STRATEGIST - IIM Shillong · seen around 293 global and domestic companies com-mitting to generate...

2 S T R AT E G I S T

S t r a t e g i s t | F e b r u a r y 2 0 1 6

We have always aimed to provide our members con-sulting projects and challenges that will equip them to tackle future assignments confidently and competitive-

ly. We also aim for facilitating in growth of collective knowledge of the entire student community interested in the Consulting and Strategy domain. This magazine says it all. In this issue of E-Zine we have emphasized on Infrastructure, which is one of the important industry going to prop up our nation’s economy in coming years. We hope you enjoy this issue of Strategist as much as we enjoy creating it.

-Team ConQuest

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1 IntroductionAs economies develop from low, to middle, to upper income, the infrastructure of the nation becomes paramount and as such, the spending evolves

2 Infrastructure around the worldGlobal infrastructure is a subject too vast to be explored in the manner of a brief summary. However, with the population worldwide expected to cross 9 billion by 2050 and other issues such as saturated existing urban regions and the growing need for renewable practices; the significance of developments in the infrastructure sector become inevitably significant.

3 Infrastructure Industry in IndiaThe Indian economy grew at 7.3 percent in the 2014-15 fiscal. One of the major reasons behind this development, apart from the increasing focus on manufacturing sector, is the array of initiatives taken in infrastructure industry

4 REIT in India: Present Status and Future Trajectory

REITs or Real Estate Investment Trusts were first introduced by the US Congress in 1960. The basic underlying concept behind REITs was similar to that of buying stocks or mutual funds – giving a boost to the real estate sector by channelling investments into it.

5 Improving Indian Railways Infrastructure

The Indian Railways is one of the largest transportation and logistics networks of the world. Improving it will surely affect our economy in positive way read this article to find out more 6 Interview with Mr. MS Nageshwar Rao

Sales Management, Head of the Company Real eT matrix Pvt. Ltd

CO N T E N T S MAGAZINE



Over the past de-cade, infra-

structure in India has been plagued by policy paralysis and not been given the adequate attention it deserves to foster the country’s growth. However, that is not to say that the sector has been neglected by the government and the private sector.

I n t r o d u c t i o n INDUSTRY OVERVIEW

As economies develop from low, to middle, to upper income, the infrastructure of the nation becomes paramount and as such, the spending evolves. The low-income groups face diff iculty in providing basic amenities to their cit izens due to lack of proper infrastructure. As the income level rises, individual and social needs l ike sanitation, hospitals, and schools gain importance. At the higher levels of income, smart cit ies with sophisticated and modernized infrastructure become the norm. Over the past decade, infrastructure in India has been plagued by policy paraly-sis and not been given the adequate attention it deserves to foster the country’s growth. However, that is not to say that the sector has been neglected by the government and the private sector. During the period 2002-2012, the private sector has invested approx-imately US$ 250 billion in various infrastructure projects.

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But the country needs further INR 31 trillion (US$ 465 billion) to be spent on infrastructure development over the next five years, with 70 per cent of funds needed for power, roads and urban infrastruc-ture segments. These figures highlight the magnitude of the problem that faces the infra-structure sector. Realising the massive investments needed, the government has adopted a new approach with Public-Private-Partnership (PPP) as the cornerstone of i ts pol icy framework. The current policy frame-work allows 100% Foreign Direct Investment (FDI) i n mos t i n f r as t r uc tu re sectors with no restr ic-tion on repatriation of profit. The infrastructure sector consists of power, bridges, dams, roads, railways, and urban infrastructure develop-ment. India’s railway network is recognised as one of the largest railway systems in the world under single man-agement; however, it has

always seen the monopoly of the Central Government, with operation and finances under the purview of the Railways Ministry. The government has been focussing on improv-ing the rail infrastructure but the same cannot be success-ful without the presence of an independent regulatory authority. The railways infra-structure has been touched upon in a subsequent article. In the power segment, India ranks 4th in the world in terms of energy consumption but only 5th in generation capac-ity. India’s power sector is one of the most diversified in the world. Sources of power gen-eration range from conven-tional sources such as coal, lignite, natural gas, oil, hydro and nuclear power to viable non-conventional sources such as wind, solar, and agri-cultural and domestic waste. The Planning Commission’s 12th Five-Year Plan esti-mates total domestic energy production to reach 669.6 million tonnes of oil equiva-lent (MTOE) by 2016–17 and

844 MTOE by 2021–22. By 2030–35, energy demand in India is projected to be the highest among all countries according to the 2014 energy outlook report by British oil giant, BP. In terms of invest-ment, the power sector has seen around 293 global and domestic companies com-mitting to generate 266 GW of solar, wind, mini-hydel and biomass-based power in India over the next 5–10 years. The initiative would entail an investment of about US$ 310–350 billion. Between April 2000 and September 2015, the industry attracted US$ 9.97 bill ion in FDIs. As PPP models have become norms for the infrastruc-ture sector, the government appointed the Kelkar Panel to suggest improved funding and reforms. The proposals include a provision for mone-tisation of projects, revamp of the model concession agree-ment and creation of a new institutional mechanism.



