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Upgrading Indias energy and transportation networks

Upgrading Indias energy

and transportation
networks: An interview with a
leading infrastructure builder
The chairman of GMR discusses the problems of Indias infrastructure
and rural economy.

Gautam Kumra

Active in airports, roads, and power, Indias GMR , led by founder and
chairman G. M. Rao, is right in the middle of the countrys efforts to build

up a weak infrastructure. While Rao expects the economy to remain

vibrant, he worries that it cant be developed fast enough to support current
economic-growth rates. The chairman, whose roots are in the countryside, is also concerned that not enough has been done to strengthen the
rural economy, which above all needs education, roads, and jobs to give
villagers a chance to participate in the newfound prosperity.
GMR began almost 30 years ago as a single jute mill in the village of

Rajam, in the eastern state of Andhra Pradesh. Our journey to todays

GMR happened just accidentally, Rao says. Whatever opportunity
came up, we have taken that opportunity. Along the way, GMR has been
active in banking, insurance, and breweries but left these industries to
consolidate around infrastructure.
Along with minority partner Fraport, which manages the Frankfurt airport,
in Germany, GMR is leading the effort to modernize Delhis international airport. It is also building a new international airport in Hyderabad
and expanding the Sabiha Gken International Airport, in Istanbul.
In addition, it owns three power plants, with projects under way for several
others, and has completed 270 miles of highways.



The McKinsey Quarterly 2007 special edition: Building a better India

Meeting in the GMR headquarters, in Bangalore, Rao and Gautam Kumra,

a director in McKinseys Delhi office, discussed Indias economic prospects,
GMRs experience with publicprivate partnerships, and Raos passion for
best-practice management of family businesses.
The Quarterly: Can India sustain its recent economic-growth rates?
G. M. Rao: In India the whole system is set up for 5 to 6 percent annual
GDP growth. The sudden growth of more than 9 percent has surprised

everyone, and sustainability is a very big question now. I have doubts that
we can sustain this type of growth if two areasthe rural economy and
infrastructurearent taken up more seriously.
Ours is an agrarian country, and a lot of things have to happen in the rural
areas. In villages there is not much connectivity, proper infrastructure, or
educational facilities. Not even a scooter or a motorcycle can go on some of
the roads; forget the tractor or the jeep. There is not an adequate supply of
qualified teachers, and the infrastructure is not there. Many schools teach in
local languages, and thats not enough to move upward. Rural people need
English schools and vocational schools, and we have to start moving aggressively with publicprivate partnerships. People in the rural areas are therefore moving to the cities, which are already very crowded. Education is very,
very poor. The government must do better at addressing the rural economy.
Growth will also be difficult to maintain without large improvements in
infrastructure. The government is putting a lot of focus on that, but there
are still a lot of challenges. For instance, getting skilled labor is a very big
problem now for infrastructure projects. Because of this, most of the projects are being delayed. We should look at something like Singapores
Building and Construction Authority Academy, which was set up by the
government to ensure that theres a continuous supply of skilled labor
for all the projects. At GMR , were also thinking about setting up our own
training center, with courses of 90 days or six months.
The Quarterly: Has the government been effective in addressing

these problems?
G. M. Rao: The government has initiated several positive changes, and private players are also more and more interested in participating in infrastructure development. However, we need increased momentum to maintain
these high growth rates. For example, the demand for housing, cold storage,
and power outstrips supplyeven considering planned capacity additions.

There are also problems with disbursing funds and implementing these
improvement projects. The government is spending a lot of money to improve

Upgrading Indias energy and transportation networks

Vital statistics
Born July 14, 1950, in Rajam, Andhra Pradesh, India
Married with 3 children
Graduated in 1974 with degree in mechanical engineering from Andhra
University College of Engineering, Vishakapatnam, Andhra Pradesh
Received honorary doctorate in philosophy in 2005 from Jawaharlal Nehru
Technological University, Hyderabad, Andhra Pradesh
Career highlights
Founder and chairman (1978present)
ING Vysya Bank (formerly Vysya Bank)

Chairman emeritus (2006present)

Director and chairman (19942006)

