett, Bettina Meyer; Europeans win big with Tata Nano; Automotive News Europe, march 2008, vol 13, Issue 5.

IB Saravanan, S Bhaskaran; Tata Motors Rs one lakh car project; reference no 307 – 037 -1; ICFAI university, ICFAI Business School, Chennai IBM Global Buisness Services; Automotive 2008;IBM, Global services, Somers, NY 10589, USA Interview with RR Akarte, consultant advisor, Engineering Research Centre, Tata Motors Interview with Jai Bolar, assistant general manager, advanced engineering, Tata Motors European technical centre.

Dinesh Narayanan; The making of a Modern Classic; Business world, January 2008, pp 37-42 Sujata Agrawal, Jai Wadia; The Nano: The Big Wonder; Tata sphere, February 2008 pp 10 – 16 Anu Kaunakaran; The Nano: set to change the Industry Dynamics; Reference no 308-37-1 2008; ICFAI business school, Chennai.

INNOCASE-III Encouraging Education How the JN Tata Endowment Fund was established as a pioneering effort to promote higher education for Indians The JN Tata Endowment Fund was perhaps the first innovation from the Tata Group way back in the 19th century. The political and social landscape at that time was the backdrop of the British rule in India as well as the early seeds of the Independence movement in the country. There were only a handful of large Indian business family groups and the Tata group was the pioneer among them. Corporate Social Responsibility was a concept that had perhaps not taken concrete shape. However, Jamshetji Tata was a businessperson and humanist who was ahead of his times and recognised the need to encourage learning and education among Indians.

From time immemorial, business houses have been involved in local charities, including those that aid in the construction of temples, wells, dams, schools, water tanks and hospitals. However, prior to the Tatas, no corporation had come forward with an endowment trust for education.

In a convocation address in 1889, Governor Lord Reay discussed the Indian educational system and its deficiencies. Jamsetji Tata was so impressed by his speech, that he initiated two actions: he proposed creating an institution for higher education in India and he created an endowment trust for funding higher education of students traveling overseas for studies.

“So convinced was he of the deficiencies of higher education in India that, in 1892, he decided to send, every year a few chosen students to England,” is how Frank Harris put it in his book, Jamsetji Nusserwanji Tata: A chronicle of his life.

A pioneering step Jamsetji was a visionary with great foresight. He decided to respond immediately to remedy the deficiencies pointed out by Lord Reay. The establishment of the JN Tata Endowment Fund in 1892 was a ground breaking social innovation – its aim was to help deserving students pursue higher education abroad.

Every year a few brilliant students were selected to receive, at a nominal rate of interest, the money required for a course of study; they were allowed to repay the loans in installments according to earning capacity. This approach ensured that the fund was replenished and could work in perpetuity. Jamsetji did

Over time, Jamsetji continued to exhibit his commitment to society. Today, the Tatas are unique among Indian industrial houses in that about 66 per cent of the profits of the parents firm Tata Sons goes to a public trust, which uses those profits for the benefit of the people and the nation.

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not restrict the subjects of study allowed for students receiving endowments. Swami Vivekananda had written to him in 1898 suggesting “the establishment of monasteries for men dominated by the spirit, where they could devote their lives to the cultivation of Sciences- natural and humanistic” (extract from The Creation of Wealth by R M Lala.)

Capitalism was emerging and with it the accumulation of wealth rather than the sharing of wealth. Jamsetji believed that for the nation to advance, one must lift up best and most gifted so as to allow them to be of greatest service to the country. His endowment trust predated the founding of several similar trusts around the world that were established for education and other benevolent purposes.

Over time, Jamsetji continued to exhibit his commitment to society. Today, the Tatas are unique among Indian industrial houses in that about 66 percent of the profits of the parents firm Tata Sons goes to a public trust, which uses those profits for the benefit of the people and the nation.

THE INNOVATION Jamsetji was of the opinion that decisions regarding service to the needy should not be made without thought, investigation or the selection of the right men, much like decisions governing the production of goods. Like most men who have succeeded by their own efforts, he was aware of the value of education, and he determined to do all that he could in order to afford to hers those advantages of which he himself had made the fullest use.

The second innovation was that the fund was designed to continue to function at a constant level; the students who had given fellowships under the endowment fund would return the loan, thereby replenishing the original fund. The introduction of the trust created a spirit of enquiry and encouraged a western approach to research among the fund’s recipients that, it was hoped, would slowly pervade the rest of the returning graduate’s countrymen.

The trust became a forerunner to other endowments and Oranisations that support education for needy

students. Later, the purpose for which the trust fund was used was broad based and educational institutions were established using the fund – India’s first institute of social sciences (Tata Institute of Social Sciences), India’s first cancer hospital (Tata Memorial Hospital) and India’s first institute of research in mathematics and physics (Tata Institute of Fundamental Research which became cradle of India’s atomic energy programme). It was not just a question of establishing a pioneering institution but also educating a nation in that field of endeavour. The trust also launched, 30 years ago, one of the first integrated rural projects and with the assistance of Royal Commonwealth Society for the Blind, Asia’s first institute for training the rural blind.

The JN Tata Endowment Fund served as a model and platform for a number of similar trusts that arose subsequently.

FACTORS THAT SUPPORT INNOVATION Spotting opportunities At the time, capitalism was emerging, and with it, the concept of foundations that would support education, research and other social activities. (A foundation is defined as “non-governmental, non profit organisation having a principle fund of its own, managed by its own trustees or directors and established to maintain or aid social, educational, charitable, religious or other activities serving the common value”.)

Corporate philanthropy in the form of trusts came into vogue several years after the JN Tata Endowment Trust. The first major American foundation was the General Education Board, established by John D Rocketfeller in 1902, followed by the Carnegie Foundation for the Advancement of Teaching in 1911.

It was also a time when the concept of corporate social responsibility was emerging. The Rocketfeller Foundation was established in 1913. There were British Foundations as well, with the Leverhulme Trust being established in 1925 and the Nuffield Foundation as late as 1943. In Europe, opportunities for education were available to everyone: Europeans didn’t perceive a need for independent foundations. But In India, social 39

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disparities were large and opportunities for education were few.

Aligning aspirations Jamsetji regarded the benefaction of the endowment scheme not only in the light of an educational boon but also as a good investment for India. Every Indian that got into the Indian civil service would save the nation Rs 200,000 per year that would have otherwise gone to England. Jamsetji’s firm belief was that more and more Indians should be encouraged to join ICS. He wanted to see them succeed in the civil service, prominent in the learned professions and prosperous in the world of business. “Jamsetji was not prepared to admit that the natural attainments of the Indian students were inferior to the European, but he recognized that the Indian suffered somewhat in the educational handicap”. His initiatives were aimed at working with liberals and making western education a window to reform.

Setting minimum critical rules There are minimum critical rules for governing the endowment trust. The procedure was made very simple and straightforward. Two rules that stand out are the following: In selecting scholars, the committee has absolute freedom of choice, the best person being taken regardless of province or creed. Originally a certain proportion of Parsee students were selected. Jamsetji himself intervened and that rule was eliminated as he felt that the best candidates should be given opportunity.

The candidate who accepts the endowment, upon his or her return, must repay the loan along with nominal interest. This was done primarily to continue the endowment fund in perpetuity.

Promoting flexibility Jamsetji’s open approach to educational reform is demonstrated by the fact that the was inspired by a

mere convocation address from Lord Reay. It is heartening to know that there are now a large number of JN Tata scholars in India and abroad involved in groundbreaking research, teaching at reputed institutions, manning and leading national and international banking, commercial and financial institutions and multinational corporations. While continually reviewing and restructuring its scholarship policy and programme to serve emerging social needs, the endowment is set to continue to fulfill its mission through the coming decades.

Conclusion Jamsetji placed enormous value upon education. learning was his chief recreation and delight. He found that providing people with opportunities worked wonders, and his main objective in starting the foundation was to give opportunities to Indian students to pursue studies abroad. The example he set was followed by the family members who inherited his wealth and industries; they too set up trusts. This social innovation made an enormous impact in the thinking of many. The trusts established by other family members expanded the scope of work in as well as the nature of, the activities founded by them. Jamsetji Tata was a visionary and the endowment trust was an illustrative example of is foresight and is a clear case of social innovation.

REFERENCES Frank Harris; Jamsetji Nusserwanji Tata: A Chronicle of his life; Balckie & sons, Bombay, 1958 RM Lala; The Creation of Wealth; IBH Publishing Company, Bombay, 1981 RM Lala; For the love of India; the life and times of Jamsetji; Penguin Books India, Delhi, 2004 RM Lala; The heartbeat of a trust; Tata Mcgraw – Hill publishing company Ltd, New Delhi 1981 Rajendra Prasad Narla; Philanthrophic Activities of the House of Tata’s ; Tata Central Archives, Pune.

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Spotlight Re-inventing Industries Inside Out Indian Telecom: Opportunities and Challenges Go Hand-in-Hand

By Rajan S. Mathews Director General, Cellular Operators Association of India

Managing the Mega Concerns of India's Power Sector

By Ashok Khurana Director General, Association Of Power Producers

IILM MANAGEMENT REVIEW

Indian Telecom: Opportunities and Challenges Go Hand-in-Hand

By Rajan S. Mathews Director General, Cellular Operators Association of India

Executive Overview Although telecommunications as an industry is quite old in India, in its modern avatar, it is quite recent. The industry started growing only after the 1991 economic liberalisation. Since then, it has grown in leaps and bounds.

However, with growth and maturity, while opportunities have been galore, challenges have been equally daunting.

The Indian telecom market, growing at more than 30 per cent annually over the last decade in terms of number of subscribers, is the fastest growing telecom market in the world. The phenomenal growth of the telecom sector has made it a significant contributor to the country's GDP. The contribution of the communication sector to the GDP has increased from 0.7 percent in 1980-81 to 4.0 percent in 2010-11.

new operators in the market in FY08, leading to a secular decline in ARPU due to competitive tariff.

The Indian telecom sector continues to attract investment from global telecom giants. The telecom sector received investments worth US$ 12.6 billion in the period from April FY01 to June FY12, accounting for 8 percent of the cumulative foreign direct investment (FDI) equity inflows to the country.

The unprecedented growth of the Indian telecom sector can be attributed to the wireless segment which accounts for more than 95 per cent of the total subscriber base and more than 60 per cent of telecom revenues.

The total revenues from the telecom sector increased more than five-fold from US$ 7.1 billion in FY00 to US$ 39 billion during FY12. The growth over the last decade was mainly driven by economic growth, low telecom tariffs resulting from high competition, low handset prices and a positive regulatory environment.

However, the percentage growth in revenue has reduced during the last four years. The sector grew only at 6 per cent, 1 per cent, 5 per cent and 7 per cent in FY12, FY11, FY10 and FY09, respectively from as high as 22 per cent and 25 per cent in FY08 and FY07. The decline in revenue growth is mainly due to the entry of

As of July 2012, the total wireless telecom subscription base in India stood at 913.5 million and overall wireless penetration was 75 per cent. The active wireless subscribers' base, which reflects the real subscriber base, was 698.06 million in July 2012 or 76 per cent of the total subscribers. The urban and rural teledensity was 42

INDIAN TELECOM: OPPORTUNITIES AND CHALLENGES GO HAND -IN-HAND

157 per cent and 40 per cent, respectively in July 2012.

ment-owned companies, Videsh Sanchar Nigam Limited (VSNL), which is now known as Tata Communications, and Mahanagar Telephone Nigam Limited (MTNL) were formed. VSNL and MTNL aimed at providing services to international and metropolitan areas, respectively.

The introduction of the New Industrial Policy 1991 initiated the liberalisation process in India. Telecom equipment manufacturing was also delicensed in 1991, and the National Telecom Policy (NTP) was announced in 1994. The formulation of NTP 1994 was followed by the launch of mobile telephony in India in 1995. However, growth in the initial years was very slow due to high mobile handset prices as well as the high tariff structure. In 1999, Government, recognising the need to overhaul its policy framework, issued the New Telecom Policy 1999, which had played a key role in shaping the sector. India has reached the goals set in NTP 1999 far ahead of time, with the market evolving into the world's second largest in terms of subscribers.

The liberalisation of the sector resulted in the need for a regulator, and the TRAI was established in 1997. In January 2000, the Telecommunications Dispute Settlement and Appellate Tribunal (TDSAT), was established to take over the adjudicatory and disputes functions from TRAI.

As per TRAI, the total number of broadband connections in the country was 14.7 million at the end of July 2012 as against the 2010-end target of 20 million set by the Broadband Policy 2004. The net broadband addition per month has been just 0.1 to 0.2 million over the last 12 months and the broadband penetration as of July 2012 was 1 per cent. India lags other developing Asian countries in terms of broadband penetration.

The broadband penetration in the country is expected to be boosted by Government initiatives. The National Telecom Policy (NTP) 2012 particularly emphasises widespread broadband connectivity and has Broadband on Demand' as one of its visions.