Activities in aviation sector internationally are on rise, with 340 new airports identified in 2015 by the month of July costing investment of about US$ 157 Billion. In the context of ports

and shipping, the congestion at US West Coast ports has led to suppliers diversifying cargo to more efficient ports that exist in the east and gulf region. The journal of commerce has recognized Shanghai, Singapore, Shenzen, Hong Kong and Busan (Korea) to be the top 5 international ports.

Global infrastructure is a subject too vast to be explored in the manner of a brief summary. However, with the population worldwide expected to cross 9 billion by 2050 and other issues such as saturated existing urban regions and the growing need for renewable practices; the sig-nificance of developments in the infrastructure sector become inevitably significant. According to PwC report Outlook to 2025, worldwide infrastructure spend-ing will grow from $4 trillion per year in 2012 to more than $9 tril-lion per year by 2025. Overall, close to $78 trillion is expected to be spent globally between 2014 and 2025. The Asia-Pacific market, driven by China’s growth, will rep-resent nearly 60% of global infra-structure spending by 2025. In

contrast, Western Europe’s share will shrink to less than 10% from twice as much just a few years ago. Developed economies, while continuing to grow, will see their infrastructure spending shrink from nearly half of the global total today to about one-third by 2025.

Developing economies, most notably China and other parts of Asia, account for nearly half of all infrastructure spending, up more than 10% from 2006. In contrast, Western Europe, which isn’t expected to reach pre-finan-cial crisis levels until 2018 or later, accounts for only 12% of global spending now, down from about 20% in 2006, and is projected to generate less than 10% by 2025.

Activities in aviation sector

internationally are on rise, with 340 new airports identified in 2015 by the month of July costing invest-ment of about US$ 157 Billion. In the context of ports and shipping, the congestion at US West Coast ports has led to suppliers diver-sifying cargo to more efficient ports that exist in the east and gulf region. The journal of com-merce has recognized Shanghai, Singapore, Shenzen, Hong Kong and Busan (Korea) to be the top 5 international ports. It is encourag-ing to see that the Indian govern-ment has initiated similar efforts with ‘sagarmala’ programme to develop the Indian ports. Brazil, another emerging economy has undertaken a massive water infra-structure project of the tune of US$ 6.4 Billion as well, dedicated to Sao Francisco River Irrigation. China also on the other hand has about 20% of the world’s pop-ulation but only 7% of the total freshwater reserves. Simply put, it is fast running out of water. The ‘South to North Water Transfer Project’ looks to divert about 44.8 billion cubic meters of water per year from the Yangtze River in southern China to the Yellow River Basin in arid northern China, where water shortages are more frequent.

i n f r a s t r u c t u r e a r o u n d t h e w o r l d INDUSTRY OVERVIEW

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On the urban housing and development landscape, the McKinsey Global Institute has estimated that between now and 2025, the world’s urban population will grow by 65 million people per year, or by almost 179,000 every day. In an attempt to build new urban powerhouses, Kazan Smart City in Russia (US$ 10 Billion) is constructed with

the objective of being a sustainable base of international business and a pleasant environment for its residents. The Morar Carioca Sustainable Community Programme in Rio De Janerio (US$ 4 Billion) hopes to upgrade the slums of the capital.

To improve the existing con-nectivity, China has decided to increase its National Trunk Highway System by 83,000 Km which would link at least 90% of the cities and population. Already having the most advanced high-speed railways and even driver-less trains; there are ambitious plans for China-Russia-Canada-America route of 13,000 Km, passing through Siberia. The Moscow Central Ring Road with its circumference of 529 Km intends to become a link in the pan-Euro-pean highway, between London and China, through Berlin and Moscow. Promised to be opera-tional by the year 2018, the total investment in this road encircling Moscow is in the range of US$ 4.2 Billion.

On the urban housing and development landscape, the McKinsey Global Institute has estimated that between now and 2025, the world’s urban pop-ulation will grow by 65 million people per year, or by almost 179,000 every day. In an attempt to build new urban powerhouses, Kazan Smart City in Russia (US$ 10 Billion) is constructed with the objective of being a sustain-able base of international busi-ness and a pleasant environment

for its residents. The Morar Carioca Sustainable Community Programme in Rio De Janerio (US$ 4 Billion) hopes to upgrade the slums of the capital.

