Toll Road

Market opportunity

CloudsThe Directors believe that the growth characteristics of India provide a compelling rationale for investment in the Indian infrastructure sector at this time.

The Indian economy has grown substantially in recent years, and India has one of the fastest growing GDPs in the world – with average GDP growth of 7.2% per annum for the period from 2003 to 2007. However, this is still lower than growth rates achieved in China and Russia. It is generally acknowledged that India’s GDP growth rate has been constrained by its lack of infrastructure.

India’s government has a formal five year planning process for its macro economic policies and formulates and publishes a "five year plan" for each period. The most recently completed five year plan has been followed by the 11th five year plan which covers the period from April 2007 to April 2012. The Directors believe this change is an important inflexion point in the development and policies of India. The GDP growth rate for the 9th plan averaged 5.5% per annum while that of the 10th plan was on average 7.2% per annum. The target for the 11th plan is an average GDP growth rate of 9% per annum.

One of the prominent aspects of the 11th plan is the need to accelerate investment in India’s infrastructure. The Planning Commission recognises that a key element of the growth anticipated in the 11th plan is the provision of basic infrastructure facilities such as health, water, education, power and transport. It also recognises the critical role the private sector has to play in achieving the GDP growth objectives.

Large building siteThe Planning Commission recognises that the GDP growth targets will require investment of US$488 billion in infrastructure which will only be possible if there is a substantial expansion in private sector contribution. The share of private sector participation in total infrastructure investment is expected to be around 30%.

The Directors believe that the relative underdevelopment of the Indian debt and equity markets, coupled with the significant domestic infrastructure investment programme, will lead to project developers needing to recycle equity. In other markets, this set of circumstances led to a secondary market for infrastructure assets; it is the start of this secondary market which the Company will seek to take advantage of.

Should the emerging Indian infrastructure market develop in a similar way in which other markets have, the Directors believe that project equity returns could be expected to increase as the sector matures. Increasing maturity in the UK and European Union infrastructure markets over several years led to accelerated and improved equity returns from a number of mechanisms, including:

  • refinancing, which brought equity returns forward
  • market and project maturity, which led to yield compression effects on exit, hence increasing equity value
  • portfolio management effects, as larger portfolios of assets emerged in a maturing market economies of scale in facilities management conferred savings to the portfolio as a whole

Infrastructure projects are those which display some or all of the following characteristics:

  • High barriers to entry
  • The provision of essential services (social or economic)
  • Contractually defined risk allocation between parties
  • Long-term, relatively predictable, often index-linked cash flows, contractually assured
  • Government or blue-chip counterparties

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