Private funds flowing swiftly to infrastructure projects

NEW DELHI: Private investments in India’s infrastructure projects crossed $25-billion mark in the first three quarters of 2009, as conducive government policies and liquidity in capital market opened the floodgates of corporate funds into the booming energy and transport sectors.

An improved show by infrastructure industries helped India lead its South Asian neighbours in terms of economic performance, said a World Bank report. South Asian region is poised to grow by about 7% in 2010 and nearly 8% in 2011. “The average size of new (private infrastructure) projects tripled from $211 million in 2006 to $638 million in 2009,” World Bank’s advance report on the South Asia Economic Update 2010 said.

In 2009, the top four initial mandated lead arrangers for project loans in the Asia-Pacific region were Indian banks. India’s energy and transport sectors attracted 40% of total investment commitments worth a record $26 billion.

Investment commitments to new infrastructure projects with private participation grew by 15% in 2009. The concentration was in large energy projects in a few countries, including India.

“Since last year, the public-private partnership (PPP) has been on an upswing,” said Arvind Mahajan, executive director at consulting firm KPMG.

This could be because of the country’s globally competitive manufacturing sector. In the first six months of 2009, India exported more small cars to the rest of the world than China, thanks to the relocation of car manufacturing from Korea and Japan.

The road, power and port sectors attracted the maximum investment in the last few months, Mr Mahajan said. But the energy and transport sectors saw large funding gaps with the railways lagging behind significantly.

To accelerate growth, India needs to “create a pipeline of PPP projects and create long-term sources of financing, with pension funds flowing into infrastructure, instead of only bank funds”, Mr Mahajan said. There is also a large pipeline of new projects coming to the market. As of September 2009, there were 96 such projects in South Asia with an investment of $48.5 billion in total. Of these, India accounted for 55, with an associated investment of $24.5 billion.

India‘s recovery after the slowdown is well under way. Growth is projected to recover to 8–9% in the next two years. The recovery of Indian GDP could be even faster than what is projected, but rising interest rates, a small appreciation of the rupee, and continued low growth in high-income countries weigh on the recovery. Risks to the outlook come from volatility in capital inflows, global recovery, and inflation shocks.