Despite a US$75 billion infrastructure fund announced between the UAE and India last month, a study by BMI Research says the facility is unlikely to produce significant results given the challenges New Delhi still has to overcome.
The firm says although India has been “aggressively seeking foreign investment”, its government has yet to tackle an unfavourable business environment that has caused many of those who had previously invested to shy away from the infrastructure market.
It also points to comments made by the UAE’s Minister of Economy, Sultan Al Mansouri, who said firms from this country that invested in India have faced challenges over regulations and market conditions.
Emaar Properties is a prime example. Within the Emirates, it is often viewed as the benchmark that others need to aim for and it continues to build a profitable portfolio.
However, its 10-year-old joint venture in India with Shravan Gupta’s MGF Development has not been a great success. Plans to raise money by floating part of the business were stymied by the 2008 financial crisis, and the venture was criticised for the late delivery of a $240 million athlete’s village for the 2010 Commonwealth Games. It has also racked up losses of $206m over the past three years, leading to MGF Development reportedly seeking to wind down the partnership, although Emaar says India is “one of our key markets and we are committed to our projects in the country”.
According to BMI Research, only 9 per cent of construction projects in India currently have UAE investors, with Emaar Properties being the most active. Most investment is also geared towards commercial and residential property schemes, which are less risky than large infrastructure projects.
What is more, infrastructure investors in the Indian market have something of a mixed record.
The British private equity firm 3i raised a $1.2bn fund to invest in the Indian infrastructure market in 2008 – 20 per cent more than its target. However, in 2013 the firm said the market had failed to meet investors’ expectations and that it would sell off the assets it had acquired. It cited “macroeconomic, political and market challenges” for its withdrawal.
Another UK fund, Infrastructure India, has seen its share price plummet from a high of 85.5 pence per share in February 2011 to 20 pence by the end of last week, although they are higher than the 12.5 pence they were at 12 months ago.
Infrastructure India’s chief executive Sonny Lulla argues that the market does have the ability to deliver attractive, risk-adjusted returns in the right sub-sectors and with the right partners.
“We see strength in sectors such as energy, in particular renewables, including wind, hydro and solar,” he says.
“The country’s logistics sector is seeing a much-needed boost from additional investment, and will be further propelled by dedicated freight corridors providing improved infrastructure and capacity.
“We expect improved liquidity for investors in the future as public and private markets seek to deploy increasingly large amounts of capital towards the most critical infrastructure needs of the economy – transportation, energy, water and sanitation,” Mr Lulla adds.
His view is backed up by Neeraj Agrawal, an executive director at the UAE’s Crescent Enterprises – which invests in ports and logistics, healthcare, power and aviation businesses.
Mr Agrawal says the company sees opportunities in both the ports and logistics markets, adding he is “hugely excited” by the prospects for India’s economy overall.
He says the election of Narendra Modi represents the first time since India’s independence where there has been a government for whom “money is not a dirty word”.
“Business is his business,” he says.
He adds that there is an urgent need for infrastructure investment, which will only happen with the involvement of the private sector.
Mr Agrawal says that in the past 20 years, more than 450 million people in India have moved out of poverty and into the middle classes. This makes it more difficult for bad governments to get away with poor delivery, he says, arguing that people now want to see more jobs and better infrastructure.
Mr Lulla says he wants to see “regulatory transparency and improved responsiveness from the bureaucracy” – from any government.
One of Infrastructure India’s investments – a major hydropower plant under construction in the state of Madhya Pradesh – has been started and stopped a number of times and is currently “stranded” by bureaucratic and financial disagreements.
Mr Lulla believes the Reserve Bank of India could help investment by allowing more sophisticated project financing techniques, including an ability to fund projects in dollars or other hard currencies.
“This would reduce the concentration of lending from Indian banks, which are already struggling with exposure to the infrastructure sector,” he says.
The BMI Research analyst Shuiyong Lim says he expects the Indian government to target pension funds and insurance funds as sources for infrastructure capital. However, BMI’s report points to a study by Credit Analysis and Research Ratings which states that only 8.4 per cent of the funds committed to investment in India during the five years to May 2015 have actually been invested.
“Land acquisition in India remains one of the major hindrances to construction of infrastructure projects and has resulted in significant delays to the country’s development plans,” Mr Lim says. “Without more robust laws to facilitate such processes, construction risk remains high, with the possibility of cost overrun.
“This in turn erodes the profitability and attractiveness of projects. Given such challenges, funds are also therefore less likely to actually invest in projects.”
That is one of two key issues Mr Modi has attempted to tackle since being voted into power in May 2014, with the other being a replacement of a labyrinthine series of indirect taxes with one goods and sales tax.
Official figures suggest India achieved year-on-year GDP growth of 7 per cent by the end of June, but Jordi Rof, an economist at Asiya Investments, says several changes to the way in which these figures are calculated has inflated them.
He also says the government has not managed to implement either of its landmark reforms, with the land acquisition bill now under amendment after India’s main opposition party, Congress, defeated an earlier version in parliament, describing it as anti-poor.
Mr Rof says a new goods and sales tax would “substantially” reduce bureaucracy and help to unify levies across the market.
“These two reforms have the potential of boosting investment in India on their own but, so far, it is highly uncertain whether the government will succeed at approving them,” he adds.
Mr Lulla describes Congress’ defeat of the land acquisition bill as “a grave disappointment”.
“We know from our own experience, and anecdotally from others, that land acquisition remains one of the most difficult aspects of infrastructure development,” he says.
“The timelines and costs can often be completely unpredictable, reducing project planning and financing to virtually a guessing game.
“A mechanism to ensure that land for industries and infrastructure can be acquired at a fair price and on a predictable timeline is sorely needed,” he adds.
Christopher Seymour, the head of Middle East markets at the building consultancy Arcadis, believes involvement from UAE funders in India should be accompanied by skill sets from developers and construction companies to improve the standard of infrastructure development. “We see the investment being not just financial but also involving a knowledge transfer where India can learn how the UAE has created the environment allowing the successful infrastructure investments we see today,” he says.
Rajesh Kalra, the managing director for the consultancy Atkins’ India division, adds: “Although India has many local companies, there are not enough to support the demand and this is particularly the case for complex major projects.
“Across the market in general, the working environment can be very challenging for both local and international companies.”
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