PRIVATE EQUITY

ADB Conference, September 30th, 2011

Private Investment In Indian Infrastructure

Prasad S. Gadkari

The views expressed in these presentations are the views of the author and do not necessarily reflect the views or policies of the Asian Development Bank (ADB), or its Board of Directors or the governments they represent. ADB does not guarantee the source, originality, accuracy, completeness or reliability of any statement, information, data, finding, interpretation, advice, opinion, or view presented, nor does it make any representation concerning the same.

Contents

Progress during the past decade Select sector experiences Concluding remarks Snapshot of IDFC PE

Past Decade

Progress during the decade

1990 National Highways ('000 lane kms) NA 2000 127* 2010 156 12,820 kms added from FY05-11 > 7x container handling capacity for private sector versus degrowth for public sector between 2002-2010 Pax growth 2x from FY05-09 Private sector airports share up 37x in same period > 4x capacity addition by private sector versus 1.3x for public sector

Coastal Ports - volume of freight handled (million tonnes)

163

334

819

Civil Aviation routes (aircraft million kms flown)

118

193

713**

Power installed capacity (GW)

*Refers to 2006, **Refers to 2009 Source: IDFC

64

98

159

Private investment in infrastructure

% of GDP

$16 bn* invested by financial investors (PE, infra funds, capital markets)
* Excl telecom

Source: Planning Commission, CSO

India has used a range of PPP models balancing efficient risk transfer, fiscal resource allocation and sector criticality

Works & Services Contracts

Management & Maintenance Contracts

Operation & Maintenance Concessions

Build Operate Transfer Concessions

Full Privatization

Asset ownership Commercial risk Typical duration

Public Public 1-2 years Roads EPC, Sewerage, Water

Public Public 3-5 years

Public Private 15-20 years

Public & Private Private 20-30 years

Private Private Indefinite

Sectors

Toll stations

Urban infra

Highways, Ports Telecom, Power Water

Low Extent of private sector engagement

High
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Select Sector Experiences

PPP in Roads - 1

60,000 km of National Highways National Highway Development Project (NHDP) worlds largest PPP based programme NHAIs process for national highway projects:
Toll based model for financially viable projects. Annuity structure for unviable projects NHDP provides Viability Gap Funding (VGF) of up to 40% on toll projects. Bidding criteria - minimum VGF Typical concession tenures are in the range of 20-30 yrs with 3 yrs construction Model Concession Agreement in place Toll rates and escalation basis specified Provides for hand over of 90% of land to developer prior to financial closure Provision for compensation in case of termination

PPP in Roads - 2

A leading builder and operator of National Highway projects in India

Equity financing at multiple levels with participation from investors with different risk profiles and return expectations
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PPP in Airports - 1

Airports owned & managed by Airports Authority of India

16 international airports, 80 domestic and 25 civil enclaves 200+ non operational/military airstrips

Top 6 cities contribute ~ 70% of the total passenger traffic PPP structure
Projects to be awarded for 30 yrs plus concession through competitive bidding Two stage bidding process First stage: Pre-qualify 5-6 bidders based on technical experience Second stage: Award project to bidder with highest revenue share Viability Gap Funding (VGF) mechanism also built-in through ADF / UDF in some airports

PPP in Airports - 2

GOI sought private partner to modernize a major infra asset of national importance, while retaining a degree of influence (but not control) In 2006, the airport awarded to a consortium of:
Airport Authority of India (26% stake) Private sector shareholders (74%)

Project Cost: ~ USD 2.5 bn Financed By:

Equity from promoters, strategic investors, financial investor Asset securitization INR Debt from Indian Banks ECBs

Combination of funding sources utilized to fund modernization of a premier airport in the country
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PPP in Ports - 1

India has about 12 major ports and 180 minor ports.under federal and state government National Maritime Development Programme (NMDP) Major Ports
Privatization largely witnessed in Container Terminals / Berths Projects awarded based on revenue share Tariffs set by independent regulator (TAMP) Provision for compensation in case of termination

Minor Ports
Witnessed setting up of greenfield ports (Gujarat, AP, Maharashtra) No tariff regulation States having some variations; but overall structure similar

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PPP in Ports - 2

Non-major Port on West Coast

Concession for 30 years Developed by Indian entrepreneur Subsequently sold to international operator Project Cost ~ USD 500 mn Equity investments from financial investors Project finance from Indian Banks IPO

Port project accessing capital through different sources along its life cycle
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Concluding Remarks

5 pillars for successful PPPs

Enabling Framework
Legislative, policy & administrative order Appropriate risk sharing through contracts Government support financial/nonfinancial, fiscal incentives Transparent regulatory (independent) environment

Sound Project Economics

Adequate revenues to meet costs (Capital/Operating/Financing) Adequate cover for debt Risk adjusted return for equity

Adequate Project preparation

Feasibility, DPR Clarity in project requirements Prescription Vs flexibility

Strong Sponsors
Ability to bring in own equity, provide comforts to lenders Ability to bring in third party equity Credit history Track record of project development and implementation

Breadth & Depth In Financial Markets

Banking system, project finance, PE funds Capital Markets
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Towards the 12th five year plan.

How do we provide steady flow of projects? Financing, not the biggest problem Few sector specific issues to focus on: Roads (timely) land availability, pending dispute resolution, NHAI staffing Power Discom health, fuel availability Airports no action after Delhi / Mumbai?? Urban infra commercial and contractual framework, ULB level reforms, next JNNURM Financial sector deepen availability of long term funding, allow domestic money to flow into PE funds, taxation

With concrete positive steps, strong interest among investors in infrastructure should definitely continue into the 12th five year plan
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IDFC Private Equity

IDFC Private Equity brief snapshot

Established in 2002, part of the IDFC Group

IDFC is itself a PPP. set up originally by Govt of India in 1997 to channelise private investments into infrastructure .now a financial conglomerate (B/S $11 bn)

IDFCs activities include project & corporate finance, funds management, investment banking, mutual fund, policy advisory and consulting

IDFC PE manages three private equity funds with corpus of USD 1.3 B Made 33 investments over last 8 years with 16 exits / liquidity events
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IDFC PEs participation in Indian infrastructure

3 airports 15 ships 2,500 trucks 200,000 students 4,962 hotel rooms 2,180 hospital beds 2 amusement parks 35 roads and bridges 11 ports and terminals 7,600 MW power plants 40,000 telecom towers 3 rail container licenses 3,100 km of gas pipelines 29 million sq ft of real estate ment 196 MW of renewable power assets
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Thank you

Annex

Equity Investors Evolution Over Last Decade

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