The Russia-China Gas Pipeline contributes on two fronts, geo-politically strengthening ties between two superpowers and as a major development on the global energy front. The US Alaska LNG Project would create a pipe-line of length 13,000 Km from north to south Alaska, making available the controversial Arctic reserves to the market at large. The Libra Pré-Sal Oil Field Exploration is another upcoming game changer for Brazil, led by PETROBRAS and its partners. The UHV Power Transmission Project in China would build eight ultra-high voltage transmission lines, reducing electricity lost when transmitted over long distances.

Numerous initiatives such as the Global Infrastructure Leadership Forum, backed by multinational giants such as BCG, aim to identify crucial infrastruc-ture projects around the globe that would revitalize economic competitiveness and lead to opportunity creation. Under these ‘Strategic Top 100’ US$ 406 Billion worth of projects in 47 coun-tries and 10 sectors have been

identified; some of which include Bahrain Airport Expansion, WestConnex Transportation project in Australia, Canakkale Suspension Bridge in Turkey and Atlantic Coast Pipeline in USA amongst others.

It is evident that most of the ground-breaking projects are underway in USA, Russia, China and the like. But growing urban-ization in emerging markets such as China, Indonesia, and Nigeria should boost spending for such vital infrastructure sectors as water, power, and transporta-tion. The PwC report also states that Demographic changes will vary by region and country, affecting both the amount and type of infrastructure spending. Aging populations in Western Europe and Japan, for instance, will require additional healthcare facilities, while countries in Sub-Saharan Africa, the Middle East, and many parts of Asia-Pacific will need more schools for their youth.

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The Indian economy grew at 7.3 percent in the 2014-15 fiscal. The World Bank has forecasted a similar growth rate of 7.5 percent for year 2015-16 as well. One of the major reasons behind this development, apart from the increasing focus on manufacturing sector, is the array of initiatives taken in infrastructure industry. For example: The cabinet has approved in June 2015 the Bangladesh, Bhutan, India and Nepal (BBIN) Motor Vehicle Agreement for the Regulation of Passenger, Personal and Cargo Vehicular Traffic among BBIN. This agreement aims to promote safe, economical efficient and environmentally sound road trans-port in the sub-continent and to further help each of the countries in creating a mechanism for regional integration.

According to the research by Infrastructure Development Finance Co., the infrastructure sector contrib-utes approximately 8% to the country’s total GDP. This number is expected to reach 10% by 2017 so as to meet the growth objectives that we have set for ourselves. In order to achieve this, the country requires about INR 31 lac crores over the next five years, where 70% of this investment would be dedicated to roads, power and urban infrastructure. And to generate funds of such a significant scale, the central government

has targeted an increased FDI in the sector; for example: 100% FDI per-mitted under automatic route in infra-structure related to petroleum prod-ucts, natural gas pipelines and petro-leum refining by private sector.

Recent developments in the Indian infrastructure scenario:

• France has announced a com-mitment of € 2 billion (US$ 2.17 billion) to convert Chandigarh, Nagpur and Puducherry into smart cities.

• The Construction Industry Development Board of Malaysia has proposed to invest US$ 30 billion in urban development and housing projects in India, one of them being the Ganga cleaning project.

• Japan has offered loan at less than 1% interest rate for India’s first bullet train between Mumbai and Ahmedabad estimated to cost approximately US$ 15 billion, on the condition that India would buy 305 of equipment from Japanese firms.

• The Government will be spending INR 850,000 crore (US$ 127.62 billion) over the next five years to modernize Indian Railways, aided by a 30 year loan from the LIC.

I n f r a s t r u c t u r e i n d u s t r y i n i n d i a INDUSTRY OVERVIEW



• Air traffic in India is expected to triple, from 190 million passengers at present to 570 million by 2025. With such projections, US$ 40-50 Billion are estimated to be necessary for the expansion of existing airport infrastructure as well as construction of new airports.

• The government has established a goal of investing INR 70,000 crore (US$ 10.5 billion) in 12 major ports in the next five years under ‘Sagarmala’ initiative; low-cost, small ports to be set up around major ones as well to facilitate quicker movement of cargo.

• In the next 10 years, over 90 million jobs would be generated in India, creating a need for more than 8 million square feet of office space.

This is a major opportunity for foreign and domestic players looking to invest in industrial infrastructure.