History of the Indian telecom Industry The Department of Telecommunications was established in 1985 to provide domestic and long-distance services in India. Further, in 1986, two wholly govern-

In May 2003, the calling party pays (CPP) regime was introduced, through which all local incoming calls were made free. During the same year, the GoI introduced the Unified Access Service (UAS) licensing regime, which permitted an access service provider to offer both fixed and/or mobile services under the same license, using any technology. The GoI also introduced the Broadband Policy 2004, which recognised the ubiquitous potential of broadband services and their contribution toward the GDP growth and improved quality of life through e-governance, e-commerce, entertainment, education and medicine, among others.

The Broadband Policy 2004 specified targets in terms of subscribers. In 2004, mobile services had outpaced fixed-line services with nearly 45 million mobile subscribers. Further, in February 2004, the DoT issued guidelines for the intra-circle merger of cellular mobile telephone service (CMTS)/UAS licenses.

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In November 2005, new UASL guidelines were issued.

The licenses were to be issued on continuous basis without any restriction on the number of entrants in a circle and applications were to be processed within 30 days of submission. Allocation of spectrum and grant of wireless license was subject to availability and, in case UASL was not allocated spectrum due to nonavailability, the licensee was required to endeavuor to rollout services using wireline technology. FDI limit in the telecom sector was increased from 49 per cent to 74 per cent. In February 2008, the DoT approved the sharing of infrastructure among mobile operators.

Operators were allowed to share infrastructure in their tower installations. In March 2008, the TRAI abolished the access deficit charge (ADC), which covered the levy paid by mobile operators to the staterun operator, BSNL. ADC was the fee paid by private mobile operators to the state-owned BSNL, which mainly used the proceeds of ADC to develop rural telephony services.

In July 2010, telecom towers were accorded “Infrastructure Status� by the Reserve Bank of India (RBI), as these constitute an essential and possibly the most expensive component in the entire telecom service delivery infrastructure. In the same year, 3G and Broadband Wireless Access (BWA) auctions were held.

In June 2012, the National Telecom Policy was announced.

The Indian telecom growth story The Indian telecom growth story is unique. The incumbents have reshaped the entire telecom value chain by adopting a 'factory minute' model, under which, the network that was once considered a core function has been outsourced to companies best known for managing networks. This allowed better cost management and improved scalability. The focus on the prepaid segment further helped reduce costs as the prepaid customers involve lower billing costs, lower bad debts and lower channel commissions as compared to the post-paid segment. Other factors contributing to better cost management include infrastructure sharing, absence of handset subsidy, and low distribution costs. Increased usage of multiple SIMs has made the absolute number of subscribers an obsolete KPI to measure market power. The industry has therefore

identified new KPI: revenue per minute and cost per minute.

Although the Indian telecom market is the fastest growing market, it is also the most difficult market to operate globally owing to various factors. The operators are at a disadvantage considering that the number of the operators is almost double of the global average of five to six and the spectrum availability per operator is almost one-third of the global average of 18-20 MHz. Since, as many as 8-12 operators vie for the same pie of the market, the tariff wars and innovative pricing models such as per second billing have resulted in tariffs as low as US$ 0.1. Between 2008 and 2011, the GSM ARPU has declined from Rs. 220 to Rs. 96.

While the cost of doing business is rising, India's voice centric market is reaching saturation. Non-voice, value added services, driven by access to mobile data services, will drive future growth in the Indian telecom market. Currently, data forms 14-16 per cent of Indian network providers' ARPU. In the developed nations, this proportion is as high as 30-35 per cent. The MVAS will play a key role in delivery of services such as governance, banking, health and education. The future lies in developing data services that will help to bridge the gaps in physical infrastructure by putting in place the digital infrastructure.

Till date, the most difficult time for the industry has been the year 2011-12. The landmark judgment of the Supreme Court quashing approximately 144 licenses of some of the telecom operators was a watershed moment in the life of the telecom industry. It brought to a head the precarious financial health and sustainability of the industry and has introduced fresh

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uncertainty to the industry from which it is still trying to emerge.

Trends and opportunities Mobile Value Added Services emerging as a key growth driver Data revenue accounted for about 15-16 per cent of the total mobile revenue MVAS will drive growth in 2012, as against close to 30 percent in China and the UK. The next albeit differently in the level of growth in the telecom sector is expected to be driven by Mobile rural and urban areas value-added services (MVAS). MVAS is becoming an integral part of the telecom industry value chain, with the MVAS market expected to increase to Rs. 482 billion by 2015 from Rs. 122 billion in 2010. This will be driven by the uptake of 3G services in urban as well as in rural areas. The demand of MVAS will differ in rural and urban areas.

MVAS in urban areas will revolve around high-end applications enabling better information, entertainment and communication. In rural areas, it will revolve around services such as m-healthcare, m-governance, m-banking, m-education, etc.

Innovation will foster growth The factory minute model and infrastructure sharing are a few examples of innovation that drove the telecom sector to a high growth trajectory in the last decade. At this juncture, the Indian telecom market needs more innovative business models, platforms and services specifically catering to the different stakeholders both the supply and demand side.

Rural India will drive the next growth wave The development of rural telephony has been high on the government's agenda for the past few years. In 2003, the DoT initiated the Universal Service Obligation Fund (USOF) to promote the development of rural telecom infrastructure for fostering rural connectivity. To promote private investments, the fund provides subsidies to private players who want to establish telecom infrastructure in rural areas. The USOF has already allocated funds worth Rs. 103.7 billion towards various activities, of which Rs. 24

billion were allocated in the year ending March 2010.

According to NTP 2012, the Government intends to provide high speed and high quality broadband access to all village panchayats through optical fibre by 2014.

It also aims to increase rural teledensity from the current level of around 35 per cent to 60 per cent by the year 2017 and 100 percent by the year 2020. For service and equipment providers, this provides an opportunity to launch a host of new services and solutions customised for the rural market. In October 2011, the Indian government launched its low-cost tablet, 'Akash' for a subsidised price of US$ 35. This could open up a completely new segment for tablet makers.

The integration of telecom services with programmes of national importance such as the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) and Unique Identification Authority of India (UIDAI) is expected to promote inclusive growth in the country. This will create demand for targeted content and applications for the rural market.

Manufacturing and infrastructure development The NTP 2012 has laid down the following objectives to promote indigenous manufacturing: 

Aims to fulfil 80 per cent of the demand through domestic manufacturing with a value addition of 65 percent by year 2020.



Creating a corpus to promote domestic manufacturing, R&D, IPR creation and entrepreneurship



Establishing an apex body to guide skill development in the telecom sector



Developing a framework with the Ministry of Human Resource Development (MHRD) to periodically upgrade academic curriculum of telecommunication courses

The Indian telecom equipment market is expected to grow at 10 per cent every year between 2011and 2020 to reach US$ 37 billion by 2020. The preferential status conferred on telecom manufacturing, coupled with the tax reliefs proposed to players, needs to be applied in a non-discriminatory and rational manner that promotes innovation, integration with international standards, competitive markets and level playing field in order to 45

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make India a telecom manufacturing hub. The increasing domestic value addition is expected to contribute to economic growth by curbing the equipment import bill and also, by generating employment. The domestically Manufactured Products (DMP) would have to grow by about 40 per cent in the next five years to meet preferential market access (PMA) provisions.

Green telecom to be a key focus area The global ICT carbon footprint is relatively small at 1.43 per cent. India is included in Rest of World (RoW) with other countries, with the share being only 27 per cent of 1.43 per cent. This amounts to only 0.38 per cent.

The global telecom emissions are expected to grow at a compounded annual growth rate (CAGR) of 4.8 per cent to reach 349 million tonnes (Mt) CO2 in 2020 from 151 MtCO2e in 2002.

With more than 4,50,000 towers in India consuming about 2 billion litres of diesel per year, the shift from diesel to alternate sources of energy will reduce CO2 emissions and generate millions of carbon credits.

There is a need to encourage Renewable Energy Service Companies (RESCOs) and provide subsidy and viability gap funding. The government can consider tax benefits for Balance of System (BOS) items like cables, controller, etc.

Challenges & Outlook Despite being the fastest growing telecom market in the world, there are several challenges facing the Indian telecom market. The profitability and sustainability of the telecom industry is at stake due to high government levies, high regulatory costs, high spectrum prices, cost of implementing security measures, huge penalties arising under modification of contract terms and unreasonable expectations of the Government from the operators. Not to forget the high prices that the operators paid for 3G spectrum in the country; intense and grueling price wars and the fact that the returns on the investments have not been adequate till date. Further, the operators are finding it difficult to receive funds from the FIIs and banks that are shying away from funding the industry due to policy instability and uncertainty.

Spectrum management In line with the growth in subscriber base, the need for spectrum has also increased in tandem with the need to ensure high-quality services to the subscribers. The spectrum allocation of 6-10 MHz per operator is among the lowest in the world leading to fragmented spectrum allocation. The more the fragmented spectrum, the less is the efficiency of spectrum utilisation and the higher is the cost structure for operators.

GSM spectrum licensed to operators in different countries Country India Denmark EU average France Germany Italy Spain Sweden UK US

GSM spectrum licensed to operators 50-60 118.4 92.6 138.5 65 72.7 100.6 92 82.2 75-96

As India moves towards providing better broadband connectivity to its people, the high bandwidth broadband applications will require a significant amount of additional spectrum. As per TRAI, in line with the estimated demand of approximately 500-800MHz spectrum across various bands out of a total of 1,161MHz by FY 2014, a minimum of 287MHz and a maximum of 454MHz is currently available. There is, therefore, a heightened need to ensure adequate availability of spectrum. Spectrum pooling, sharing and trading will lead to optimal and efficient utilisation of spectrum. R&D efforts such as the use of cognitive radios, etc., also should be promoted There is a need for an objective review and critical analysis of such matters asspectrum refarming, one-time spectrum fee, modalities for spectrum renewal etc., which would have significant bearing on the sector. These issues, if implemented in the form presently being considered by the government, will do great damage to the financial and operational health of operators and may set the industry back irretrievably.

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Fragmented market The presence of 8-12 operators in a given telecom circle is significantly higher as compared to the global average of 4-5 operators. New telecom operators are rolling out services and are setting lower tariff rates to capture a share of the market. This has adversely affected ARPU over the last two years. The substantial capex requirements, coupled with a high proportion of low ARPU are translating to lower profitability for the new operators.

Number of GSM operators in different countries Country

Number of GSM operators

France

3

Spain

3

UK

4

Netherlands

5

Germany

4

China India

2 8-12

Note: Data as of December 2009

Funding constraints Given the increasing debt burden for telecom operators and declining profitability, funding for telecom operators has been constrained in the recent past. The industry is reeling under a huge debt burden of INR 1.85 lakh crores and stands at the cusp of 2G auctions, which will require substantial investments. The telecom industry is capital intensive as it needs to continuously adapt itself to the latest technology.

However, the capital expenditure levels were only US$ 7.3 billion in 2010 as against 9.9 billion in 2009. Other than 3G, no major capex has been undertaken by the industry in 2010. High taxes and levies The telecom industry pays 6–10 per cent of the adjusted gross revenues (AGR) as licensing fees and 18.5 per cent of profit before taxes in the form of minimum alternate tax (MAT). Moreover, states levy additional taxes such as octroi, VAT, stamp duty, entry tax and levies on towers, which aggregate to 30 per cent of the revenues earned by telecom companies as compared to about 5% in other Asia-Pacific (APAC) countries. The

levies are also charged on the non-telecom related revenues of the service providers. This makes Indian telecom one of the highly taxed industries in comparison to other Asian countries. There is a need to rationalise the taxes and levies in the sector.

Conclusion If growth in the last decade was a consequence of aggressively acquiring subscribers, the coming decade will be growth driven by innovation. Catalysts for this will be policy and regulatory stability, customer centricity and content. While the new telecom policy is forward looking and provides clarity to the industry and investors on the future, much needs to be seen in the details surrounding the implementation of the policy through various legislative and regulatory means. A “light touch regulation” approach would be beneficial for the industry as opposed to focusing on micro-management of the sector which often leads to distortions of market dynamics. Greater availability of spectrum and sharing of the same should be facilitated so as to help the sector to optimize its performance. The industry requires support such as reduction in the multiple levies and fees so as to expand with increased penetration levels, especially for rural penetration, where an incentivized approach is necessary. More liberal M&A norms would provide a much required impetus to the sector. One of the major objectives of the Government being ‘Broadband for all’, a public-private partnership (PPP) approach towards the National Optical Fibre Network implementation initiative would be helpful. Unnecessary and untried actions, like redistribution of existing spectrum from 900 MHz to 1800 MHz should be avoided as it affects the efficiency as well as the financial health of the industry without any documented benefits. These measures if implemented and followed can easily make India the global telecom leader over the next few years.

