Speaker Name : Dr. Rajiv B. Lall

Speech Date : November 30, 2010 – December 1, 2010

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Speech by Dr. Rajiv B. Lall at the Infrastructure Investors Conference 2010 in New Delhi. Excerpts:

Please settle down, we do not want to start with a delay.  We have a very, very tight schedule for the day.  So I think there are still people that are going to be filtering in so it is my pleasant duty to welcome you and to act as a time filler until our first keynote speaker for the day arrives.  Seriously though a very warm welcome to all of you, I know that many of you have traveled long distances to be here with us and so a very warm welcome to this our IDFC’s second annual infrastructure conference.  This conference is a very important event for us. 

It is an opportunity to bring together a number of our stakeholders but in particular members or the LP community that have chosen to invest in our various funds.  Select number of institutional investors that are interested in the infrastructure space and it is an opportunity to showcase a little bit of what IDFC is about but much more importantly this is hopefully a platform that will give you just a little bit deeper insight into the challenges and opportunities facing the India infrastructure sector.  Our endeavor today is to provide you multifaceted perspective embracing the views and opinions of various policy makers, practitioners and indeed other members of the wider community of opinion makers about the issues that we face in the trenches every day. 

There is a lot of noise and lot of controversy that has been swirling around Indian infrastructure over the last several months, starting almost with the Commonwealth games which somehow we got done with some aplomb to controversy surrounding the allocation of spectrum for telecom operators but before we get lost in the dim, it is I think useful to recall where it is that we have come from to put things into some perspective.  Seven years ago which is 2003, infrastructure spend as a share of GDP as some of you have heard me say repeatedly recently was only 4% of GDP equivalent and this year it is expected to be 8% of GDP equivalent and over these seven years, the share of spending on private infrastructure projects has gone up twelve-fold from 0.3% of GDP equivalent in 2003 to an expected estimated 3.6% of GDP equivalent today of this year and what this means is that of the 90 billion dollars roughly that we are spending annually on infrastructure today and a little shy of 40% is being spent on projects that are private in the sense that equity risk is being taken in these projects by investors like yourselves and entrepreneurs. 

That is an extraordinary development and IDFC was set up to act primarily as a catalyst to facilitate the development of private infrastructure in this country, has seen itself riding on a megatrend within a megatrend and this has been a very strong wind for ourselves and our general performance over the past five years our balance sheet has drawn at a compound annual rate of 30%.  This year in the first half alone, we have dispersed gross disbarments of 4 billion dollars equivalent of deals.  We have sanctioned seven billion dollars worth of deals and it looks like we will finish this fiscal year with a balance sheet that we foresee of 10 billion dollars.  We have become, in a very short space of time and intensity on how rapidly things are changing in India.  We were ranked this year the fifth largest ranger of private finance done globally.  We have through IDFC raised three billion dollars of equity capital largely for infrastructure this year and we are the single largest provider of third party equity capital through the infrastructure space in the country managing 2.2 billion dollars and third party funds of which 1.4 billion have so far have been invested. 

We have not thought about it much but we were just traveling some numbers and it is quite incredible.  Since our inception, IDFC has participated in the funding of 27,000 megawatts of our fine power generating capacity which is half of total addition of power generating capacity over the last 15 years.  We have participated in the financing of more than half of all private facilities, 5 million things out of total of 9 million of capacity had it.  We have financed one-fifth of all PPP national highways in the country and one quarter of all addition passenger and freight capacity in our airports has been funded directly or indirectly partly by IDFC and we have done this profitably. 

Over the past 5 years, the compound annual growth rate of our profits have been 28% and our asset quality has been exemplary and our net NPA ratio is under 0.12% of our assets.  A lot must have happened right for IDFC to deliver this performance and what has happened right goes way beyond IDFC.  First the experience of the last seven years demonstrate that our entrepreneurs have the risk taking ability and the extraordinary execution capability to take on increasingly complex infrastructure projects.  It also demonstrate despite skepticism, even our own skepticism at times, the depth of our equity markets as well as our debt markets.  Third it demonstrates that we have evolved in this country an ecosystem of intermediaries, accountants, lawyers, facilitators that have made possible the structuring of complex projects and finally despite all the noise, it does demonstrate that there must have been a reasonably robust regulatory regime that has made it possible for so many private investors to risk such large dollars in the infrastructure space.  So the glass is certainly half full, but much, much more amends to be done, so let us look forward very briefly. 

According to the latest prognostications of our own planning commission, the next plan period which is the period 2013-2017 will require reasonably conservatively estimated, one trillion dollars of additional investment expenditure and infrastructure, so if you look forward 7 years from today, a population of 1.2 billion is expected to spend 1.2 trillion dollars over the next seven years which is 150 dollars per capita per head per year.  Now that is a very, very tall order and there are many challenges for us to be able to deliver on this goal.  I would like to focus on three and these three are at least two of the three reflect actually the structure of the conference as well.  The first and the most obvious one is the financing challenge, so roughly we are expected to spend 10% of GDP equivalent every year on infrastructure and about 40% or half of that in private infrastructure so what that translates into is about 2% equivalent a year every year of GDP will be required in equity financing and about 4-5% of GDP equivalent will be required in debt financing just for private infrastructure but for overall infrastructure the debt financing requirements would be closer to 7-8% of GDP equivalent. 