• After the Coal Mines Special Provisions Bill (2015), the government has been auctioning several coal blocks by either auction or nomina-tion to state entities; in the second phase, the centre would also assign such blocks to private corporations.

• The shift in focus, to renewable energy, is clearly visible with US company SunEdison wining a contract to provide 500 MW solar energy at a rate as economical as INR 4.63 per unit; helping India’s US$ 160 billion clean energy drive.

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REITs – A Brief Introduction

REITs or Real Estate Investment Trusts were first introduced by the US Congress in 1960. The basic underlying concept behind REITs was similar to that of buying stocks or mutual funds – giving a boost to the real estate sector by channelling investments into it. Though the idea has been around for the last 56 years, it gained traction only in the last two decades. Starting from the end of 1992 through the end of 2010, the size of the REIT industry has grown constantly and progressively from just under $16 billion to $389 billion .

Why REITs?

• A land or a property can generate revenue in two ways – the income earned through rent, or the income earned through mortgage interest rates. Based on this classification, REITs are classified into two major types. The former is called an Equity REIT and the latter, a Mortgage REIT.

• Additionally, the REITs may also be publicly listed and traded on major stock exchanges.

• The biggest advantage of this instrument, unlike equities, is that it acts as a natural hedge against inflation risks, as there is lower correlation. As commercial real estate is a distinct business class, there would be a fairly low correlation with other securities over longer time periods.

R E I T i n i n d i a : p r e s e n t s tat u s a n d f u t u r e t r a j e c t o r y BY: DIGANTA SARKAR, SREEKANTH K N (IIFT, DELHI)



The companies that carry out an REIT listing, distrib-ute most of its income as dividends, just like stocks; and the asset class has higher cash flows, leading to more dividends in the future. Most of the countries which issue REITs have to dis-tribute at least 90% of the taxable income as dividends to shareholders Even during Bear Markets, the REIT secu-rities fared better compared to other equity indices as can be seen from the following compar-ative chart.

REIT in India: The Story so Far

The REIT journey in India began with its introduction into the maide¬¬n budget, by Finance Minister Arun Jaitley. The following timeline depicts its slow transition across the months. Presently, it has been a year and a half since the budget was construed, and the follow-ing pointers are noteworthy:

• In spite of the various facilitators implemented, bottle-necks in the form of removal of

DDT and other minor tax regu-lations still remain

• The public are yet to be made fully conscious of the product; and subsequently, there are quite a few lingering doubts about its acceptability

• Projects are riddled with the trademark red-tapism and cronyism of Indian bureaucracy

To bypass these pitfalls, SEBI has put in place a few regulations:

• All REITs are to register themselves in prior with SEBI

• Certain investment sanc-tions have been imposed – 80% in the case of completed prop-erty, 90% for dividend pay-out, etc.

• They will have to invest in at least two projects; coupled with the fact that not more than 60% value of net assets would be assigned to one single project

• The Minimum Asset Size required to start off the process is INR 500 Cr. In an additional testament, 25% of the total initial corpus is to be invested by sponsors

However, REITs took some time to gain a proper foothold in the United States as well, since its introduction in the 1960s. In India, DLF – India’s largest real estate developer, is the first to announce REIT listing by mid-2016. In a first-of-its-kind act in this country, it is supposed to monetise commercial assets adding up to almost 30 million square feet. Presently, DLF is awaiting final clarifications on the tax reforms and foreign investments; post which it should engage the market.

REIT in India: Our Opinion on the Future Trajectory

REITs provide a simplis-tic way for investment in one of the most burgeoning fields of present times – Commercial Real Estate; and that too while doing away with the opportunity cost or illiquidity of the qualm of having to own property directly. Since its introduction in the US, countries like the Netherlands (1969) and Australia (1971) fol-lowed up very soon; while the US itself went on to legislate tax reforms in the 1980s that made the new structure more appeal-ing to both companies and indi-vidual investors.

Currently, most developed countries and many develop-ing countries in the world (South Africa, Brazil, etc.) have adopted REITs; while it remains under con-sideration in China.

The global real estate secu-rities market has a significant market cap of approx. $1.8 Tn., spread across 487 com-panies around the globe. (As of 9/30/2015).

The Indian Real Estate Market has the inherent poten-tial to grow and blossom into one of the top five markets in Asia by market cap, accord-ing to a study by Cushman & Wakefield. Below is an analogy to the Singaporean REIT; and our two cents for transforming the present status of REIT in the country into something pre-dominantly more conducive for business.