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IILM MANAGEMENT REVIEW

Managing the Mega Concerns of India's Power Sector

By Ashok Khurana Director General, Association Of Power Producers

Executive Overview Although the history of power generation is a century old, private sector participation in power came about in a substantive way only after the Electricity Act of 2003. And although the power sector was one of the first to open up after liberalisation, its growth has not been to its full potential. What are the challenges that the industry is facing? How can they be overcome?

The history of power generation in India is over a century old. Merely fifteen years after the first country in the world, United States started generating power in New York, India's CESC Ltd pioneered the generation of electricity in the country. In 1899, it commenced power generation and distribution in Kolkata.

Today, with 1.2 billion people where one fifth of the world lives in India, the task of bringing light to the vast country of over 6 lakh villages is no mean task.

However, its rich history in power generation has stood the country well. According to the 2011 census, already over 5 lakh villages have been electrified. Over the past 30 years, the country's energy demand has grown at an average of little under four per cent per annum and India today accounts for four per cent of the global energy consumption, even as it accounts for 17 per cent of the global population.

Current status of the Indian power sector The installed generation capacity of the country is 206,456 MW as of 31st July 2012. Inspite of significant augmentation in generation, transmission and distribution capacity, the growth in demand has always outstripped the capacity additions.

capacity of 54,964 MW was added during the 11th Plan, which is almost equal to the capacity addition during the 8th, 9th and 10th Plan periods put together. The private sector played a very important role in this feat with over 42 per cent of the capacity being commissioned by private power developers. In fact, the private sector achieved more than double of its 11th Plan target while both the Centre and State power generation utilities were unable to meet their planned targets.

The boost in the private sector participation in the generation segment was brought about by the Electricity Act 2003. It consolidated all the previous policies, thereby streamlining the power sector and improving efficiency. The foundation for large-scale private investments in power generation was laid out with the de-licensing of generation. Tariff determination was made a transparent process and competition was encouraged through the concept of Open Access and competitive bidding for procurement of power.

The figure below traces the rise in importance of the private sector with respect to generation capacity addition.

While India's per capita electricity consumption as of 819 kWh (as per provisional 2010-11 data) is still a fair distance away from the National Electricity Policy target of 1000 kWh per capita by 2012, it is undeniable that huge strides have been made in the power sector during the 11th Plan period. A record generation 48

MANAGING THE MEGA CONCERNS OF INDIA'S POWER SECTOR

The private sector is expected to play an even more important role in the 12th Plan. Out of the planned generation capacity addition of 78,000 MW, the private sector is expected to contribute around 56 per cent.

However, there are several viability issues plaguing the private investments already made in the sector and which threaten to leave precious power generation capacity stranded. Unless these issues are resolved, the power developers and the banking community are likely to remain wary of further investments in the sector, thereby affecting the power needs of the nation in the years to come.

Key challenges facing the power sector 

Fuel Concerns



Shortage of Domestic Coal Securing adequate and appropriately-priced coal for power generation is the most critical challenge faced by power developers today. Coal accounts for 57 per cent of the total installed generation-based capacity and it is therefore the dominant fuel source by far.

Dwindling Coal Production Demand for fuel by coal and gas-based plants is increasing at a faster rate than supply. The requirement of domestic coal for power generation has far surpassed the availability of coal from domestic sources.

Delays in obtaining environmental clearances, problems relating to land acquisition, local agitations and law and order problems have resulted in Coal India regularly failing to achieve production targets.

As per the Working Group on Power for 12th Plan, the total requirement of coal for power plants is 515 MT for the year 2012-13 while the total availability from indigenous sources is 407 MT leading to a shortage of 81 MT. The situation is grim since this shortage, which has already had a significant adverse impact on the power sector of today, is projected to increase to 238 MT by the end of the 12th Plan period. This massive projected deficit will not be able to be bridged through coal imports due to technical limitations of boilers in blending of imported coal.

Table: Coal shortfall scenario for 12th Plan 2012-13 2016-17 i Indigenous Coal requirement during the year 2016-17

492 MT

788 MT

a) Coal India Ltd

355 MT

415 MT

b) Singareni Coal Colleries Ltd

34 MT

35 MT

ii Coal availability from:

c) Captive blocks allocated to power utilities 27 MT

100 MT

d) Import of coal for plants designed for imported coal

23 MT

54 MT

Total coal availability

416 MT 550 MT

iii Shortfall

76 MT

238 MT

Fuel Supply Agreements (FSA) Prior to 2007, Coal India used to provide coal linkage assurances to coal-based power projects which were however not contractually binding on either Coal India or the power developer. Many power plants used to run without being able to maintain the normative level of coal stockpiles and eventually the New Coal Distribution Policy (NCDP) was notified by the Ministry of Coal in 2007 which placed an obligation on Coal India to sign Fuel Supply Agreements (FSAs) for supply of 100 per cent of the 'normative' requirement of the power sector consumers (normative requirement as per power sector regulatory norms corresponded to 85 per cent of the plant availability).

However, despite the introduction of the NCDP in 2007, the FSAs were not signed till late 2009 due to conflicts between Coal India and the power producers over the minimum coal supply trigger level below which Coal India was liable to pay penalties. These FSAs were signed only for the projects commissioned till March 2009 and for projects commissioned after March 2009, CIL came up with a revised draft FSA under which power projects would be assured domestic coal supplies at only 50 per cent of Annual Contracted Quantity (ACQ) with the rest 50 per cent to be met through expensive imported coal, the cost of which was to borne by the developer.

Due to the skewed terms of the draft FSA which put the power projects at a serious disadvantage, no FSA was

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IILM MANAGEMENT REVIEW

signed for projects commissioned after March 2009.

After many attempts to convince Coal India to increase the level of supply assurance failed, the Prime Minister's Office stepped in during early 2012 and directed Coal India to sign FSAs for a minimum supply trigger level of 80 per cent of the ACQ with the projects commissioned after March 2009 and having long term Power Purchase Agreements signed.

paucity of such Case 1 bidding opportunities, there are projects which are about to be commissioned and have Letter of Assurances (LoAs) but would not be able to produce or generate power for want of PPAs. !

No clarity on further allocation of coal linkages -

There are several requests for coal linkage already pending and a recent priority list sent by the Ministry of Power to the Coal Ministry contains 129 projects While Coal India has finally agreed to sign FSAs at a totaling up to more than 142,000 MW for commissioning in the 12th and 13th Plan periods. Many of the trigger level of 80 per cent, there are many important projects are likely to be commissioned in the next 1-2 issues which still remain unresolved and which seriously threaten the domestic coal linkage based years and are still without coal linkages. Considering generation capacity in the country, such as: the power deficit situation in the country, it is imperative that necessary steps are taken to provide linkages !

Pricing Issues Related to FSAs - All bids under the for these projects. competitive bidding regime have been based on a !

Disconnect between State and Centre policy normative availability of 85 per cent Plant Load framework - While as per Ministry of Coal's directive, Factor (PLF). FSA only guarantees supply at 80 per long term PPA is a precondition for signing FSA, cent (of ACQ), corresponds to 68 per cent PLF as some states have indicated FSAs should be a condicompared to Power Purchase Agreement (PPA) tion precedent for signing of long term PPA. obligation of 85 per cent PLF, thereby requiring the developer to resort to alternate and costlier sources of bridging this 17 per cent gap between supply and normative requirement. There is no clarity yet on the pricing modality of this aspect and this is needed to be resolved at the earliest since these projects are based on tariffs that have been bid on the basis of normative availability and are locked into contracts which have no provision to deal with this change.

!

Delays in Captive Coal block production

Delays in clearances

While 98 coal blocks have been allocated to power projects, it is now noted that over 9,540 MW of these projects would be stranded shortly due to delay in Ministry of Environment and Forests clearance for the captive coal blocks. This is due to the subsequent notification of various areas as “No-Go” areas for coal !

Requirement of signing PPAs as a pre-condition to mining. While this notification is now withdrawn, FSAs - As per the new FSA, long term PPA has been MoEF is contemplating certain areas as “inviolate” made a requirement for signing of the agreement. areas for coal mining, which has the same effect.

However, at the time of the award of the coal linkage, no requirements/conditions of having a long term PPA with distribution companies was mandated and this condition has been imposed without giving any time window for fulfillment. Further, there has been a shortage of competitive bidding opportunities which is highlighted by the fact that only 7,745 MW PPA has been signed on long term basis through Case 1 bidding in the last 3 years. There are numerous states which have not even called bids and the Southern Region, despite being a power deficit region, is yet to conclude a single bid. Considering the

This delay means that power plants would be unable to fulfill PPA commitments from the original timeframe, resulting in heavy losses to the developer.

Lack of incentives for additional coal recovery Before 2009, captive coal blocks were allocated to power projects on a nomination basis. The process of allocation was not based on any bidding but on the recommendation of the State Government and the decision of the screening committee. This process suffered from lack of transparency and not optimising 50

MANAGING THE MEGA CONCERNS OF INDIA'S POWER SECTOR

the benefits to the Government or the power consumers. The conditions of allotment did not specify the power sale process (regulatory vs tariff based bidding vs merchant route), nor did it incentivise the production of more coal by the block allocattee even if there was potential to do so. Further, if there were any delays in the development of the end-use project (power plant), the mining activity was not pursued and the mines remained unproductive.

Empowered Group of Ministers in 2008, it was decided that gas would be made available for power plants only after the plant was constructed. Thus, no “reservation” of gas was permitted under the policy. In July 2010, official projections by the Ministry of Petroleum & Natural Gas showed abundant availability of natural gas in the near future. Based on these official projections, a set of gas projects, with capacity of about 9000 MW are now ready, and are awaiting allocation of gas.

Additional recovery of coal reserves is possible through significant capital investment; however the present policy framework does not provide any incentive for the private developer to invest additional capital in order to increase mine production.

Considering the need to augment domestic coal supplies, the lack of a remunerative policy to provide adequate incentives for production of surplus captive coal can only be detrimental to the sector.

However, the EGOM meeting on February 28th 2012 was presented a completely different set of projections, showing a 75 per cent decline in gas availability from KGD6 compared to the figures presented in 2010.

Based on this, no gas allocations were made, and existing power capacity of about 15,000 MW is now operating on reduced PLF of 50 per cent. Subsequently, due to the bleak availability of gas, the Ministry of Power has notified on the website that no additional gas will be made available till 2016. Due to this, projects in Category 2 above have been severely impacted and can at best work at 30 per cent PLF with the gas currently available. Operating plants at such low PLFs is technically unfeasible and hence these capacities are all stranded at present. All Category 3 projects in final stage of construction are now languishing due to freezing of bank lines due to this notification.

Dwindling gas supplies The gas based generation capacity in the country can be divided into 3 main categories: Table: Gas-Based Power Capacity Category Description

Capacity Gas Allocation (MW) (MMSCMD) KG D6 APM Sources

I

Projects commissioned 8,001 before 2002

17

7

II

Projects commissioned 7,143 between 2002 and 2012

8

12

III

Projects under commissioning

8,770

0

0

Total

23,913

25

19

The gas-based capacities commissioned before year 2002 were based on gas discoveries and fields predominantly under ONGC and have gas allocation under the Administered Price Mechanism (APM). Over the years there was a decline in ONGC fields production and hence a small amount of gas from KGD6 fields was allocated to this category.

After 2002, fresh discoveries of gas gave impetus to new IPPs to come up. Plants commissioned during this period (7,143 MW) were mostly allocated gas from KGD6. Under the Gas Utilization Policy notified by the

Table: Gas Shortage for Power Plants Category Description

Capacity (MW)

PLF (%) in 2013

PLF (%) in 2014

I

Projects commissioned 48% before 2002 8,001

44%

II

Projects commissioned 7,143 between 2002 and 2012

26%

20%

III

Projects under commissioning

8,770

0%

0

Total

23,913

37%

32%

Further, the new Standard Bidding Documents (SBDs) which were to be notified separately for gas-based power plants are not being finalised and are kept in abeyance. Gas-based power is an integral part of every country’s power mix, as it provides for peaking power, and has a very low environmental footprint. Gas based power has low ramp-up time, and can be used for load management and grid management to prevent grid outages. Considering the advantages of gas based 51

IILM MANAGEMENT REVIEW

power, suitable policy interventions are required at the earliest to convert the currently stranded capacity into power generating units.

• Contractual Framework Concerns • Competitive Bidding Framework for prospective projects The Electricity Act 2003 emphasised on competitive bidding for procurement of power by distribution licensees. In accordance with the provisions of the Act, the Competitive Bidding Guidelines were notified in notified in 2005 to lay out the framework for the bidding process as well as standard bidding documents. The competitive bidding framework has provided a strong platform for increased private participation in the power sector and has resulted in considerably low tariff discoveries in comparison to the traditional cost-plus tariff determination regime.