Now you might wonder that a country that saves 35% of GDP equivalent, this amount should not be that hard to finance but the reality is that our financial markets are not deep enough yet to meet the requirements of the infrastructure space.  So just to illustrate that total household savings out of the 35% of GDP comprise 22%, the rest is mostly corporate savings and a little bit of public savings so the equity financing requirements of private infrastructure annually every year would represent roughly the equivalent of 20% of the free cash flows generated every year by all of corporate India and that is very difficult to execute.  Likewise, the debt financing requirements for overall infrastructure would represent two-thirds of the financial savings in this country.  There is a big difference between financial savings and total savings, household savings.  Financial savings are only half of our total savings so two-thirds and the bulk of those line bangs, so two-thirds of the savings that Indians place in banks every year would have to go systematically to finance infrastructure if we are to meet these goals.  This requires financial deepening on a scale that is hard to contemplate.  It requires the development of deeper equity markets, different classes of equity to be provided and it requires the development of the insurance sector, contractual savings more generally and deep end liquid corporate debt markets. 

A lot is happening but sufficed to say that we will for the foreseeable future despite our substantial savings have to lie on foreign sources of equity risk financing and foreign sources of long term debt financing which is why you are so important and your role is so important for this country in these coming years.  The second set of challenges that we will face are linked to the allocation of land, natural resources and environmental sustainability.  Land is an extreme short supply and infrastructure development requires lot of it.  For a country at our stage of development there is a huge amount of value accretion that occurs from the change in land use, from agriculture to non agriculture progresses. 

Unlike China where there is value accretion is captured by the state and substantially reinvested in the development of infrastructure and in our country that value accretion is not being captured by the state in the form of taxes or in the share of profits; however there is a political problem with respect to the perception of fairness about the distribution of these values.  Environmental sustainability, we have plans to add another 120 Gigawatts of generating capacity over the next 6-7 years and much of this has been core based.  The environmental consequences of this could be quite severe.  Much of the coal that we need for this purpose is in forest covered land and therefore mining it is also environmentally risky. 

Our cities are growing at a pace that will see the population in urban India double from 350 million to 700 million people of the next decade.  The design of our cities is totally energy inefficient.  Our transportation systems are not planned for public transportation.  We under invest in railroads and are over investing in our road infrastructure.  All of these have consequences for the environment.  The good news is that the debate in India has shifted or is shifting from a narrative of allocation of historical unfairness vis-à-vis the rest of the world to a realization that just for ourselves we need to do something urgently to deal with the problem of carbon emissions.  This has seen a flaring of activity on the policy front. 

The national solar emission and renewable energy certificates that will be trade able, renewable energy targets set for each state are but few of the initiatives that have been unveiled.  Likewise on the environment, policy is becoming much more stringent and on land, acquisition is becoming more controversial.  This has led to a huge and ongoing debate and uncertainty with respect to how all these aspects of infrastructure development are going to be regulated.  This debate is very healthy because it will sort out these problems hopefully in a sustainable manner but in a short run, it does lead to execution difficulties and risks on the ground.  The third set of problems and challenges are related to inclusion. 

Although our energy footprint per capita is very low, one of the reasons it is low is that 100 million households in this country do not have access to reliable and electricity, hundreds of thousands hamlets and villages in this country do not have access to roads or drinking water.  There is a huge push within government to sort out these issues inclusion is no longer a political gimmick, it is actually a political necessity.  Our challenge is to deliver inclusion without leading to fiscal irresponsibility and now that might sound an oxymoron but the reality is that in our country there is so much administrative waste, only 15 cents on every dollar that is intended as a social transfer gets to the intended recipient. 

If we could improve the delivery of public infrastructure, I am confident that we would be able to deliver inclusion without busting the bank.  Financing issues are subject to various panels that you will have the opportunity to participate during the course of the day.  The first panel is focused on execution challenges, the second panel is focused on social and environmental consequences or infrastructure development.  In the afternoon, we will be discussing the land and the challenge of urban infrastructure development as well as bottom of the pyramid business models to deliver inclusion, but for this morning, we will kick off the proceedings with a discussion of a fascinating new scheme that hopefully will hugely reduce the cost of delivering public services and for that I am deeply privileged and delighted to Welcome amongst us Nandan Nilekani.  All of you know Nandan no doubt as the co-founder of Infosys and as a risk taking entrepreneur, but Nandan is much more than that.  He is a consummate professional.  He is now a celebrated author. 

If you have not read “Imagining India,” I urge you to buy it and read it.  Buy it even if you do not read it and most importantly, he is now Union Cabinet Minister in charge of the National Unique Identification Authority.  He is all these things but he is more, he is a kindred spirit, driven to make a difference and I think in his current responsibility, he has an opportunity to do precisely that, bring about transformative change to the way public services are delivered in this country, so please welcome Nandan.  Nandan the floor is yours.