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Recommendations

Singapore REITs or S-REITs are one of the best performing REIT markets in Asia. The first REIT in Singapore was only 80% sub-scribed and eventually had to be scrapped . Then, certain reforms were introduced, such as:

• filing tax exemption,• increasing in gearing

limit, and • stamp duty recession; all of which combined

together to result in a better per-formance of the REITs.

When converting these changes to the Indian perspec-tive, we believe that the follow-ing variations could be made:

• Minimum outlay for

trading is Rs 1 Lakh. This might limit the volume traded on the exchanges. Being a fledgling idea in the Indian real estate market, this limit could be decreased to lure small investors into this.

• Taxing norms should be relaxed. Currently, if the special purpose vehicles have a fair value of Rs.10 and the value on transfer to REIT is INR Rs.50, resulting in a gain of Rs.40. If the REIT units are sold finally for Rs.80, only the gain of Rs.40 should be taxed and not the remaining Rs.30. Currently entire Rs.70 could be taxed.

• Holding Period for REITs to qualify as a long term capital asset could be reduced from the current 36 months to 12 months, as in the case of listed equity shares, to make it lucra-tive to investors.

• There are significant unsold inventories, belonging to vacated offices and spaces in malls. Though this provides opportunities for REITs to acquire assets at an attractive price, there is a lot of illiquidity which makes the exit difficult.



To increase its mar-ket share in the transpor-tation of

bulk and non-bulk freight, the Central government has been steadily increasing investments in rail-way infrastructure. The budget allocation was increased to Rs 643 billion in 2014-15 from Rs 593.6 billion in 2013-14.

i m p r o v i n g i n d i a n r a i lway s

i n f r a s t r u c t u r e BY: DEBROOP BANERJEE, NEERAV MAHAJAN (NMIMS) The Indian Railways is one of the largest transportation and logistics networks of the world. It runs about 12,000 trains, carries over 23 million passengers per day and con-nects about 8,000 stations spread across the sub-continent. Currently, Indian Railways runs more than 7,000 freight trains per day carrying about 3 million tonnes of freight every day. Railway traffic growth is positively correlated with rise in index for industrial production (IIP). However, Indian Railways has not been able to capture this growth due to unavailability of wagons and lack of infrastructure, consequently losing share steadily to roads.

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Infrastructure Investments

To increase its market share in the transportation of bulk and non-bulk freight, the Central govern-ment has been steadily increas-ing investments in railway infra-structure. The budget allocation was increased to Rs 643 billion in 2014-15 from Rs 593.6 billion in 2013-14. Presently, the focus is on finishing the capacity-aug-mentation projects which have the highest rates of return. There are 154 New Line, 42 Gauge Conversion, 166 Doubling and 54 Railway Electrification projects across the country at a cost of Rs 285,652 crore (US$ 42.87 billion). For Railway Electrification proj-ects, the cost as on April 1, 2014 is estimated to be Rs 6,692 crore (US$ 1.0 billion).

In August 2014, The Department of Industrial Policy and Promotion (DIPP) introduced and permitted 100% FDI in certain sub-sectors of the Indian Railways. The revised FDI policy allows FDI in the con-struction, operation and mainte-nance of only the following:• Suburban corridors through

public private partnership (PPP)

• High speed train projects• Dedicated freight lines• Rolling stock including trains

sets and locomotive/coaches manufacturing and mainte-nance facilities

• Railway electrification• Signalling system• Freight terminals• Passenger terminals• Testing faci l i t ies and

laboratories• Non-conventional sources of

energy• Railways technical training

institute• Concession of standalone

passenger corridors (branch lines, hill railways etc.

• Mechanised laundry• Rolling stock procurement• Bio-toilets• Technological solution for

manned and unmanned level crossings

• Technological solutions to improve safety and reduce accidents

Some of the major develop-ments and investments in the railway sector are:-

1. Japan International Cooperation Agency (JICA) granted the Madhya Pradesh Government a loan of Rs 12,000 crore for Indore and Bhopal metro rail projects2. Japan will finance India’s first bullet train between Mumbai and Ahmedabad at less than 1% interest rate, on the condition that India buys 30% of equipment from Japanese firms. The cost of the project is almost Rs. 98000 crores.3. Indian Railways issued a Letter of Award to US-based General Electric (GE) for a Rs 14,656 crore (US$ 2.2 billion) diesel locomotive factory project at Marhowra, and to French trans-port major Alstom for Rs 20,000 crore (US$ 3 billion) electric loco-motive project in Madhepura, both in Bihar.4. A MoU was signed between the Ministry of Railways in India and the Czech Railways (Ceske Drahy) and Association of Czech Railway Industry (ACRI) of the Czech Republic on technical cooperation in the field of the rail-ways sector.