Power projects aggregating over 44,000 MW have been awarded since the notification of the competitive bidding guidelines under the processes of Case 1 and Case 2 bidding.

However, market developments over the last 5-6 years have necessitated a serious relook at the bidding framework. The conditions and premises under which the standard bidding documents were initially drafted have changed dramatically. Some of the glaring shortcomings which have been exposed in the contractual framework are: • Fuel supply risk: A spectre of acute coal shortage looms large on the power sector and there is a severe risk of power generation assets being stranded for want of coal. The standard bidding documents have been found to be inadequate in dealing with the situation arising out of short supply of coal by Coal India as there are no provisions to account for additional cost incurred by the power project developer in sourcing more expensive coal through e-auctions/imports. The same situation holds true in the case of gas as production from KG-D6 fields has been declining steadily.

• Change in law of coal source countries: Recent developments in coal source countries – minimum

export price by Indonesia, Carbon tax by Australia; have led to unexpected increase in coal prices.

Looking at the trend of resource nationalism and volatility in the international commodity pricing, it is very difficult for any developer to take a risk on fuel pricing for 25 years • Mismatch in timelines: Delays in forest clearances for coal blocks allotted to specific end-use power projects has led to a mismatch between mine development timelines and power plant development timelines. The standard bidding documents do not provide any relief to the developer to such delays which are not in his control.

• Unsuitability of the existing documents for gas based power – Gas based power projects have inherent differences compared to coal based projects in terms of fuel contractual frameworks, fuel market dynamics, dispatchability, pricing and availability, operational aspects, LNG and pipeline infrastructures etc.

• Obligations imposed by some States – Some States impose additional obligations in the bidding documents asking for a part of the generation capacity of the plant on concessional terms. This poses a problem for the developer since the coal supplies to a plant are now linked to 85 per cent capacity being tied up under long term power purchase agreements.

• Material Adversity – While the power purchase agreement is for a term of 25 years, even with human ingenuity notwithstanding, no bid can remain iron clad without provision for any material adversities during this period.

• Issues related to locked-in tariffs of existing projects.

Estimates indicate that around 37,680 MW of domestic linkage coal based projects, 17,500 MW of captive mine linked projects and 14,240 MW of imported coal based projects are currently affected due to reasons such as change in law of source countries, less supply of coal by Coal India as compared to assured quantity and delay or denial of environmental clearances to allocated captive coal blocks, thereby resulting in contractually locked-in tariffs being rendered unviable.

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MANAGING THE MEGA CONCERNS OF INDIA'S POWER SECTOR

The figure below highlights the fuel dynamics which are impacting the viability of projects with locked in tariffs.

need to happen on a regular basis to bridge the existing revenue deficit. !

High Level of Losses

Faulty infrastructure and poor collection efficiency due to theft and un-metered connections are the leading causes for the high level of losses in the sector. The T&D losses for 2009-10 on an All-India level stood at 30 per cent, however this loss level is misleading because it is based on a mix of industrial High Tension (HT) and Low Tension (LT) consumption. If the HT and LT consumption is considered separately, the actual losses on the field in LT consumption is around 40-45 per cent.

Thus there is still much to be desired in efficiency !

Deteriorating health of Distribution Utilities improvement and infrastructure upgrade.

The distribution segment continues to be the most important and at the same time the weakest link in the power sector. Massive generation capacity addition plans notwithstanding, it is the Discoms who ultimately purchase power on behalf of the consumers.

Discoms, have historically been riddled with losses and beset by inefficiencies. The precarious financial condition of the Distribution Utilities has adversely impacted the inflow and sustainability of investments in the power sector value chain and quality of service to consumers.

The accumulated losses of the Discoms have reached a staggering Rs 2 lakh crores as of 31st March 2011. There are three key reasons for the increasing losses.

!

Increasing Debt

High and increasing levels of outstanding debt on discoms balance sheets have been resulting in higher interest costs. It is estimated that large loss funding has significantly increased discoms debt to around Rs 2.1 trillion as on March 31, 2011 (Crisil estimate) which is almost equivalent to the total turnover of the distribution segment. Given that a significant portion of the debt has been used to finance losses rather than create productive assets, this debt only adds to the sector's inefficiencies.

Meeting the Challenges: Way Forward !

Fuel Concerns

! !

Shortage of Domestic Coal Widening Revenue Gap

There has been an increasing gap between average tariff realised per unit and average cost of power supply per unit. The gap increased from an average of Rs 0.60 per kwh during the last 5 years (from FY05 to FY09) to Rs 1.27 per kWh in 2010-11. This upward trajectory has been caused by inadequate and delayed tariff revisions in most of the States and has been exacerbated by the cross-subsidisation of cheap power to the agricultural sector through differential tariffs for other segments. However, the last 2 years has seen a positive trend of many State distribution utilities hiking power supply tariffs and such tariff increases

Urgent measures are needed to augment the domestic coal production in the country. The coal mining sector needs to be opened up to the private sector, and while the Government has appointed an Inter-Ministerial group to push forward the MDO (Mine Developer and Operator) model, this needs to be operationalised at the earliest. At the same time, simultaneous efforts need to be made to increase coal supplies for the power sector.

In line with the Gas Utilisation Policy, domestic coal should be reserved for regulated sectors such as power and fertilizer.

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IILM MANAGEMENT REVIEW

!

Fuel Supply Agreements of the hour that a forward looking coal policy is

formulated at the earliest to ensure that there is adequate coal for the nation's need and imports may be minimized. A progressive surplus coal policy framework incentivizing the production of domestic coal would also result in significant improvement in India's energy security, and result in the development of about 1 lakh new jobs in the 12th plan period.

!

Regarding pricing issues related to the FSAs, the

developer should be allowed to arrange for the shortfall in coal to meet the normative requirement of 85% plant availability, and this additional cost should be considered a pass-through in tariff. The alternative to this is that the normative requirement level be reduced to 68% in order to be in sync with the level of coal supply by CIL.

In this context the former Chief Justice of India Shri Lahoti has opined that no legislative changes are !

Considering the difficulties in signing a long term required to utilize surplus coal from captive blocks in PPA under the current circumstances, the developer other power plants and only policy modifications are may be allowed a period of 3 years for the PPA to be required. concluded and in the interim the developers may be ! allowed to supply power on the basis of tariff to be Dwindling Gas Supplies determined under Section 62 of the Electricity Act. At Considering the dire situation of gas based power the same time, necessary instructions may be given to plants, policy initiatives need to be taken urgently the States to reconsider the requirement of FSA as a without with almost 16,000 MW worth of gas based pre-condition for long term PPAs, or CIL may be generation capacity commissioned after 2002 will asked to sign the FSA with release of coal subject to remain stranded and be unable to contribute to signing of long term PPA. This would also help the meeting the power needs of the nation. developers get financing as the banks also insist on Some suggestions on improving the gas supplies to FSA before release of funds. power sector are: !

For the projects which were named in the priority list !

As per MoPNG estimates, an additional 16 mmscmd for commissioning in the 12th and 13th Plan periods is expected from new sources over the next few years. and which have not yet received linkages, the MoP may make a formal request to MoPNG for Ministry of Coal needs to issue Letter of Assurances allocation of this 16 mmscmd for power sector. for them while simultaneously undertaking capacity augmentation for domestic coal production by Coal !

Making peaking power mandatory and differential India. tariffs for peak hours. !

Delays in Captive Block Production !

Policy initiatives to enhance the affordability of RLNG based power.

The issue of delays in statutory clearances has been taken up by the Group of Ministers on coal and a few !

Gas allocation policy needs review power should be blocks have been expeditiously cleared. However, this accorded the top priority as power cannot be needs to be expedited for all such stranded power imported whereas fertilizer can be imported. capacity due to delayed MoEF clearance for coal blocks. !

Contractual Framework Concerns In the meantime, tapering linkage from Coal India or surplus coal from other captive blocks can be utilized in Ministry of Power is in the process of revamping the the interim. standard bidding documents for procurement of power. Due care needs to be taken during the process Further there are several captive coal blocks which of finalisation that the shortcomings in the previous have significant surplus coal reserves and it is the need

54

MANAGING THE MEGA CONCERNS OF INDIA'S POWER SECTOR

documents are taken care of appropriately. CEA should be consulted on technical issues related to the contracts and the Banks and Financial Institutions need to be consulted on commercial issues.

financial health of the Discoms do not again degenerate and that the anticipated financial turn- around is sustainable.

To conclude, it is evident that the power sector is now in ! a precarious condition and the issues facing the sector Distribution Utilities need to be addressed urgently. With the nation battling While it is an encouraging development that several to sustain an average annual GDP growth rate of 8 per states have initiated tariff hikes, the accumulated losses cent, adequate power availability is now at the heart of of the Distribution utilities has now crossed Rs 2 lakh the challenge. Stranded power capacities are likely to crores, and has led to a bailout package being devised have a ripple effect on the banking sector and the by the Finance Ministry in line with the recommendaIndian economy as a whole. In fact, the early signs of tions of the panel headed by B.K Chaturvedi. This stress has started showing on the order books of bailout package needs to be accompanied by concrete equipment manufacturers and the banking sector. measures and strict monitoring to ensure that the

55

Research@Work Lessons From The Golden Age of Private Equity

By Ashish Dhawan Founder and CEO, Central Square Foundation & Former Senior Managing Director, ChrysCapital

Financial Reporting: What India Should Do

By Dolphy D'Souza Partner and National Leader, Member Firm of Ernst & Young Global

A New Prescription for Healthcare Delivery

By J. Jacob Chief People Officer, Apollo Hospitals Enterprise

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IILM MANAGEMENT REVIEW

Lessons From The Golden Age of Private Equity

By Ashish Dhawan Founder and CEO, Central Square Foundation & Former Senior Managing Director, ChrysCapital

Executive Overview India's private equity industry flowered only about a decade back, though it existed in a nascent way for a few years before that. The 2002-2007 was the golden age of private equity in India. It was a period that was good for the economy, private equity investors and the companies. With the global economic recession, that period has moved on. What are the lessons to be learnt?

I

ndia's private equity industry has seen a series of transformations in the last two decades. In fact, it can be seen in four clear phases. The first phase saw many of the early players taking a shot in the dark, perhaps just before liberalisation in 1991 and this continued into the late 90s, for nearly a decade. They were mostly government-run organisations since foreign capital was minimal. These included TDICI, the predecessor to ICICI and the Gujarat Venture Capital Fund. There were also some multilateral players like the International Finance Corporation and the Commonwealth Development Corporation (CDC) which later became Actis, which is a fairly sizeable player in the maket. These were mid-sized, good players in the market. However, capital investments were not really high.

It was also a phase when companies were not sure how they needed private equity (PE). The rules were not clear and many of them were afraid to give a board seat.

There was also no real sector focus among investors.

They were also not clear about the quantum of investment: should they be making a $ 5 million investment or less? I would say that it was an age of experimentation. But even as it was a new concept, there were government institutions pioneering the development of the nation's private equity industry.

Phase 2 was around 1998-1999, which is when people like us got involved. There was lot of excitement around technology, the internet boom, and India's

export story. PE companies put money in the internet where they got good returns but they also backed players in information technology. Business Process Outsourcing (BPO) as an industry was also popular then. The top 15-20 of the BPO companies that emerged were funded privately. Infosys at that time had taken private equity money. At that time, private equity had a strong bias for export-related businesses. Pharma was also emerging as a key investment sector for PE players. These were smaller pools of capital. At that time foreign funds had just entered; there were few global firms like CDC and Eventures.

At that time, the local Indian fund sizes were in the range of $ 25 to 100 million each. The global funds, of course, could put in more money. In CVC, when Ajay Relan was there, they did a clean up in 2002 -03. At that time, they had 50 portfolio companies with an average taking-size of $ 1 million each. In that phase, the focus

The domestic companies which went through a difficult period in 1996-2002 did a lot of restructuring. They became lean, they looked at the outside world and benchmarked themselves on productivity and clearly they had a sharp focus, in terms of activities.

57

IILM MANAGEMENT REVIEW

was on export-related companies and IT, and the internet companies were a part of it.

This phase lasted from about 1998-1999 to 2003. In 2003, a number of players chose to look at India's domestic market. The focus was on growth capital. In 2002, our company, ChrysCapital realised that it was too early to be deep private equity players in the venture play which ae really start-up players. When they introspected, they realised that India's ecosystem was not ready yet. They thought of the internet, but the customers were still not there. When talk about starting new companies began, besides BPO, in most other sectors it takes too long to hit criticl mass, so they didn't think it worth. They said that the growth space is a better place to be, because we can see now the macro reforms have started trickling down into the micro economy.

The focus was also on good promoters.

Industries and companies would grow much faster in the overall economy. That was a big bet and people who took the risk, were rewarded. It was a golden age, because companies grew much faster, and the Indian economy was rocking.

pany in early 2001. The first was UTI Bank. They told the bank that this was going to be a new form of private equity, for which they needed to be flexible. It is another form of growth capital. UTI Bank is still growing, they need the money.