Fast facts
Serves as chairman of board of Hyderabad International Airport

G. M. Rao

Established GMR Varalakshmi Foundation in 1991, which focuses on

education, health and hygiene, community development, and empowerment
of rural youth. In 1997 the foundation launched GMR Institute of
Technology (GMRIT), an engineering college in Rajam, Andhra Pradesh

roads, but, ultimately, a lot of that is not reaching the people, and this has
been happening for the past 60 years. Unless you change this, that allocated
money is not going to do much good.
Implementation is also a problem. The government is not organized for
this kind of growth or for speedy implementation of projects. It has to
strengthen the whole system. For example, the National Highways Authority [of India] has one system for the whole country, but it should be regionalized into four sectors: south, north, east, and west. They could each call for
their own tenders and monitor their own projects, while reporting to Delhi.
Under the current system, we have so far only completed about 10 percent
of the planned national road improvementsfor instance, widening roadways from two lanes to four.
The Quarterly: What can the government do to improve the rural economy?
G. M. Rao: The government should encourage manufacturers to set up

their factories in the villages. I read recently that a big multinational mobilephone maker designs its phones here in India but manufactures them in
China. This company makes millions of pieces a year, and about 2,000 people have jobs there. Why cant we have the manufacturing as well? One
reason is the Labour Act.1 We cannot expand the manufacturing industry
Under the Contract Labour (Regulation & Abolition) Act, 1970, any business with more than ten workers
faces strict regulations on hiring, firing, and working hours, among other aspects of employment.


The McKinsey Quarterly 2007 special edition: Building a better India


without the right to hire and fire. We have the capability to manufacture,
but we have to change our labor policy.
We also need to expand microfinancing further into rural areas. So many
people in villages fall into the debt trap. Their family land is subdivided
among brothers into plots too small to cultivate effectively. Then they go to
the moneylenders to get by. When they cant make payments, the moneylenders take away their land. Families that were once respected landowners
are now laborers, and they migrate to the cities.
The Quarterly: What is GMRs role in building India?
G. M. Rao: The government is targeting investment of more than $475 billion in infrastructure over the next five years, and I am sure that GMR

will contribute significantly to this nation-building program. Today we are

present in both agribusiness and infrastructure. We want to play a major
role in all three infrastructure sectors that were in todayenergy, highways,
and airports.
On the energy side, we generate 880 megawatts of power using liquid fuel.
But we also have coal and hydro projects under way. We are also looking to
enter transmission and distribution, and whenever nuclear opens up, we
want to move into it. On roads, today we have built 270 miles of roads, and
we want to go more aggressively into this sector. But as I said, there is a
problem getting skilled labor.
Our final core area is airportsnot just the buildings, but also the facilities.
At Hyderabad we want to bring in international best practices for cargo,
ground handling, and even the fuel farm 2 there. And today all Indian aircraft are going to other placesSingapore, Dubaifor maintenance and
major repairs, so were setting up a maintenance hub in Hyderabad as well.
In Delhi we want the airport to be like a city, an aerotropolis. Everything will be available around the airport: convention centers, residential
complexes, a hospital, and entertainment facilities.
The Quarterly: Is it realistic for the government to expect the private sector

to participate heavily in building the countrys infrastructure?

G. M. Rao: I dont think the government is asking too much. Today we

are involved in two publicprivate partnerships with the airports in Delhi

and Hyderabad, and our experience has been very positive. The public
side has the capabilitiesthe technical capabilitiesbut the speed is not

The fuel storage and distribution system at an airport.

Upgrading Indias energy and transportation networks

there. We are bringing the speed, as well as the best technology, the best
financial engineering, and the best talent in the world.
Take the Delhi [International] Airport as an example. Building that type
of airportfive million square feetwith high standards would take
a minimum of six or seven years anywhere in the world. But were helping
to expedite the project, and well build it within three-and-a-half years
by implementing global best practice. The government is giving us its full
support. Its helping to get us all the clearances that are needed, like
utilities, power, evacuating the land.
The Quarterly: What has made the partnership so successful?
G. M. Rao: You must be transparent and communicate with the government

properly about any issue that comes up. Im not facing any major problems
now. One has to regularly communicate. Every month we have meetings with
people from the Ministry of Civil Aviation, with the state government,
with the lieutenant governor, or with cabinet secretaries, and we discuss what
is happening on the project. But if what you say and what youre doing
are different, then the authorities in the government will become skeptical.
If youre honest and transparent, then youll get the clearances you need.
But the private side also has to do a little more than just communicate
clearly. One has to be perseverant to get things done. Once the officers or
bureaucrats are back in their offices, their time is not their own. They get
preoccupied with meetings with internal and external constituencies. Youll
no longer have their attention. Its up to you to keep things moving. I
might need A , B , or C , but once an official is back in the office and is distracted by meetings and appointments, it could take 5, 10, 15 daysa
monthto get what you need. So somebody has to follow up. You cannot
have a passive relationship; you have to be very actively engaged.
The Quarterly: In July GMR and two partners3 won the bid to build a

new terminal at Sabiha Gken International Airport, in Istanbul. What

made you expand abroad?
G. M. Rao: With Indias government and the Left opposing further privati-

zation of airports, it will take a lot of time before new opportunities come
up in India. We already had a good airport business-development team
and we had good skills. We had very little time to prepare for the opportunity
in Turkey, but we geared up and won the bid.

