VZCZCXRO1537
RR RUEHBI RUEHCI RUEHNEH
DE RUEHNE #2399/01 3311324
ZNR UUUUU ZZH
R 271324Z NOV 09
FM AMEMBASSY NEW DELHI
TO RUEHC/SECSTATE WASHDC 8738
INFO RUEHCG/AMCONSUL CHENNAI 5340
RUEHNEH/AMCONSUL HYDERABAD 1145
RUEHCI/AMCONSUL KOLKATA 4550
RUEHBI/AMCONSUL MUMBAI 4366
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 NEW DELHI 002399 
 
SENSITIVE 
SIPDIS 
 
USDOC FOR ITA/MAC/OSA/LDROKER/ASTERN/KRUDD 
DEPT OF ENERGY FOR A/S KHARBERT, TCUTLER, CZAMUDA, RLUHAR 
DEPT PASS TO USTR MDELANEY/CLILIENFELD/AADLER 
TREASURY FOR OFFICE OF SOUTH ASIA MNUGENT 
TREASURY PASS TO FRB SAN FRANCISCO/TERESA CURRAN 
 
E.O. 12958:  N/A 
TAGS: EINV ECON ENRG ELTN EWWT IN
SUBJECT: INDIA UNLIKELY TO MEET $500 BILLION INFRASTRUCTURE SPENDING 
TARGET 
 
¶1. (SBU) Summary.  Both Government of India (GOI) officials and 
private sector experts expect the GOI to fall far short of its plan 
to spend $500 billion on infrastructure between 2007 and 2012. 
Public-private partnerships have become an acceptable format for 
such projects but the private sector remains a small player due to a 
lack of bankable projects, uncompetitive expected returns, and 
several local and sector-specific problems.  The private sector 
shortfall is primarily due to inadequacies in the policy 
environment, with the GOI lacking the energy or capacity to create 
projects that meet the private sector's desire and financial ability 
to invest.  This approach will have to change if India wants to meet 
its economic growth targets over the long-term.  End Summary. 
 
¶2. (SBU) The GOI Planning Commission set out an ambitious 
infrastructure spending plan in its Eleventh Five-Year Plan 
(2007-2012), calling for $500 billion to be spent on infrastructure 
during the next five years.  Progress, however, has been slow. 
Ministry of Finance Joint Secretary for Investment and 
Infrastructure Govind Mohan told Econoff that in the first two years 
of the plan, India spent only about $75 billion total.  Mohan said 
the crucial years to meet the plan would be 2011 and 2012, when the 
GOI is expecting a substantial jump in infrastructure spending. 
However, Mohan later said that he is expecting India to fall far 
short of its $500 billion in infrastructure spending target after 
five years. 
 
¶3. (SBU) Despite the results to date, Mohan still was quite positive 
about the GOI performance for increasing the amount spent compared 
to past spending and changing the GOI mindset regarding 
infrastructure financing.  Even if the GOI does not meet its target, 
Mohan said, it will still have spent much more on infrastructure 
than in the 10th Five-Year Plan.  More importantly, said Mohan, the 
GOI has taken an ideological leap in breaking from the past to 
embrace public-private partnerships (PPPs).  Prior to 2007, there 
were no PPPs for infrastructure development but the GOI is now 
expecting to finance 30 percent of its infrastructure investment 
through PPPs.  Mohan said PPPs have now taken deep roots within the 
GOI and India has leapfrogged other countries in supporting PPPs. 
 
¶4. (SBU) Private sector contacts, however, were not as quick to put 
a positive spin on the GOI's efforts to increase infrastructure 
spending.  Vinayak Chatterjee, Chairman of Feedback Ventures, an 
Indian infrastructure services company, told Econoff the GOI would 
spend $275 to $300 billion in the Eleventh Five-Year Plan, only 
slightly more than the $222 billion spent from 2002-2007.  He said 
it was government hype that 30 percent would be from PPPs.  Rather, 
he expected it to be closer to 20 percent, a figure several other 
potential investors mentioned as well. 
 