Golden age of private equity

The domestic companies which went through a difficult period in 1996-2002 did a lot of restructuring.

They became lean, they looked at the outside world and benchmarked themselves on productivity and clearly they had a sharp focus, in terms of activities. The time, 2000-2007, was the golden age of private equity. It was focused around growth capital. It had largely a few players. Warburg Pincus was a big player at that time, CVC was another, and so was Actis.

Among global names, Baring was a a key player. It was in India for a while, but remained dormant until 2002.

They paid the price for being around for five years; typically they were the ones who benefited. Blackstone entered later. They got the benefits from 2002-2007.

People who realised this and survived the venture sharply focused on growth capital. They started depending on the domestic economy, as opposed to being solely focused on exports. Again, it's the one who said, “I am going to be a minority shareholder,� who benefited.

At that time thee were a lot of control related issues in companies. Companies too, were willing to be flexible in terms of approach. ChrysCapital was criticised when we began our first investment in a public com-

Business risk was out. Dr. P.J.Nayak had taken over at UTI Bank. He was a good leader, and the Bank had hit a certain size, but this would last only for about 10 months. The emphasis was not on startups. By then Jerry Rao had bought BFL, he got decent revenue of over $ 50 million. He got in the profits and was starting a new BPO. He was ready for super normal growth for the next five years.

While at CVC, whether it was public or private, the strategy was growth capital. In fact, it was a contradictory thought process, they were biased towards minorities. They thought the best entrepreneur will not sell a large piece of the company; in fact, he will fight for every per cent of his company.

The focus was also on good promoters. Industries and companies would grow much faster in the overall economy. That was a big bet and people who took the risk, were rewarded. It was a golden age, because companies grew much faster, and the Indian economy was rocking. There were limited players; one had to cherry pick. The entry valuations were good; exit valuations were stellar and the market was rocking by 2006-2007. One could easily exit and get a multiple increase.

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L E S S O N S F R O M T H E G O L D E N A G E O F P R I V AT E E Q U I T Y

There were three ways one could make money; it was about revenue growth; it's what happens with your margin. Margin increases your earnings to revenue growth, but if it declines it will be low. But then, there was multiple growth. If your entry multiple was 10, and your exit multiple was 15, you had to do even better. If earnings have gone up 3x, and your multiples grown 1 1/2 half times, you made a 4 ½ x. But if multiples came down by half, earnings gone up 3x, you still will make 1 ½ x. So these are the 3 levels.

In 2002-2007, all three levels were being pushed. The economy topline was growing 13-15 per cent, because there was 8-9 per cent real growth. Earnings were growing even faster at 30-50 per cent and the multiples were increasing. You could make returns in excess of 30-40 per cent. That's why it was the golden age. One had to be clever enough to realise that this was a lucky period and that this wouldn't come back again.

Conditions that made the golden period Firstly, India invested more in fixed investment, savings rate went up and that kicked up growth.

Secondly, the corporates were ready. They had gone through trials and tribulations, they had lowered their debt, and they could fire people. They were healthier coming into 2002-2003 and had a sharper focus.

Thirdly, there was margin to cut, because of excess capacity. Pricing power had still not kicked in, so that margin was in the pocket, which could still go up.

Lastly, the public market was stagnant, because the real run-up in India had happened in 1991-1994, it was

stagnant for 8-9 years. The Sensex was at the same level in 2003 as it had been in 1994. It had done some yoyoing around, but nobody was excited about it.

Therefore, that provided an opportunity to be contrarian. Those preconditions were needed to make it a golden age, which continued for five years.

Then there was the onslaught of massive campaign.

When there is a pot of gold, everybody rushes to grab it.

So, many global funds began looking at India. 2007 was a watershed year, but they were looking since 2005, because they could see how much money was to be made. The Warburg Pincus investment in Bharti Airtel was a watershed investment in some ways.

Then, there were smaller players like ourselves and many exits happened. There was a huge influx of capital. Out of the top 20 global private equity funds, 17 of them had physical offices in India. All of them came, they also went to Europe, China, and other parts of Asia at the same time, because results were good.

Two, every local fund became much bigger. We also grew in size. We had raised $ 60 million in 2001 before we raised our second fund. By 2007, they had raised $ 2 billion and that was humongous growth. The same was true of others as well. There were people going global and there was greater India allocation. At CVC, for instance, a Rastogi sitting in London was doing allocations for emerging markets, he made India a heavier bet. It's wasn't just new global funds, not just existing local guys, but others, too, who were giving India a bigger portion. New funds were created; people were also leaving existing funds and raising new capital. This was a new era where big capital was coming in.

Then, there were smaller players like ourselves and many exits happened. There was a huge influx of capital. Out of the top 20 global private equity funds, 17 of them had physical offices in India. All of them came, they also went to Europe, China, and other parts of Asia at the same time, because results were good.

Phase 4 was a place where some maturation of the market took place. This was also a time when the global economy and the Indian economy took a dip and governments changed at the Centre. Now, maturation, is a good and a bad word. In the good sense, people have a sharper focus, go into do venture or turn around deals, opt only for a certain type of growth, or only for specialised deals and the market gets segmented.

That's the sign of maturation, which is a positive sign.

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The more recent years

There was maturation where the market had gone sideways and people struggled.

Several funds were going out of business.

Global players had to rethink their India strategy.

The negative side of maturation is when one is typically at the top of the market, where capital is coming in, but where things can only get worse. Such as, in a global economy that was going into a recession. India as a country grew. Peak levels of equity were raised: about $ 15 billion.

If $ 15 billion was raised in a year, people imagined in the next five years, $ 100 billion could be deployed. But that's only $ 20 billion average a year. The math was done on that basis, and that was ludicruous because $ 15 billion was itself the peak. We at ChrysCapital felt that India had changed. And that number would probably be closer to $ 40-50 billion. Actually, $ 15 was a bit high; the real number was perhaps $ 7 or 8 billion.

That's what happened, some money came in but the total size of the market shrunk.

Secondly, companies weren't growing as rapidly. They didn't need as much money. The better companies felt their valuation is down, so they didn't take the money.

Thirdly, the mix of investments changed. There was a heavier focus on infrastructure investments. GMR won all the contracts, power kicked in, it was the 2005-2006 boom. In road projects, companies that were bidding had no equity capital and they needed money.

Infrastructure and real estate therefore became half the market. The complexion of private equity changed, because that's a different kind of debt and has much greater political risk attached to it. It meant dealing with poorer quality and covering standards that were lower. When funding risks are higher, you generally do not fully fund it. PE players were also entering at peak valuations.

Let's look at what happened to capital in the last five years. Roughly $ 50 billion was employed. What is the net-net? The net-net is not a pretty picture. In fact, a lot of investments made in 2006 -2007 are still stuck. Only 15 percent have exited, the rest are stuck, waiting to get out. Almost no money has been made in the last five years.

There was maturation where the market had gone sideways and people struggled. Several funds are going out of business. Global players had to rethink their India strategy. Should it be 10-15 per cent of allocation ratio versus 30 per cent, should they shut down their offices? At such a stage, the pool of capital will shoot to some extent, because a lot of capital in India is swing capital. But, last year it slowed down. But perhaps, there could be a rethinking.

Now comes the consolidation phase, where there will be some withering out, in the next two years. This is an industry where you die a very slow death, because unlike the hedge fund business where people control the money at a click of a finger, here the money is locked up for a long time. Therefore, the over supply of capital is still not fixed. It will take a couple of years before it happens, but it's starting to happen. Funds are struggling to reach the next point. But, even if they reach that point, the amount would be smaller than the previous one.

Meanwhile, global funds are prioritising funds in revaluating business. The pool of capital is already shrinking. There might be opportunities that will take off in some time, because the economy is also now stuck. When you are growing at 5 per cent, there is demand for capital.

If this consolidation period takes a couple more years, there will be some rationalisation in the industry and then it will be a better environment. It may not be a return of the golden era but it will be good for private equity again, because you will have smaller pool of players, you will have less capital, hopefully the economy would start functioning better and the infrastructure component would come down. Maybe 60

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there needs to be infrastructure fund and logistic fund which needs to do private equity.

Today, the valuations are clearly more attractive than they were in 2007. So it's a better entry point as well.

Those who survive will be better poised to benefit from the next kick-up in private equity. It's the same thing that if you could survive 1998-2002, you will survive the current phase. Obviously to survive, you need to make returns, and not just hang in there. If you can do that, you will do well and will benefit from the global recovery when that happens. You need to up your performance, work your companies hard and get rid of your duds. If you could do that, then you will be well positioned for 2015 -2020.

India and other markets Meanwhile, in Brazil and China, there are larger pools of private companies. In India, the way we are set up, many companies are public, and so there is a difference in the types of deals. China and Brazil have true private equity companies. It is harder for companies to go public and therefore, we get a much better valuations coming to a private company. In India, that's not the case. The pool of high quality private companies is limited. There is high proportion of infra funding in India. In all major markets, the state tends to fund infrastructure. In India, it's been done largely with private capital. In China, banks have provided lower cost finances. This heavier component of infra in India is qualitative to other emerging markets. In China, in particular, there is a better penetration of private equity into internal investment. In India, companies are concentrated on five to 10 cities. Once you go into Lucknow or Kanpur there are no big companies. You are still mining the private equity potential in the top cities. But in China, the growth has percolated down to 30-40 cities. Much like in the US, a FedEx came out of Mepmhis, Tennesee. But, in India, seldom does a big company go to a small city and even if it did, it would move to a large city for its infrastructure needs. The Munjals and Mittals moved from Ludhiana to Delhi, because being in Ludhiana you won't get business, you won't find talent, you don't have connectivity or the

Another big difference is that in China you have a better developed venture market.

One is that the internet took off much earlier.

At least now in India, you have some semblence of a venture market.

ecosystems required. This is the big difference. Private equity doesn't percolate into inner parts of India as in other places.

Another big difference is that in China you have a better developed venture market. One is that the internet took off much earlier. At least now in India, you have some semblence of a venture market. But, in China there has been more investment in research and development (R&D). China has 20 times more Ph.Ds than India, so true innovation is happening there.

That's not the case in India and Brazil and these are the major differences.

In the developed world, the biggest difference is that they are buy-out markets and there is also the growth capital market. India over time will start to see more buy-outs. Eventually people will have to rationalise, particularly if banks start to become more active. The only way is to sell as there is no need to be in five to ten businesses. Smaller businessmen are running two to three businesses which make no sense. Business groups also need to understand that they will be much better off, with one or two businesses.

Sometimes you are in a bold position, like the Tata's and the Mahindra's, but then one has seen the mess these big groups are in, for entering into different business. So also, in telecom as Reliance and Tata's have. It doesn't get the same focus as Bharti or Vodafone have. As in life, you can't be good at 10 different things. As you get into a more competitive market, that is one big trend that will get ahead.

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A financing market doesn't exist here and that will take time; so also will a corporate bound market, it would take at least five to seven years, could be by the end of this decade. Until then, it would remain the same in India, with more rational behaviour and more involvement with the company, with greater premium on governance. In the “golden age” there was money in construction companies and every other company. As a result, in the next period people didn't distinguish.

Now, people know the difference. If you are a Pharma or an IT company, you are in for a treat. But, if you are an infrastructure company, forget about discount, PE investors may not even touch you.

Success and mistakes Personally, over the years, the biggest lesson for me was to always think of myself as an investor. Not to think of being a business person but always think of providing advice, focus on generating returns as opposed to looking at security. Second, I learnt that being nimble was essential as the market always changes and one has to adjust to that. Third, was to be pro-active upfront, to know all the companies in advance and create deep sector knowledge which was important for success. In India, that's how you separate someone with a shallow story with that of someone whom you may have tracked for three years.

Fourth, the need to have a sharp exit focus. People opt for the investments and fall in love with them. There is need to be disciplined and exit as planned and return the money to investors. The last factor is the need to have stability, because in this industry there is often a

lot of churn.

Often when things work out, one imagines old tricks can still be employed, but that's not true. For instance, you think one can make an investment in construction.

But since the timing is wrong and everything is going through a tough phase, the “trick” doesn't work. That's lesson one.

Lesson two, there's a need to focus on better governance. We always want better governance, and we believe that things are improving, but that may not happen. It's important to keep the bar high in terms of a quality company. It was done early on in the company, but a bit of that was lost because things were so good in between. That was a failure in the last few years.

Thirdly, being able to go out and find more proprietary needs. It's tough since the market is more mediated, everything comes through a banker, it's hard work. But it's something to push for.

An entrepreneur's checklist In India, we have a very vibrant eco-system. It is therefore important that entrepreneurs should stay focused. Second, they should be careful about balance sheets not just P&L, and focus on cash flows. Raise money in advance, don't lever up too much, and focus on solid free cash. Thirdly, they should get more professionals. Companies pay lip service, but don't do it well. There should be a deep commitment to good governance. The last few years have not been good because people access the money one way or the other.