The consortium that won the bid consists of GMR (40 percent), Turkeys Limak Holding (40 percent), and
Malaysia Airports Holdings (20 percent). Malaysia Airports Holdings is also GMRs minority partner in the
Delhi and Hyderabad airport projects.


The McKinsey Quarterly 2007 special edition: Building a better India


We are open to other opportunities abroad in any of our sectors. Were

not going to go after all the tenders, though. We would prefer to be selective,
ensuring that we deliver what we promise.
The Quarterly: How have you been so successful in these highly competi-

tive tenders?
G. M. Rao: With the Delhi airport, it was really the opportunity of a life-

time. We worked for two years on the Delhi airport proposal, focusing
on the ultimate goal of winning the bid. We concentrated on improving
the financials, evaluating various options to combat the challenges. We
visited different airports, set up a separate business-development team in
Delhi, and examined all the parameters. We followed the same process
for Istanbul.
The Quarterly: What organizational changes have you made as GMR grew?
G. M. Rao: I started business all alone. Then in the course of time, some

friends joined me. It has been a long journey since those days, and weve
taken advantage of opportunities as they came along; for example, when the
government opened the power sector to private investments, we made
the strategic decision to enter energy. Starting from a single jute mill in 1978,
we now have more than 2,000 employees, a radically different focus, and
annual revenues of almost 2,000 crores.4
Two recent changes are worth noting. First, weve launched a detailed
performance-management system throughout the group and have introduced
variable pay linked to performance as part of the process. Until now weve
just had fixed compensation at all levels. Regular performance appraisals
with clear-cut goals and talent-pipeline management have been introduced
in a new human-resources-management system. This was very difficult to
initiate. People were treating the appraisals as rituals that they had to go
through. Then we included performance targets, and people started taking
them seriously.
Next, about two years ago we formalized our strategic-planning process.
And after identifying high-priority areas, we implemented a balancedscorecard system to keep track of our progress. These scorecards are deployed
down to the manager level and are reviewed at least twice a year.
The Quarterly: Can you tell us what youve done to ensure GMRs health

as a family-owned business?

Twenty billion rupees. Gross revenues in fiscal 2007, ended in March, were 19.7 billion rupees, or about
$480 million.

Upgrading Indias energy and transportation networks

G. M. Rao: When I was a director at Vysya Bank, one of my tasks was to

talk to people with nonperforming assets who were about to default. I saw
a lot of family businesses in trouble. I remember one well-respected family
with two brothers. The younger would never sit down before the older one
did, as a mark of true respect. Three years later the same brothers were
fighting in the streets with knives. Once family members start fighting, their
energy is diverted. They are no longer focused on the business, but on the
fight. That was a big lesson for me.
Later, I went to a conference on family businesses and heard M. V. Subbaiah,
of the Murugappa Group,5 speak. That was a real eye-opener for me. I
started attending international family business summits, and I brought in
top experts to look at my business. Then I called a meeting of my family
and, very reluctantly, all eight members came. We had a lot of differences,
and everyone was allowed to talk freely. We all started talking very animatedly, emotionallyarguing and what not. It took time to get everyone to
reach consensus. I put it all on video so that the next generation gets to
see how we executed it.
In the end we agreed to a family constitution model that outlines succession,
conflict resolution, our values, and our mission. It says what qualifications
are needed to enter the business, as well as our media and political policy. It
even talks about what happens in case of a divorce. All these things needed
to be addressed in detail to protect and delink the business from the family.
Today 65 percent of the top companies on the National Stock Exchange
[of India] are family-owned businesses. We need to think about their
governance. These companies are becoming so big that if the family gets
estranged, it could impact the national business environment.
The Quarterly: What would you like to see GMR become?
G. M. Rao: We want to be a good player in infrastructure and a great

institution. All of my family members share this idea. We want to be a valuedriven institution. That is the type of brand that we want to create. Ill
know weve reached this point when something happens in the business and
no one bothers me. Other people will take care of it, so I can go on a long
vacation and nothing happens.

Indias Murugappa is a fourth-generation family-owned conglomerate with interests in financial services,

steel, sugar, fertilizers, and other businesses.

Gautam Kumra is a director in McKinseys Delhi office.

Copyright 2007 McKinsey & Company.

All rights reserved.



The McKinsey Quarterly 2007 special edition: Building a better India