Deepak Parekh

Chairman

The year 2009-10 has seen IDFC consolidate its position as the country’s leading specialist infrastructure finance company and one of the largest financiers of infrastructure in the country with most of our businesses scaling new heights this year. IDFC has evolved into a composite financial services platform operating a full range of business lines, from project and corporate finance to asset management(mutual funds and alternatives) and investment banking. This will enable us to serve our clients seamlessly as well as to provide our shareholders with steady returns.

Going forward, we believe that this breadth of services combined with our domain expertise in infrastructure gives us the unique ability to capitalize on the opportunities for developing, financing and implementing infrastructure projects. We are at an inflection point in the expansion of our country’s infrastructure and IDFC is well-positioned to lead the development. IDFC, therefore, aims to atleast treble its footprint over the next three to four years. The Infrastructure Finance Company (IFC) status will allow us to diversify our borrowings and access long-term funds, supporting our growth ambitions. It enables us to obtain more bank financing as well as external commercial borrowing and increase our single party and group exposure.

We know that achieving this planned growth will be no easy task. Therefore, we spent 2009-10 in taking stock and evaluating our organizational capabilities in terms of the preparedness for this growth. We gave special emphasis to nurturing and developing talent, so as to create a strong team of empowered professionals who can steer our diverse business needs. We undertook a platform-wide initiative to create a common culture based on the pillars of knowledge expertise, teamwork and stewardship. It is this culture that will help us create a better aligned and synergized platform that not only delivers growth, but also helps us distinguish IDFC in the market. Further, in keeping with our mission of nation building, we have carved out the development agenda of the IDFC Group under the rubric of the IDFC Foundation.

India has high domestic savings but we still need to develop our financial system to channel these savings into long-term finance such as that required for infrastructure. In this context, some initiatives announced recently should help in raising long-term finance. The tax-saving scheme for individual investors into infrastructure bonds could be a significant source of long-term finance each year. Until there is a big enough pool of investors with a long-term view, though, the government may need to step in to meet the need through credit enhancement and refinancing facilities. The Planning Commission's proposed debt fund would be able to lend for much longer term.

The year stands out in terms of the progress made in infrastructure development which has clearly been led by the private sector. Take the case of highways and power. After the government ironed out problems in the framework for private sector participation in national highways, the almost moribund highway sector witnessed a sharp increase in projects put up for bid and awarded. For example, 34 projects were awarded in a span of four months and many more were in final stages of bidding. The momentum is continuing as the pipeline of projects is large. At the same time, many constraints to project implementation are being addressed. For example, the single biggest cause of project delays, land acquisition, is being addressed through the establishment of Special Land Acquisition Units (SLAUs) at the state level, focused attention and accountability for execution and enhanced partnership between the centre and states. Altogether, this has resulted in acquisition of double the amount of land last year as compared to the annual average of the previous three years.

There is good news on the power sector as well. IDFC has estimated that about 50,000 MW of generation capacity will be added by the private sector alone in the next five years. Some of this capacity addition has been spurred by the maturing of the trading platform and positive steps that have been taken to facilitate merchant power by improving the regulatory framework, particularly for open access for sale of such power across the country. The transmission needs for these plants are also being addressed. Some deficiencies continue to exist in the implementation of open access, though I'm hopeful that these will be addressed.

But capacity addition will not bear fruits unless distribution reforms are taken forward on a war footing. Some distribution utilities have shown improvements in their financial health through concerted efforts to reduce transmission and distribution losses. But their number is limited. Most are still bleeding and their dependence on subsidy from state governments is rising. Yet, states continue to resist tariff rationalization. Even utilities that have improved their financial health have been suffering due to the steep increase in power purchase costs in the recent past, a consequence of having to import fuel due to domestic constraints. From a financier's perspective, I can tell you that under such circumstances any lender would be wary of the ability of utilities to absorb the massive inflow of power that would be generated.