PLANES, TRAINS, AND TRUCKS
Infrastructure in India.
By Cesar Bacani

Sanjeev Sancheti, CFO of Chennai Container Terminal, should be sitting easy. Since his company, a unit of Dubai’s DP World, took over the management of privatized Chennai Port in 2001, the volume of cargo passing through the port has more than doubled.

That’s good news, of course. But Sancheti has a problem: his port boasts more than US$100m in state-of-the-art equipment, yet the government-maintained roads linking the terminal to the rest of India are narrow and congested. “Our facilities and operations are world-class,” he says. “But the roadside infrastructure is going to cause bottlenecks.” What good is a world-class port if cargo trucks cannot get to it?

Chennai Container’s dilemma is, on a small scale, what India’s vibrant businesses confront nationally. The country’s economy is beginning to rival China’s, but its antiquated infrastructure – roads, railways, airports, and power supply – threatens to choke growth. “Now that India is on a firm growth path of 7% to 8%-plus GDP growth, capacity needs to be added rapidly,” says Arvind Mahajan, national industry director, infrastructure and government, at the Indian unit of consultancy KPMG. “The investment-to-GDP ratio needs to increase to 40%-plus, from 26% to 29% currently.”

Can India pull it off? The coalition government of Prime Minister Manmohan Singh has doubled the target spending on infrastructure to US$320 bn from 2006 to 2012, and created the India Infrastructure Company Limited (IIFCL) to invest part of the country’s US$200 bn in foreign exchange reserves on infrastructure. In April, IIFCL signed a strategic agreement with UK private equity firm 3i. IIFCL has also partnered with Citigroup and Blackstone, a US private equity group, to raise US$5 bn, while the State Bank of India Mutual Fund has launched a dedicated infrastructure fund that aims to raise 18 bn rupees (US$444m) by June 18.

Adil Zainulbhai, managing director (India) of McKinsey, is optimistic. “Over the last few years, the government has tried to put in place model agreements for public-private partnerships or for privatization,” he says. “Where the policy has been put in place it has done very well, as you can see in telecommunications.” Still, the yawning gap between supply and demand means it will take years for infrastructure to catch up. “Currently India has 110,000 megavolts of installed capacity,” says Zainulbhai. “In the next five years, we will need to install another 75,000 to 100,000 megavolts to support economic growth of 9% a year. That’s a massive undertaking.”

Indeed, the real question may be whether new infrastructure can be built fast enough. “Will the government have the political will to move homes and shops that line the narrow roads so they can be expanded?” Sancheti wonders. The political perils were highlighted last year by the fury that greeted the award of 30-year concessions to Germany’s Fraport to run the international airport in New Delhi and homegrown GVK to manage the airport in Mumbai. In the end, though, both projects went ahead. “We don’t see opposition from unions and politicians derailing the overall process,” says Mahajan.

In the meantime, CFOs must be patient and resourceful. Big corporations like Tata Steel and Infosys Technologies have bought their own power generators, constructed their own hotels, and built their own jetties and private roads. But like the rest of the business community, they bear the cost of the country’s broader inefficiencies. Moving cargo in India, for example, is estimated to account for about 11% of landed costs, compared with the global average of 6%. Rail freight is three times more expensive compared with rates in China. India has come a long way, but it still has far to go.