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February 11, 2005

Finding the money to build India's infrastructure

Businessworld has a cover story on the challenges facing the building (and financing) of India's physical infrastructure:

"Year 2005 is the year of Indian infrastructure, and it is the private sector that will drive these efforts," says Sanjay Sinha, director, Crisil Infrastructure Advisory. "It is the government that needs to change its outlook and orientation, build capacity internally and create an environment conducive to private participation," he says.

Let us take a quick look at what this could mean. We have assumed earlier in this survey that India needs to spend about 7 per cent of its GDP to build world-class infrastructure. About 55 per cent of this is likely to come from the government. Foreign capital - including loans from multilateral banks like the World Bank and Asian Development Bank - will take care of another 15 per cent. That still leaves us with 30 per cent, or about 2.3 per cent of GDP.

Can the domestic banking system and capital market come up with this extra money without sending interest rates shooting skywards? That is the critical question...

... While debt is available, though in a limited way, seed capital or equity is practically non-existent. The IDFC-promoted Rs 1,000-crore India Development Fund (IDF) is minuscule compared to the needs of the sector. In fact, according to people in the know, the fund would be significantly committed to projects by March 2005. "The fund will be exhausted in barely 20 months because there is simply no competition in the area, and the needs of the sector far outstrip the supply of equity funding," says a source. There is talk of ICICI Bank and IL&FS launching an infrastructure fund in the near future.

Earlier in the year, the Asian Development Bank launched a private equity fund to promote infrastructure - the Infrastructure Fund of India, which plans to invest in non-listed securities of companies that develop, own or operate infrastructure projects in the country. In 1999, AMP Capital had launched a similar fund and invested in telecom, gas and port sectors. "When we invested in the telecom sector in 1999, there was no telecom regulation in place. We took a risk and took the plunge," says Krishan Sehgal, director, AMP Capital. The latest $125-million AMP fund launched last year will be looking at ports, logistics industry and gas and oil pipelines.

Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.