Those rules of the game have changed. So if they now don't truly dont professionalise and don't improve governance, investors will just stay away.

In India, we have a very vibrant eco-system.

It is therefore important that entrepreneurs should stay focused. Second, they should be careful about balance sheets not just P&L and focus on cash flows. Raise money in advance, don't lever up too much, and focus on solid free cash.

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Financial Reporting: What India Should Do

By Dolphy D'Souza Partner and National Leader, Member Firm of Ernst & Young Global

Executive Overview Accounting dates back to more than 7000 years, but continues to be a dynamic process to align with an environment and society that is in a constant state of flux. Unlike IFRS and US GAAP which are global standards and well developed to suit capital market requirements, Indian accounting standards were initially developed primarily to meet the financial information requirements of the tax authorities. However, post the liberalisation era, several new Indian standards were issued to meet capital market requirements. Nonetheless, on quality they substantially fall short of global standards, with no appropriate standards on financial instruments and business combinations. How should India be re-casting its financial reporting standards?

A

financial statement is the communication of financial information of a reporting entity to a wide variety of users. These are prepared in accordance with a set of principles or rules generally referred to as Generally Accepted Accounting Principles (GAAP). Accounting dates back to more than 7000 years, but continues to be a dynamic process to align with an environment and society that is in a constant state of flux. Over time different nations based on their own needs developed their own accounting standards; though globally, the two most prominent GAAP are US GAAP and International Financial Reporting Standards (IFRS).

Global developments in financial reporting IFRS was earlier known as International Accounting Standards (IAS). In June 1973, the International Accounting Standards Committee (IASC) came into existence, with the stated intent that the new international standards it released must be capable of rapid acceptance and implementation world-wide. Though a series of standards were issued by the IASC since 1973, it is only since 2000 that IAS became truly global

standards, largely as a result of bold action by the European Commission of making them mandatory in the EU. This requirement has changed fundamentally not only the face of European financial reporting, but global reporting as well. Since 2001, almost 120 countries have required or permitted the use of IFRSs. All remaining major economies including US, Japan and India have indicated their desire to converge with or adopt IFRS in the near future. Currently IFRS is the most dominant GAAP on a global basis, far greater than US GAAP. Indian Accounting Standards Unlike IFRS and US GAAP which are global standards and well developed to suit capital market requirements, Indian accounting standards were initially developed primarily to meet the financial information requirements of the tax authorities. However, post the liberalisation era, several new Indian standards were issued to meet capital market requirements.

Nonetheless, on quality they substantially fall short of global standards, with no appropriate standards on financial instruments and business combinations.

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A company takes a US $ loan from a bank which is repaid in thirty six equal installments in the next three years. The company does not stand exposed to exchange rate volatility as the loan

its nominee, and the other party can do this by buying one additional share, but with no change in the joint sharing of the control. Therefore though the arrangement effectively is unchanged; a small structuring can provide a vastly different accounting result. This is not possible under IFRS.

installments will be paid out of highly

Bad standards also prevent good accounting

probable and matching future $ revenues.

A company takes a US $ loan from a bank which is repaid in thirty six equal installments in the next three years. The company does not stand exposed to exchange rate volatility as the loan installments will be paid out of highly probable and matching future $ revenues. Typically the hedging standard would allow the company to use hedge accounting for natural hedges and thereby avoid volatility in the income statement because of exchange rate swings.

Unfortunately under Indian GAAP, hedge accounting is not permitted when they contradict a standard that is notified under the Companies Act. Under Indian GAAP such exchange gains and losses are recognised in the income statement creating an unnecessary volatility in the income statement, though the company has a 100 per cent natural hedge. Under IFRS it would be possible to apply hedge accounting.

Indian standards are a hotchpotch of pronouncements issued by various agencies. The main agency is the Accounting Standards Board (ASB) of the Institute of Chartered Accountant of India (ICAI). The ASB was established by ICAI in the year 1977. In addition to the standards issued by the ASB, ICAI also issues numerous clarifications, guidance notes, technical guides, frequently asked questions, etc to assist preparers in areas where accounting standards are not yet issued.

Besides the ASB, other standard setters are the SEBI, RBI, IRDA, MCA, NACAS, GASAB, etc. In addition, numerous accounting requirements are contained in various legislations. A case in point is Schedule VI under the Companies Act that sets out the requirement with respect to presentation of financial statements and disclosures. The courts in India have been given powers under the Companies Act of India to approve accounting requirements in the case of amalgamation and restructuring.

Does Indian GAAP fulfill investor’s expectations of providing reliable financial information? The short answer is No. Consider the following.

Bad standards result in bad accounting Consider an arrangement where there is an agreement between two parties to jointly share control. The board of directors has equal representation of directors from both parties. Both parties own 50 per cent shares each.

Under Indian GAAP, joint control would result in proportionate consolidation. However, it is possible for both parties to achieve full consolidation. One party can do this by adding one more director on the board as

Too many cooks spoil the broth Consider this - a listed parent entity grants stock option to the employees of its subsidiary. Accounting for stock options is covered under both SEBI’s Guidelines and ICAI’s Guidance Note.

ICAI’s guidance note requires the subsidiary company to recognize expense on share based options irrespective of whether the subsidiary has any settlement obligation towards the parent. As per SEBI guidelines applicable to listed entities, the parent records the compensation cost.

These conflicting requirements create confusion and provide arbitrage to entities, and results in inconsistent application of the principles. Under IFRS there are no such inconsistencies and the subsidiary would recognize the stock option expense.

A duck will quack even if you call it a cat Yes, a duck is a duck. Consider this. Many loans with a defined term and a guaranteed interest rate are struc64

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tured as preference capital issued under the Companies Act, so that they are classified as share capital under Indian GAAP. This vitiates the true debt equity ratio of the company. Further the interest payments are treated as dividends to be appropriated from the P&L account rather than a charge to the P&L account. This is possible because Indian GAAP takes a view that when preparing financial statement, the Companies Act requirements will override accounting requirements. The author believes that accounting should reflect the substance of a transaction. This should not be seen as overriding legislation, which has been drafted for a different purpose and objective.

Under IFRS, the substance of the transaction would be clearly reflected. Remember the world is changing rapidly Though the world has changed and is changing rapidly Indian GAAP remains in the mediaeval ages. Consider this. Though financial instruments are rampant, the accounting standards relating to financial instruments are not yet notified in the Indian Companies Act. As a result there has been a lot of confusion, inconsistency and misuse of accounting principles. Under Indian GAAP, a company can structure a loan received from a bank on the pledge of the shares of its subsidiary as a sale of shares with right to buy back the same in the future at an agreed price. Typically this is a financing transaction, but under Indian GAAP one could recognize the sale of the investment and recognize the buy back of the investment in the future. This practice could lead to recognising profit on sale of the investments, not recognising the loan and the corresponding interest expense on the books and obtaining deconsolidation and consolidation at convenience.

Such practices are impossible under IFRS.

Yes, a duck is a duck. Consider this. Many loans with a defined term and a guaranteed interest rate are structured as preference capital issued under the Companies Act, so that they are classified as share capital under Indian GAAP.

The tax authorities are not concerned with the fair values, as they would typically tax rentals or realised capital gains. Standard setters should draft standards for capital providers. Drafting standards that will meet requirements of both capital providers and tax authorities is like fitting a square peg in a round hole. Tax authorities should draft separate accounting standards for taxation purposes that will meet their fiscal objectives. Unlike Indian GAAP, IFRS’s are developed keeping only the investor and other capital providers in mind. Since IFRS has a clear focus and objective, the standards are more clear and consistent.

Advantages of implementing IFRS in India High quality and robust standards

Fitting a square peg in a round hole

IFRS will provide a high quality and robust set of standards for preparation of financial statements, which can be relied upon by investors and other users of financial statements. Though IFRS themselves would need improvement, they are undoubtedly far more reliable than the present Indian accounting framework. IFRS’s are developed using a very rigorous process, and involves a Board comprising of esteemed representatives from across the globe. Free Capital Flow

Financial statements have many users but the real objective of any general purpose framework is to provide investors and capital providers with decision useful information. An investor in an investment property company wants to know the fair value of the investment property portfolio, for decision making.

Imagine a Japanese, American, Chinese and Indian in a room, all of them speaking in their own mother tongue.

They can go on and on, but nothing will be achieved.

Needless to say they need to speak in one language. It cannot be any different for business or accounting as well! Accounting differences can completely obscure

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comparisons. In 1993, under German GAAP DaimlerBenz reported a profit of 168 million Deutsche Marks but under US GAAP for the same period, the company reported a loss of almost a billion deutsche marks.

Such type of differences confuses investors. With companies seeking capital at the lowest cost anywhere in the world, and investors seeking opportunities all over the world, there has to be a uniform set of standards to facilitate comparison.

prepared under various GAAPs. The amount of time and effort that is spent in generating multiple financial reports under different GAAP is a colossal waste, and the accounting confusion that results from dozen of GAAPs is a disservice to all users of financial statements. A single accounting language will eliminate the need for multiple financial reports.

Extensible Business Reporting Language (XBRL)

the Indian economy by allowing more

XBRL is a computer language that is used to report aggregated data such as financial statements on the internet. It allows tremendous flexibility in terms of drill-down, analysis and comparison. It has a generic standard that can interpret user defined data tags and works on established taxonomies.

The primary benefit of XBRL is real time reporting. When more companies begin to use XBRL to report their financials, it will give accountants, financial analysts, and investors a valuable tool. These groups of people will have distinct advantages with XBRL reporting over traditional methods. Accountants will be able to audit their clients on a real time basis. Financial analysts will have the ability to compare companies and evaluate them with greater ease. Investors will be able to look at their company’s current statements from the comfort of their own home computer without having to wait for the year end statements, often days after the reported period has ended. They will also have the ability to “drill-down� for more detailed information if they are not satisfied with the aggregated data. The IASB a founding member of XBRL has developed a taxonomy for IFRS. A single accounting language with a single reporting format all across the world will provide a unique and significant advantage to all participants. It may be noted that India has already adopted XBRL reporting for the purposes of filing financial statements with the MCA.

Indian companies to tap international

KPOs and BPOs

IFRS could have a huge positive impact on the Indian economy by allowing more Indian companies to tap international capital markets. Indian companies have to incur a risk premium on foreign capital since their financial statements are not in accordance with a standard that could be comprehended by an international investor. Such risk premium would reduce if IFRS is adopted, and this would significantly reduce cost of raising foreign capital. China has been receiving foreign capital very successfully for more than two decades now. To ensure that it continues to do so, it has adopted IFRS. India should adopt IFRS as soon as possible, so that it can raise its level of inbound and outbound investments and capital flow. This would further fuel the growth in Indian economy.

Escape from Multiple Reports Imagine an Indian subsidiary (listed in India) of a listed UK company that is also listed on the US market. The Indian subsidiary has to prepare its accounts, under IFRS, US GAAP and Indian GAAP. Besides if tax year is different then tax accounts would also have to be prepared separately. Further, quarterly accounts are

IFRS could have a huge positive impact on

capital markets. Indian companies have to incur a risk premium on foreign capital since their financial statements are not in accordance with a standard that could be comprehended by an international investor.

There is already a huge potential for KPO and BPO services in the accountancy and financial services sector. This vast potential has remained largely untapped with regards to IFRS outsourcing, partly

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There are numerous differences between Ind-AS and IFRS, but the key differences are with regards to accounting of real estate sales, foreign exchange losses, agriculture accounting, investment property, first-time adoption requirements and financial instruments.

because there are resource constraints, and partly because the available resources are not IFRS literate.

All that can change significantly if we accept IFRS and initiate a massive programme to attract more students into the accountancy profession and incorporate IFRS in the curriculum.

The Global Indian Accountant IFRS expertise would create an extra-ordinarily good market for Indian accountants on a global scale. To the Indian accountant, embracing IFRS provides an unique opportunity to become a premier and much sought after professional globally. Indian accountants would be trotting the globe like never before. A strong grounding in an universal framework, such as IFRS, would make them invaluable.

Status of IFRS implementation in India As the world was marching towards implementing IFRS, there was immense pressure on India from various stakeholders to implement IFRS in India. It was widely believed that India would implement IFRS from 1 April, 2011. Though eventually the Ministry of Corporate Affairs notified 35 Indian IFRS standards (Ind-AS) in the Companies Act, it did not announce the implementation date; thereby postponing it indefinitely.

Ind-AS – Are they IFRS? Ind-AS’s are a substantially diluted version of the global IFRS standards. IFRS and Ind-AS differences are caused not only because the standards are diluted

but also because of practice and regulatory environment in India.

There are numerous differences between Ind-AS and IFRS, but the key differences are with regards to accounting of real estate sales, foreign exchange losses, agriculture accounting, investment property, first-time adoption requirements and financial instruments.