Government Initiatives

1. The Ministry of Railways has sanctioned implementation of Eastern Dedicated Freight Corridor (EDFC) and Western Dedicated Freight Corridor (WDFC) with freight train speeds of maximum 100 Kmph. 2. The Government of India plans to spend Rs 850,000 crore (US$ 127.62 billion) over the next 5 years to modern-ize Indian Railways for which they have received a 30 year loan from LIC. The Cabinet also cleared the Rs 82,000 crore (US$ 12.3 billion) dedicated freight corridor for decongest-ing existing network.3. Encouraging private sector participation in Railways, Mr Suresh Prabhu, in his maiden Railway Budget, amalgam-ated public welfare with private investment. While investment through public-private partner-ships (PPP) was increased to Rs 5,781 crore (US$ 867.94 million), several schemes for improving efficiency of the Railways were kept under this head.4. To cut energy costs, the Indian Railways signed a bilat-eral power procurement agree-ment with the Damodar Valley Corporation (DVC), under which railways will buy 50 MW of power from DVC at Auraiya Grid Sub-station facilitated by Railways Energy Management Co. Ltd, a joint venture of the Indian Railways and RITES, a public sector unit of the Ministry of Railways.5. The Government of India sanctioned Rs 1,000 crore (US$ 150.14 million) for a 15 km railway project connecting India and Bangladesh linking Agartala in Tripura and Akhaura in Bangladesh.



6. The Maharashtra gov-ernment has planned to set up a Special Purpose Vehicle (SPV), Maharashtra Railway Infrastructure Development Company, with a view to ensure timely completion of various development projects. 7. A memorandum of under-standing (MoU) and an Action Plan have been signed between the Government of India and the Government of China to improve technical cooperation in the rail-ways sector. 8. The Union Cabinet has given its approval for establish-ing a new rail coach manufactur-ing unit at Kolar, Karnataka. The unit will produce 500 coaches per annum at a projected cost of Rs 1,460.92 crore (US$ 219.34 million) with the Ministry of Railways providing 50 per cent of the finances and the Karnataka government providing land, free of cost, and the remaining 50 per cent of the project completion cost with escalation.

Public-Private-Partnerships

Railway infrastructure requires large investments that cannot be undertaken out of public financ-ing alone. Hence the Government has resorted to Public Private Partnerships (PPPs) to attract private capital and the techno-managerial efficiencies associ-ated with it. 1. Railways Infrastructure for Industry Initiative- This policy was announced in 2008-09 to attract private participation in rail con-nectivity projects so that addi-tional rail transport capacity can be created. 2. Private Freight Terminals (PFT) Scheme- It was launched in May 2010 in a bid to develop a network of freight terminals with

efficient and cost effective logis-tic services and warehousing. The development of PFTs is to be funded through PPP and they can be either “green field” termi-nals or “brown field” ones, where private sidings/container termi-nals can be converted into PFTs with traffic being handled by the private investors. As of 2012-13, 43 proposals had been received for development of PFTs of which 38 had been finalised.3. Automobile Freight Train Operator Scheme (AFTO) and Special Freight Train Operator Scheme (SFTO)- These schemes were introduced in 2010 to increase the Railways’ share in the transportation of automo-biles and commodities like fertil-izers, molasses, edible oil, caustic soda, chemicals, petrochemicals, alumina, bulk cement and fly ash. These schemes are to be carried out through private participation for procurement and operation of SPWs. These schemes have been further liberalised in 2013. For AFTO, the Railways received pro-posals from two firms out of which one had been given approval as of 2012-13. This AFTO will manu-facture a new type of automobile wagon that has been developed by RDSO.4. L iberal ised Wagon Investment Scheme and Wagon Leasing Scheme (WLS)- The Railways has allowed invest-ments in Special Purpose Wagons (SPW) and High Capacity Wagons (HCW) by manufacturers and consumers of goods and their leasing by leasing companies from 2008. To make these schemes more popular, the Ministry of Railways revised the eligibility criteria in February 2011 by reducing the minimum net worth requirement for wagon leasing companies.

The new norms also allowed for the leasing of wagons under the Automobile Freight Train Operators Scheme, Special Freight Train Operators Scheme and Container Train Operators Scheme. By 2012-13, two com-panies had registered as Wagon Leasing Companies. 5. Kisan Vision Project (KVP)- To facilitate setting up of cold storage and tempera-ture controlled perishable cargo centres through PPP mode, logis-tics based PSUs i.e. Container Corporation of India Ltd. and Central Warehousing Corporation Ltd. have been asked to develop perishable cargo centres with temperature controlled storage facilities at six locations in the Railways.6. Rail Connectivity to Coal and Iron Ore Mines (R2CI) - This scheme was announced on February 21, 2011 to overcome the constraints of rail-road con-nectivity to coal blocks and iron ore mines which is not provided in the R3i policy. Proposals of only those new lines, which are either 20 km or more in distance, shall be eligible under this policy.