¶5. (SBU) For the private sector, the issue is not a problem of 
finding financing despite the economic times, but rather the GOI 
itself.  According to Chatterjee, the GOI - center, state or local 
level - does not have the energy or capacity to create bankable 
projects.  Even Saumitra Chaudhuri, a member of the Planning 
Commission, told Econoff that the problem is the "malaise of 
government."   Brooks Entwistle, CEO of Goldman Sachs India, told 
Econoff that the result of government performance is that there are 
not a lot of "clean, unencumbered" projects that can compete on 
returns with other developing countries - or even developed 
countries.  Entwistle noted that Goldman Sachs can get the same 
return on a road project in Pennsylvania as it could in India, where 
the uncertainty and risks are higher. 
 
¶6. (SBU) India is flush with foreign capital, as foreign direct and 
indirect investment is increasing rapidly each month.  Lots of cash 
but few bankable projects have led to a seller's market, according 
to Chatterjee.  Doing a "back of the envelope" calculation, 
Chatterjee thought there was only about $60 billion worth of 
projects for the private sector to invest in over a five year period 
or just $12 billion per year. (Note:  Chatterjee assumed that in 
five years $300 billion would be spent on infrastructure, 20 percent 
of which would be financed by PPPs.  End note.)  Chatterjee thought 
part of the problem keeping returns low was there was too much cash 
chasing too few projects. 
 
¶7. (SBU)  Local factors are also keeping returns low or making it 
difficult for international investors to invest in infrastructure 
projects according to Sreekumar Chatra, Associate Director of 
 
NEW DELHI 00002399  002 OF 002 
 
 
Macquarie Capital Advisors.  Chatra told Econoffs that required 
returns on domestic capital are lower than required returns on 
international capital as there is a difference of opinion on risk, 
equal to five to six percent.  Indian investors are also willing to 
accept lower returns since, in many instances, they also act as the 
project contractors, generating fee income that compensates for the 
lower returns on capital.  Lastly, Chatra said domestic companies 
are averse to dilution, making it difficult for international 
private equity firms to invest in Indian infrastructure companies 
since the private equity firms usually want rights and control. 
According to Chatra, the market is starting to see solutions to this 
problem with growing use of mezzanine financing and convertible 
five- to seven-year bonds linked to an IPO, or private equity firms 
taking an initial passive role but later getting a more active 
management role. 
 
¶8. (SBU) Despite infrastructure needs in most sectors, foreign 
investors only find a few sectors attractive.  Going through many of 
the sectors, Chatra discounted water projects as having too much 
political risk, dismissed telecom as too mature of a market to 
generate investable returns, and crossed off rail projects due to 
unclear policies and legislation regarding track usage and rates. 
Airport and ports were okay to invest in, said Chatra, but road 
projects have had significant problems in the past and it still 
remains to be seen if Minister of Roads and Transport Kamal Nath 
will change this.  Even if Nath does make the necessary changes, 
Chatterjee thought American companies still would not be interested 
in the road sector since it is not high tech enough and they cannot 
compete with Indian and Chinese contractors on price.  (In general, 
Chatterjee did not think Americans were really interested in Indian 
infrastructure as developers or investors.  American companies, he 
felt, were only interested in being equipment sellers. ) 
 
¶9. (SBU) Power, however, was the one attractive sector that would be 
a good story for a long time as the Indian power deficit is expected 
to last until at least 2015, according to Chatra.  Joint Secretary 
Mohan said India initially planned to increase power generation by 
80,000 megawatts by 2012 but now expects to build 50,000 megawatts. 
The shortfall was due to land acquisition problems and fuel supply 
issues.  Mohan also thought the original target was too ambitious 
and noted that in the Tenth Five-Year Plan, India was only able to 
build 20,000 megawatts of new power generation. 
 
¶10. (SBU) Comment:  At its current pace, India's infrastructure 
spending is growing six percent annually and equal to approximately 
five to six percent of GDP.  These numbers are about 1.5 to two 
times slower than what most analysts believe India needs to spend in 
order to grow its economy at nine percent over a long period of 
time.  The country is not lacking in opportunities, investor 
interest, or money but will need significant improvement in GOI 
performance of creating an enabling environment for infrastructure 
projects to reach its goals. While several units of the central 
government (e.g. Finance and Roads) have the will to change their 
performance, state- and local-level governments have not exhibited 
uniformly convincing reform efforts.  It's unclear in India's 
federal system how much water the center carries, when so much of 
the critical project creation and land acquisition occurs below the 
center.  End comment. 
 
¶11. (U) Visit New Delhi's Classified Website: 
http://www.state.sgov/p/sa/newdelhi. 
 
 
ROEMER