Under IFRS real estate sales are accounted using the completed contract method, whereas Ind-AS would require them to be accounted under the percentage of completion method. Foreign exchange losses on long term loans are fully recognized in income statement under IFRS, however, under Ind-AS the losses could be spread over several years on an amortized basis. For investment property accounting under IFRS is done using either the cost model or the fair value model.

Ind-AS does not allow any option and mandates the use of cost model. The first time adoption standard in Ind-AS makes applicability of most critical requirements of IFRS such as leases embedded in service contracts on a prospective basis rather than on a retrospective basis.

In addition, practice related differences are likely to emerge between IFRS and Ind-AS. For example, globally under IFRS, rate regulated assets are not recognized as they do not fulfill the definition of an asset under the IFRS framework. Under current Indian GAAP practice is to recognise rate regulated adjustments as assets. It is most likely that this practice under Indian GAAP may be carried forward under Ind-AS. Another example is that of agricultural accounting.

Under IFRS biological assets are fair valued under IAS 41. However, Ind-AS does not contain any standard on agricultural accounting and consequently the practice of measuring biological assets at cost under Indian GAAP most likely would be carried forward under Ind-AS. Finally regulatory hurdles may also widen the gap between Ind-AS and IFRS. The depreciation rates under Schedule XIV of the Companies Act may defacto become the norm though those may not reflect the useful life of an asset for a company and hence may not

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comply with IFRS. Interpretations and opinions issued by the Expert Advisory Committee of the Institute of Chartered Accountants of India, may at times, not reflect global practice. The Companies Act needs to be amended to disable certain sections which are not aligned to IFRS accounting, for example, section 391 and 394 permit departure from accounting standards in an amalgamation or restructuring exercise. Even if these sections are amended, those can only have a prospective effect. Therefore it is not clear what happens to the accounting prescribed in the court sanctioned schemes prior to amendment of section 391 and 394 which may be in conflict with IFRS. Financial Reporting – What India should do For the long-term health of the capital markets and their sustainability, financial reporting has to be relevant to the needs of the user. There are many groups such as preparers, suppliers, customers, competitors, employees, government and regulators who depend on the information given in the financial statements. However, few are as dependant on financial statements as the investor community is. Financial information is absolutely vital to the investor and it underpins critical decisions on buy or sell. A healthy economy and vibrant capital market demands that we understand the needs of the investor community.

Ernst & Young did a very interesting survey in early 2011, by addressing the question of whether Ind-AS should and to what extent be consistent with global IFRS. The survey comprised 10 questions, and covered a few key areas of difference between IFRS and Ind-AS.

The findings of the survey offer reliable insight — they clearly tell us that investors demand a common accounting framework across borders. Hopefully, the clear mandate in favour of global IFRS will be considered by standard setters and regulators as the reporting model in India.

The participants were investor community (AMC’s, PE funds, analysts, credit rating agencies, credit appraisers, etc) in the Indian market, and many of those were also of Indian origin. The key finding is a growing recognition in the investor community that the reporting model in India should be much more closely aligned to IFRS than they currently are under Ind-AS. Out of the survey participants 28 per cent are in favor of full adoption of IASB IFRS and 55 per cent participants are willing to accept only a few departures from the IASB IFRS in exceptional circumstances. In broad terms, this means that 83 per cent of the respondents were in favor of global IFRSs or as near thereto as possible.

The findings of the survey offer reliable insight — they clearly tell us that investors demand a common accounting framework across borders. Hopefully, the clear mandate in favor of global IFRS will be considered by standard setters and regulators as the reporting model in India. One of the reasons for postponing the implementation of Ind-AS was that it was driven towards meeting the requirements of the investors and were not suitable to determine taxable profits. For example, investors in an investment property company would like to judge the company based on fair value of the investment property. Considering this, IFRS allows companies an option to account for the investment property at fair value, with the changes in fair value being recognized in the P&L. However, incometax authorities seek to tax companies based on the rent earned or capital gains on sale of property, rather than changes in fair value. Thus a strong need was felt to separate accounting standards used for statutory reporting purposes and those that would be used to determine taxable income. With the pressure to implement Ind-AS building up, a committee of experts from the government and professionals was constituted by the CBDT in 2010 to draft tax accounting standards (TAS) that could be notified under section 145(2). Media reports now confirm that the committee has completed its work and a slew of TAS will be soon exposed for public comments. Final standards would be issued after due process. Though the date of application of TAS is not known yet, it is believed that they will 68

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apply in the near term. India had made a commitment at the G-20 summit as well as to other institutions such as the European Union that it would converge to IFRS. However given that Ind-AS are far removed from IFRS, it is questionable if we have really converged to IFRS and fulfilled our commitments. Worse still Ind-AS’s were notified almost two years ago. Since then IFRS has moved on significantly, but the notified Ind-AS’s have not been changed; thereby further increasing the differences between global IFRSs and notified IndAS’s.

raise capital locally and globally. It’s key to providing energy, food, water, education, employment, health and alleviating poverty. Having a variety of accounting standards across the world creates confusion, encourages errors and facilitates frauds. Having a single set of high standards, like IFRS, creates clarity, enhances confidence in financial statements and results in reduced costs of capital.

(Views expressed are personal)

The convergence model is relevant when a country makes only one or two departures from IFRS, due to technical reasons or national interest, acceptable only in the rarest of rare situations. However, in the given instance the differences between global IFRS and IndAS are so numerous that people are questioning the need to change from existing Indian GAAP to another form of Indian GAAP. Is the change and hard work justifiable, if Indian entities are unable to proclaim that their financial statements are IFRS compliant and use them for cross border fund raising or other purposes?

One of the main hurdle in implementing IFRS’s in India was the finalization of tax accounting standards. With that issue almost resolved, the standard setters should now focus on updating the notified Ind-AS’s and bringing them in line with global IFRS, preferably with no differences.

The role of robust accounting standards should not be underestimated, in creating a climate of trust for investment. Only when nations create trust; they can

The convergence model is relevant when a country makes only one or two departures from IFRS, due to technical reasons or national interest, acceptable only in the rarest of rare situations. However, in the given instance, the differences between global IFRS and Ind-AS are so numerous that people are questioning the need to change from existing Indian GAAP to another form of Indian GAAP.

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A New Prescription for Healthcare Delivery

By J. Jacob, Chief People Officer, Apollo Hospitals Enterprise

Executive Overview In the last decade, there has also been a tremendous change in the healthcare landscape from government-run hospitals to private hospitals and now corporate super-specialty hospitals. Investments in the healthcare sector have also risen substanially in recent years. How are these impacting the nature and scope of healthcare delivery in the country? Crucially, what are the growing people challenges in this sector?

In the last decade, private participation in the healthcare sector has risen significantly on the back of increased interest by investors and growing private equity and mergers and acquisitions (M&A) activity.

Further, the sector has also evolved through increased investment in research and development (R&D) and the introduction of specialised delivery models. In the last few decades, there has also been a tremendous change in the healthcare landscape from governmentrun hospitals to private hospitals and now corporate super-specialty hospitals. Some of the major changes in the healthcare sector are enumerated below: Investment trends Driven by increased domestic demand for high-end investment services as well as medical tourism, the healthcare sector has attracted huge investment lately.

The healthcare sector is likely to see an increase in investment from $ 34.2 bn in 2006 to $ 78 bn in 2012 (CAGR of 15 percent) with 80 per cent of investments coming from private players. The investments of this scale are expected to increase the bed ratio from 0.9 beds per 1000 people to 1.85 beds per 1000 people.

healthcare� players in the Indian market. However, this scenario is expected to change given t h e a t t r a ctiveness of the sector. Many foreign players are making forays into the market through joint ventures with local healthcare units. F o r e x a m p l e , Singapore's Pacific Healtcare made its foray into the Indian market, opening an international medical centre, which is a joint venture with Vitae Healthcare, in Hyderabad. Singapore-based Parkway Group Healthcare PTE Ltd had also entered the Indian healthcare market in 2003 through a joint venture with the Apollo Group to build the Apollo Gleneagles Hospital. Many international diagnostic care players entered India and others including medical education players are looking keenly at sectoral entry points.

M&A deals Pharma, biotech and healthcare sectors have seen significant traction over the last four years with deal values ranging from $ 1.5 billion in 2007 to $ 6.2 billion in 2010. Healthcare services accounted for 14 percent of the total M&A deal value in 2009.

Foreign Direct Investment (FDI) The FDI inflows in the hospital sector have not been significantly high despite government incentives to attract FDI investments (including 100 percent F D I in most health-related services). There are currently a limited number of “100 percent foreign-owned 70

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Private equity investment There has been an increase in the PE and VC activity (both domestic and global) over the past couple of years. These investments have been made across the healthcare delivery chain.

Developments in research Healthcare research is a core focus within the healthcare sector. In the Union budget 2010/11, the expenditure budget of the Ministry of Health and Family Welfare for health research increased by 25 percent Y-o-Y corresponding to $ 110 million in absolute terms.

Moreover, rising R&D cost and declining R&D productivity have led to outsourcing as a key strategy for improving profitability for global innovation companies. This has been a key driver for the growth of Contract Research and Manufacturing Services in India.

Contract research in India Contract Research is a fast emerging business opportunity for Indian companies, particularly for mid-sized companies.

The players in the Indian CRO market in the year 2005 were 20 and increased to 100 in the year 2008. These are expected to be in the range of 150-200 in the year 2012.

Hospital chains are venturing into contract research to reduce their operational and clinical costs. Fortis Healthcare is among the latest entrants in contract research with its Fortis Clinical Research Services.

Apollo Hospitals' site management organisation Apollo Spectra Research Foundation has been managing clinical trials for some years now and Max Group has a contract research organisation called Neeman Medical International.

New Delivery Models Day Care Centres: The concept of Out-Patient surgeries is growing worldwide as in-patient facilities can be expensive and inconvenient in some cases. A large number of surgeries can now be performed without the

patient having to be admitted at all with the help of Daycare Surgery Centres. This delivery model is advantageous for both the healthcare providers and consumers. It is estimated that by 2020, 75 percent of all surgical operations will be carried out in ambulatory surgery centres.

In India, the concept of stand-alone daycare surgery centres is currently in its infancy. Many of the major hospitals have a separate daycare surgery centre which caters to the management of ambulatory (also commonly referred to as “same day surgery�) procedures in India and about 20 percent of all surgical procedures are performed on outpatients.

Studies reveal that treatment in these centres would cost about 47 per cent less than in hospitals.

End-of-Life Care Centres : In medicine, end-of-life care refers to medical care not only of patients in the final hours or days of their lives, but more broadly, medical care of all those with a terminal illness or terminal condition that has become advanced, progressive and incurable. Therefore end-of-life care centres have three objectives: !

To reduce the agony and burden of prolonged dying

process !

To develop mental peace at the time of death !

To establish ethical principles supporting death in the

Indian hospitals.

In India, over 138 organisations provide hospice and palliative care services in 16 states or union territories.

These services are usually concentrated in large cities and regional cancer centres, with the exception of Kerala, where services are more widespread.

Single-Speciality Hospitals: Single-speciality hospitals are a small but rapidly growing genre among today's hospitals in India. The growing number of specialty centres and hospitals signals a move towards maturity of the healthcare industry with an increasing complexity of business and consumer affordability.

Speciality hospital formats range from low-risk speciality including eye care, dermatology, mother and 71

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child to high-end speciality including cardiology, cancer and transplant medicine.

Wellness Care: Hospitals are also setting up wellness centres to cater to the requirements of the medical tourists. 

Apollo Hospitals has an entity called Apollo Wellness Plus which has fitness and ayurvedic treatment centres.



Manipal Hospitals provides ayurvedic treatment, fitness solutions through Manipal Cure and Care.

Medical tourism Medical tourism is a growing sector in India. India's medical tourism sector is expected to experience an annual growth rate of 30 per cent, making it a $ 2 billion industry by 2015. As medical treatment costs in the developed world balloon - with the United States leading the way - more and more Westerners are finding the prospect of international travel for medical care increasingly appealing. An estimated 150,000 of these travel to India for low-priced healthcare procedures every year.

Advantages for medical tourists include reduced costs, the availability of latest medical technologies and a growing compliance on international quality standards, as well as the fact that foreigners are less likely to face a language barrier in India. The Indian government is taking steps to address infrastructure issues that hinder the country's growth in medical tourism.

Chennai is regarded as the hub of medical tourism in India.

Recruitment and retention of the right number of qualified staff is very high on the list.

Everyone knows that there is a big nursing shortfall, but there is a need for highly qualified individuals all around.

Most estimates claim treatment costs in India start at around a tenth of the price of comparable treatment in America or Britain. The most popular treatments sought in India by medical tourists are alternative medicine, bone-marrow transplant, cardiac bypass, eye surgery and hip replacement. India is known in particular for heart surgery, hip resurfacing and other areas of advanced medicine.