Conclusion

Turning around the cash strapped Indian railways is a herculean task. A lot of investment, research and time are required to put it back on track. Though the present gov-ernment in its election manifesto spoke a lot about improving the railways infrastructure and have placed a qualified and experi-enced minister at the helm of affairs. However it can be safely concluded that their efforts will bear fruits when the changes promised will be visible.

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Q1) White Paper on Infra Financing by ASSOCHAM and CRISIL estimates that INR 31 lakh crore investment is needed in the infrastruc-ture sector. How could the government look to finance this need?

Large infrastructure proj-ects are normally government funded through budgetary pro-visions spread across multi-ple fiscal periods. In the recent years India has been following a multi prong approach to execute Infrastructure projects. These predominantly could be through central allocations, in partner-ship with the states, treading the PPP path and through the SPV routes involving centre, state & private enterprise, through setting up of independent state corporations like Delhi Metro Corporation (DMIC) or Delhi Mumbai Infrastructure Corridor Development Corporations ( D M I C D C ) . T r a n s p o r t Infrastructure projects are exe-cuted by involving private enter-prises like Yamuna Expressway, Dwarka Expressway, and Nandi Infrastructure Corridor. These projects are carried out on Build Operate Transfer (BOT), Build Own Operate Transfer (BOOT). These private funded proj-ects will have the safety nets like Concession Agreements,

Viability Gap Funding, Toll Collection Mechanisms and opportunity for more profit-able real estate developments across these corridors.

Some of these high visibility & high potential projects are funded by World Bank, Asian Development Bank, Engagements with agen-cies like Japanese International Cooperation Agency (JICA), Japan International Bank (JIBA), which offer long term loans (30-40 years) at nominal interest rates 0.5% interest per annum. The other important funding mech-anism these projects are also funded through Foreign Direct investments.

Q2) Bank lending to infrastruc-ture sector has grown at a CAGR of 28 percent from 2005-2015, higher than the overall credit growth. However, this poses a risk of asset-liability mismatch as the infrastructure loans have a period of 10-15 years. How do you see this trend affecting the credit availability in the future, particularly with the NPAs of banks rising fast?

RBI’s cap on funding infrastruc-ture companies have strength-ened the due diligence mech-anisms of funding agencies. The policy paralysis prevailing during the previous dispensation

appears to be addressed and many projects, which were stuck, are back in the reckon-ing. There is now higher com-petition & closer scrutiny of exe-cution companies vying for the limited funds that are available. The assessment of execution capabilities and risks associ-ated. If developers can adopt honest demand estimation methods and be conservative in their profitability predictions with laser sharp focus on operations, we shall witness more & more successful projects. This will in turn address the Asset Liability mismatch and bring back the confidence of funding agencies to extend credit to this all impor-tant nation building activity.

Q3) With the government announcing the smart cities project, what steps need to be taken to speed up clear-ances for PPP projects?

Smart City Initiative seems to be heading in the right direc-tion. With the announcement of the top 20 cities, there is trac-tion and urgency in rolling out the scheme. It is good to note that cities are vying for the top spots by submitting well thought out proposals and action plans. This would definitely create a healthy competition among cities to attract investment,

i n t e r v i e w w i t h m r . ms n a g e s h wa r r a oS A L E S M A N AG E M E N T, H E A D O F T H E CO M PA N Y R E A L E T M AT R I X P V T. LT D

INTERVIEW



create urban infrastructure andmore importantly jobs for our burgeoning working age pop-ulation. Though the naysayers are crying foul about the polit-ical intervention in the selec-tion process, a beginning has been made. The focus now shifts to enabling policy formu-lation and stringent implemen-tation of the proposed rede-velopment, brown and green field developments to make our cities smarter in letter and spirit. Speeding up of the stuck PPP projects, at least in the selected cities will be inevitable and also a great opportunity to boost confidence among inves-tors and build deeper relation-ships with them to embark on the new infrastructure develop-ment journey.

Q4) With the government focussing on bullet trains, what is the viability of the project in India? How much impact will this have on the infrastructure development?