Telemedicine Telemedicine is an upcoming field in health science arising out of the effective fusion of Information and Communication Technologies (ICT) with Medical Science. This new area has an enormous potential in meeting the challenges of healthcare delivery to rural and remote areas besides several other applications in education, training and management in the health sector. It may be as simple as two health professionals discussing medical problems of a patient and seeking advice over a simple telephone to as complex as transmission of electronic medical records of clinical information, diagnostic tests such as E.C.G., radiological images etc. and carrying out real time interactive medical video conference with the help of IT-based hardware and software, video-conference using broadband telecommunication media provided by satellite and terrestrial network.

People challenges It's no secret in the healthcare industry that the work force is possibly the most expensive cost centre. But with the lack of professionals and a disconcerting future, the fears surrounding the healthcare labour force are extending beyond just costs.

Recruitment and retention of the right number of qualified staff is very high on the list. Everyone knows that there is a big nursing shortfall, but there is a need for highly qualified individuals all around. Due to the rapid growth of the healthcare sector and its sheer size, it is a challenge to fill jobs. And despite this need, there are obvious pressures for cost containment with people accounting for the lion's share of an organisation's costs.

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highly skilled programmers, clinicians and technicians.

The key HR processes, when it comes to the criticality of business would be the Performance Management system that helps in building the performance culture, the Employee Engagement process that propels the organisation forward, the Compensation philosophy and the Talent Management process.

3. High employee turnover. The industry has traditionally seen high turnover rates especially among Doctors and Nurses. Doctors are either poached by competition or become independent consultants. The biggest reason for nursing turnover is for better prospects abroad. Other major reasons for attrition in this category are Family Circumstances, Pursuing Higher Studies and Marriage.

Because of that, there is a pressure to make the human resources of the organisation world-class, or at least strive to be better. As a result, it has become imperative to employ better processes and technologies to overcome the challenges of talent management, workforce planning and scheduling, self-service applications and business intelligence.

4. The under-trained millennial generation. In addition to the lack of new talent entering the healthcare workforce, serious underlying issues exist when it comes to the country's educational system.

We're not doing enough to drive up the calibre of the people who are exiting the educational system and are coming into the workforce.

The key HR processes, when it comes to the criticality of business would be the Performance Management system that helps in building the performance culture, the Employee Engagement process that propels the organisation forward, the Compensation philosophy and the Talent Management process. The HR function is a critical enabler for transformation of the organisation. If I have to choose one critical process within HR that contributes the most to this transformation, it would be the Talent Management process which includes performance management, talent infusion, development and talent retention.

5. The impact of company culture on recruitment and retention. Healthcare organisations cannot expect to solve their recruitment conundrums without having a culture and environment where people can excel and want to stay. It is crucial to develop a synergy between an organisation's engagement and retention strategies and its recruitment strategies, since companies would want to recruit people who are going to be relatively self-motivated and independent: people who are going to view themselves as part of the business and not just as technical specialists, and then develop a leadership and management style that's going to allow those people to feel respected. This will add value to the organisation as a whole.

1. The retirement of the baby boomer generation and the lack of new talent. The healthcare industry is facing some huge challenges, not least of which is seeing a serious increase in the number of older people backing out of the workforce. Issues arise when organisations, in particular those in the healthcare realm, have skilled senior people as opposed to “generalists.�

2. The shortage of skilled health IT professionals. It is no surprise that a major trend in today's workforce is the lack of IT professionals. Most hospitals are suffering from a shortage of the very skilled talent and the

6. The younger generation's desire to have a broader say in the business. The newer generation doesn't view their positions purely as jobs. Instead, they want to feel they're part of the business, and therefore need to be encouraged to view themselves as part of a bigger team. They're not merely a programmer, an analyst or a clinician; they're part of a healthcare system, and that's one of the things that is going to differentiate between the organisations that are successful at attracting and keeping people versus those with a constant churn of people.

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7. Healthcare leadership. Healthcare is one of the industries which practices a relatively bureaucratic and traditional style of management. Healthcare isn't known for the quality of its management; healthcare is largely populated by experts in their fields, and that means they're not great at general management and leadership. Hence, leadership development in line with the latest approaches and trends are very critical for the growth of this sector.

Change in business model: Focus on Tier-II and TierII cities The Indian healthcare sector has matured to international standards and the continuous innovation in new methodology has brought in professionalism in this sector. The world has recognised the healthcare potential of India. The country now stands on the brink of being a lead player in the global economy. The biggest challenge of India is to make healthcare available to a billion people.

The striking feature is that it has the potential to grow at a much faster rate in the foreseeable future and shall present new 'sectors of opportunity' within healthcare, which shall emerge as growth drivers.

The healthcare industry is being transformed radically as it tries to cater to the Indian middle class who, with its rising affluence is now willing to pay for quality healthcare. Certain new trends are clearly discernible like the emergence of a network of high quality corporate hospitals as the private sector becomes more involved in owning and running hospitals, use of new and innovative technology in treatment and reliance on advanced equipment and the increased availability of private health insurance.

In India, healthcare has emerged as one of the largest service sectors with estimated revenues of around $ 30 billion constituting 5 per cent of GDP and offering employment to around 4 million people. Nearly 73 per cent of India's total population lives in rural areas where healthcare infrastructure is significantly low as compared to urban areas. Only 20 per cent of India's total healthcare infrastructure is in rural areas.

India's rural areas have community health centres and the primary health centres. To cope up with this intricacy, the government has started the system of the Village Health Guides who are responsible to train one person for safer health care of the village but with a small salary and corruption in the administrative system it wasn't a very attractive job.

Rural

742,490,639

72.2%

Urban

286,119,689

27.8%

Indian Population Rural Vs Urban Urban

Numbers

Tertiary Medical Colleges & Hospitals

117

ESI and PSU Hospitals

1200

Urban Health Posts

1500

Rural

Numbers

District and Taluk Hospitals

4400

Community Health Centres

2400

Primary Health Centres

23,000

Sub Centres

132,000

Public Healthcare Infrastructure Current Status of healthcare Out of pocket semi-urban and rural expenses higher than Urban Rural (per 1000 popn)

Urban (per 1000 popn)

Hospital Beds

0.2

3.0

Doctors

0.6

3.4

Public Expenditure

Rs. 80,000

Rs. 560,000

Out of pocket

Rs. 750,000

Rs. 1,150,000

IMR on live births

74

44 Births

Attended

33.5%

73.3%

Source: www.cehat.org

Investment needs of healthcare Healthcare in India will grow at 10.8 per cent annually to reach $ 190 billion. More than 70 per cent of India lives in Semi-Urban and Rural India constituting 300 million middle income families.

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Since the need for beds and skilled manpower is going forward, the following investments are required to build both tangible assets (beds) and intangible assets (manpower) • Increase of 50% in overall number of beds required • Increase of 150% in number of tertiary beds required • Increase in number of physicians to reach the ratio of 1 per’000 population • Increase in number of nurses and other healthcare manpower Tier II Cities: Emerging Metros of Tomorrow “Indian healthcare owes its facelift to changing consumer expectations.”

The growth in affluence of the over 300 million strong middle income consumers is creating demand for higher standards of healthcare. It has been observed that multi-specialty private hospitals are preferred even if the consumers bear this expense personally.

Hospital czars are now pouring in heavy investments into tier-II cities due to the skyrocketing growth there.

Tier II city is soon going to be regarded as fast flourishing metro. Moreover Delhi, Mumbai, and Chennai have given way to the new contestants in the race.

Industries have realized that there is a life beyond the mega and metropolitan cities in India and those tier-II cities are the latest investor's paradise.

Growth and new destinations reveals that besides eight metros, cities such as Surat, Chandigarh, Nagpur, Vadodara, Visakhapatnam and Jaipur are experiencing the initial phase of rapid economic growth. The major industrial sectors are expected to make huge Growth and new destinations reveals that besides eight metros, cities such as Surat, Chandigarh,

N a g p u r,

Vadodara,

Visakhapatnam and Jaipur are experiencing the initial phase of rapid economic growth. The major industrial sectors are expected to make huge investments in these cities, making them hotbeds for growth and development.

Source: CII-Mckinsey Report

investments in these cities, making them hotbeds for growth and development. Similarly hospital sectors have now diverted their focus from metropolitan cities to tier-II cities like Pune, Chandigarh, Indore, Ahmedabad, Kochi, Secunderabad, Jaipur, Rajkot, Surat, Nagpur, Vadodara, Visakhapatnam, Thiruvananthapuram, Nashik, Madurai, Tiruchirapalli, Tiruppur and Ludhiana in the search for greener pastures. All this states that tier-II cities are now playing an instrumental role in taking healthcare to the next level. These towns have a huge sea of opportunities in store for healthcare both from the demand and supply side. They are termed as the "emerging metros of tomorrow". It is predicted that with the boom in the Indian economy, tier-II cities have a major share in the growth pie.

Few of the people challenges as a result of this change in business model are given below: • It is a challenge to get Doctors, Nurses and Paramedics for tier-II and III cities. The lack of educational institutions in these cities for corporate intake further exacerbates the situation.

• Nursing staff don’t prefer to work in tier-II and III cities due to lower salaries and opportunities as compared to metros. They manage to save more money in metros since their accommodation & transport is taken care of by the employer and food is subsidized.

• Some of these rural hospitals have lower occupancy and revenue which tends to impact the increments and incentives given to employees in these hospitals.

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• Even the quality of non-clinical staff in the hospitals suffers since they are not exposed to modern corporate practices.

• Service levels in rural hospitals are generally low since the hospital staffs in these areas are not oriented to service excellence concepts.

Possible strategies to overcome the people challenges in tier-II and tier-III cities • Structured-On-boarding mechanisms can be used as a major strategy to align the new joiners in rural hospitals to the corporate culture, value systems, work practices and service excellence concepts. It can also become a crucial factor in attracting and retaining talent in these hospitals.

• Skill development centres in rural areas is a good way to harness the potential of local resources and build local capability.

• A relook at the compensation structures for staff at rural hospitals is the need of the hour. Doctors can be given a ‘Revenue Share’ which will not only attract more doctors to rural hospitals but can also increase the revenues of the hospitals.

• Providing continuous education programmes and a healthy work environment to employees will help in retention of staff in these regions.

• Defining a proper career path especially for the nonclinical staff is very essential. A robust Reward & Recognition is pertinent to improve motivation and increase productivity of associates in these regions.

While HR in a care-provider must evolve, it cannot lose credibility or performance in the traditional administrative processes that keep day-to-day operations running smoothly. The key is to optimise efficiency and effectiveness to allow a greater focus on Strategic and Change Partnership roles.

There are four key roles that every HR organisation fills to varying degrees: Administrative Expert; Relations Manager; Strategic Partner; and Change Partner. HR organisations often incorrectly try to drive efficiencies and cost savings by focusing solely on streamlining employee transactions and improving vendor relationships—the Administrative Expert and Relations Manager roles in the model.

HR transformation in healthcare The objectives of most of the HR initiatives within the healthcare sector are universal. These include reducing operating costs, improving HR service levels, leveraging HR outsourcing and alternative delivery capabilities, and integrating technology. While the objectives of typical HR initiatives are certainly relevant in today’s competitive landscape, HR’s true strategic opportunity lies in its ability to evolve from focusing primarily on tactical administrative transactions to investing in areas with greater impact.

There are four key roles that every HR organisation fills to varying degrees: Administrative Expert; Relations Manager; Strategic Partner; and Change Partner. HR organizations often incorrectly try to drive efficiencies and cost savings by focusing solely on streamlining employee transactions and improving vendor relationships—the Administrative Expert and Relations Manager roles in the model. The next generation of HR leadership should strive for operational efficiency and effectiveness, but it should shift significant time and attention to the upper half of the model—the Strategic Partner and Change Partner roles.

The centrepiece of the strategic/change partner roles is the development of a Human Capital Strategy and Plan that is directly aligned with the organizational strategy. A fundamental shift in the way HR operates is necessary—from Transactional Partner to Strategic/Change Partner. It is through collaboratively implementing the Human Capital Strategy/Plan that HR aligns its resources to help the organization realize its strategic objectives.

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This includes: • Anticipating workforce trends (i.e. aging population, succession planning, etc). • Leading change management initiatives. • Effectively filling talent needs through competency based recruiting and staff development (e.g., nurses, lab technicians, junior doctors, specialists).

While HR in a care-provider must evolve, it cannot lose credibility or performance in the

traditional administrative processes that keep day-today operations running smoothly. The key is to optimise efficiency and effectiveness to allow a greater focus on Strategic and Change Partnership roles. In many cases, this can be difficult to initiate because HR may not be participating in inter-departmental strategic meetings. To be at the table, HR must be able to present a solid value proposition to other departments demonstrating how it can help the department/agency better achieve its goals.

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