Grandiose infrastructure proj-ects have been used as a means to achieve higher growth by many nations across the globe. These projects when announced are bound to draw sharp criticism from certain quarters of the polity and society. Attention is drawn to other proj-ects that need to be undertaken for the benefit of the society at large. Vehement arguments and suggestions are put across pointing out that these projects will benefit few. However we need to understand that though such projects are to the benefit of the neo rich, the effects of these developments will have far reaching consequences for the benefit of all. It signals the

inherent capability of the nation to conceive & pursue such proj-ects and their successful imple-mentation will further enhance the image of the nation helping in attracting further assistance & investments to spur growth.

Q5) What are the impediments to the development of REITs as an investment opportu-nity in India? How will REITs develop in the country in the coming years?

Development of REITs and Invest’s are important for transparent mechanisms that can fuel the growth of cash starved Real Estate & Infrastructure Sectors. These are also mechanisms to enable retail investors to participate in the oth-erwise capital-intensive activ-ity leaving out a large number of small investors. REITs are in the reckoning since 2007, but till 2014 there was not enough policy push to make it a reality. There has been a positive movement in this direc-tion in the commercial Real Estate Sector and many development companies in partnership with funding agencies are consolidat-ing their holding of Grade ‘A’ com-mercial stock. Recent investment of Blackstone Group in Bangalore based Embassy group is a case in point.

The impediments have been the lack of clarity in the poli-cies regarding tax structures and lock in periods and more importantly the lack of title insur-ance, which is perceived as a major risk for investing compa-nies as these investments could get embroiled in protracted legal disputes.

However, REIT’s & Invest’s are here to stay. This will definitely

help clean up the development processes and push more & more development companies to adopt transparent & ethical property development activities to access all important source of capital for the cash starved Real Estate & Infrastructure Sectors.

Q6) JNNURM was initiated to focus on urban infrastruc-ture development, but the program has been a mixed success. What are the possi-ble ways in which it could be further improved? Is there a need for a similar program for the rural areas?

JNNNURM was an important step in the Urban Infrastructure Growth trajectory that the Country has followed. Like any new initiative, it has its share of successes and failures. Urban infrastructure proj-ects and the fund allocation are viewed as opportunities to create illegal wealth by the strong nexus prevailing among bureaucrats, politicians & developers. Lack of independent responsibility and accountability is the missing link in successful implementation of such projects. What we probably need is the technology to clone human beings in large numbers like Mr. E. A. Sreedharan of Delhi Metro fame. Extending initiatives like 100 Smart Cities to include 500 Smart Towns, 1000 Smart Villages & also special focus on Rural – Urban (Rurban) bound-aries by creating sustainable inclusive development models. The focus here should be to redefine the word ‘Smart’ by drawing up relevant parame-ters for these regions.

19C O N Q U E S T


Q7) What are the major trends you foresee for the infrastruc-ture sector in India? What is your forecast for the sector?

There is definitely a change in the narrative as to how India should develop from here on. Make in India, Start up India, Skill India, Clean India are clear pointer to the change in approach. These developments will take to time to portray a significant percepti-ble change on the ground, which are deep-rooted anomalies exist-ing in our society. We have been successfully executing challeng-ing world-class infrastructure projects like Konkan Railway & Kolkata Metro projects in the past. However, in the recent past projects like Delhi Metro Project, Mumbai Pune Expressway have been successfully executed within the estimated costs and in record times. We somehow seems to have mastered the art of deliv-ering feats which are considered impossible in isolation, too far too few. These examples need to be replicated more frequently for India to race ahead economi-cally. We have to transform these flashes in the pan into to a major fire of desire & will to bring in glow & glory to this great nation.

We seem to know where we need to go, we are working on the means to reach our desti-nation and there are more self-believing individuals who are seeing & feeling the change. I am personally very positive about our potential and believe in our capabilities to come out trumps.

• http://www.ibef.org/industry/infrastructure-sector-india.aspx• http://www.oifc.in/infrastructure• http://www.oifc.in/Uploads/MediaTypes/Documents/CII%20Policy%20Watch-Infrastructure.pdf• http://www.ibef.org/industry/indian-railways.aspx• http://www.ibef.org/industry/power-sector-india.aspx• http://www.cci.in/pdfs/surveys-reports/real-estate-sector-in-india.pdf• http://rbsa.in/archives_of_research_reports/RBSA-Indian-Power-Industry-Analysis.pdf• www.mckinsey.com/~/.../india/.../powering_india_the_road_to_2017.ash...• https://www.preqin.com/docs/reports/2015-Preqin-Global-Infrastructure-Report-Sample-Pages.pdf• https://www.pwc.com/gx/en/capital-projects-infrastructure/publications/cpi-outlook/assets/cpi-outlook-to-2025.pdf

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