Investment Strategy for India Investment Commission Report February 2006 Executive Summary India has achieved impressive GDP growth of over 7% per annum in the last few years. However, sustaining growth at over 8% per annum will require a significant increase in investment levels in the economy – from approximately 30% of GDP to about 34% of GDP1. Over the next 5 years, this translates to a cumulative investment of over $ 1. 5 trillion. The report undertakes to define a strategy that could enable India to achieve this investment goal.
While expansion of domestic investment is essential to achieve this goal, FDI, which has been stagnant at about $ 5 billion2 in the past, also needs to be increased significantly – the Investment Commission has set itself the goal to increase the level of FDI to $ 15 billion by 2007-08. To this end, 25 key sectors spanning Infrastructure, Manufacturing, Services, Natural Resources and the Knowledge Economy have been studied. They represent a significant part of the economy, and between them would require an aggregate investment of $ 525 – $ 550 billion over the next 5 years.
The sector studies also identified past investment levels, plans/ forecasts for future investment, as currently visible, and identification of the deterrents to investment. Extensive investor interactions have provided key insights on policy and other impediments faced by investors. The Commission has interacted with industry bodies, associations, Ministries at the Centre and State level, business delegations and companies. Interactions also included meetings with business delegations from the US, UK, Italy, Japan and the Scandinavian countries with over 130 companies represented, altogether.
Direct investor interactions (mostly personal meetings) were undertaken with an additional 64 international and domestic investors. Arising out of these interactions, projects were identified for facilitation/ support totalling to a likely investment of about $ 30 billion. Representations on policy/ procedures or other impediments were either resolved through reference to the Finance Ministry or have been incorporated in the recommendations in this report. The major impediments to investment that span multiple sectors have been identified as: 1.
Investment restrictions and/ or entry route barriers in several sectors of significant investment potential/ investor interest 1 Assuming an Incremental Capital Output Ratio (ICOR) of 4. 0; while this is higher than the current ICOR of ~3. 6, it is based on the assumption that greater investment in infrastructure and manufacturing will increase ICOR going forward 2 Less than 10% of China’s FDI Investment Commission 1 2. Absence of long-term policies, non-implementation / reversal of policy and breach of contract 3. Lack of level playing field – especially in sectors with PSU dominance 4.
Inflexible labour laws 5. Many agencies engaged in doing the same or similar activities relating to FDI 6. Bureaucratic delays, discretionary interpretation, vested interest, bias and subjective practices (In particular, approvals from Ministry of Environment & Forests seen as a major impediment in terms of inordinate delay). 7. Centre-State divergence on investment related policies 8. High cost of entry, transactions and exit; ineffective dispute resolution 9. Poor infrastructure 10. Priority Sectors are not clearly identified/ specified
Based on the investment goals and the identified impediments, a set of broad recommendations have been made which could facilitate and improve the investment climate. These are listed below: 1. Remove/ reduce restrictions on sector caps and entry route on all sectors other than those considered “strategic”. Permit “automatic route” for all investments within the sector cap. 2. Provide labour flexibility by removing the requirement of State Government approval from Chapter V-B and permitting Contract Labour in all areas 3. Promote SEZs for key sectors.
Redefine norms on the basis of scale, investment quantum/ levels and sector focus. Separate the Developer of the SEZ from the Occupants 4. Provide a level playing field in sectors with PSU dominance – establish an Independent Central Regulatory Commission headed by a Chief Commissioner appointed by the President or the Prime Minister with independent Regulators for each regulated sector 5. Provide long term visibility and consistency of policy 6. Improve business environment – reduce number of procedures and approvals; make all approvals time bound and non-discretionary 7.
Eliminate scope for discretionary interpretation to stem corruption – update key laws and statutes using Study Groups or Committees (with Government and Industry participation) to reflect this 8. Establish effective mechanisms to resolve centre-state issues – establish an Empowered Committee framework (as done for VAT implementation) for implementation of key policies that require Centre-State cooperation such as Power sector reform, Labour law reform, Urban Land reforms (including ULC Act), APMC amendment 9. Other Recommendations Create a special high level fast track mechanism for priority sector projects
Investment Commission 2 Enhance availability of skilled manpower for sectors like Biotechnology, Automotive Engineering, Textile Engineering, IT – establish new private educational institutes with international collaborators Facilitate upgradation of Urban infrastructure by having a directly elected Mayor in key cities – as is the case with major cities in China and the USA. Establish a single point contact at the Centre to implement policies and procedures to enhance investment as well as facilitate high value projects across Ministries and Departments.
In addition, recommendations have also been made for specific sectors – Energy, Civil Aviation, Telecom, Metals and Mining, Textiles and Garments, Auto and Auto components, Food and Agro processing, Financial Services, Real Estate & Construction, Tourism and IT / ITES. As the next phase of taking investment levels to a higher plane, the Investment Commission recommends: 1. The creation of National Thrust Areas – where the Government removes all impediments and provides special incentives for a pre-determined time period in order to achieve a specified growth.
These could include Tourism, Power, Textiles and Agro-processing. 2. The hosting of Mega Events which will focus the country’s attention on infrastructure development while also building national pride. Some ideas are: 2010 Commonwealth Games, 2020 Olympics, Football World Cup, Formula One Racing etc. Investment Commission 3 Overview The Investment Commission was constituted in December 2004 with the objective of enhancing both foreign and domestic investment levels in India. It is estimated that to support the GDP growth target of over 8% per annum, a total investment of over $ 1. trillion is required over a 5 year3 period, of which FDI should be $ 72 billion. The mandate of the Commission entailed identifying and interacting with investors, promoting investment opportunities in India; facilitating investors in their investments; and recommending policy / implementation changes which would remove or reduce present deterrents to higher levels of investment, particularly in FDI, where India is attracting only about $5 billion per year or less than 1% of world FDI flows4 (as compared to $60 billion or almost 10% of world FDI flows by China).
The Investment Commission has set itself the goal to increase the level of FDI to $ 15 billion by 2007-08. The Commission has undertaken their task through the following activities: A sectoral assessment of investment opportunities The preparation of an ‘Investment Handbook’ and a website, to promote India Identification of, and personal meetings with, current and potential investors Meetings with foreign embassies, foreign investor groups, Indian business councils and trade associations Identification of policy / regulations which are deterrents ecommendations for changes in policy and procedures. to investment and Further, on a continuing basis, the Commission has also been facilitating and supporting individual investors in their specific projects, with references to the Finance Ministry, other Ministries and relevant State Governments. This report covers the activities of the Commission to-date. The 1st section defines the Investment Goals to support a GDP growth rate of over 8% per annum, with sector-wise investment goals estimated for the 25 sectors studied to-date.
The 2nd section summarizes the Investor Interactions by the Investment Commission, including the status of the Projects facilitated, and concludes with the impediments to investment brought to the notice of the Investment Commission by investors. The 3rd section presents the Recommendations for policy or regulatory changes which the Commission believes would be needed to enable India to achieve its investment goals and growth targets on a sustainable basis. The concluding section Looking Ahead, discusses possible future options with specific suggestions for Government consideration which could contribute to a higher growth rate. FY 2006 to FY 2010 Global foreign direct investment (FDI) inflows in 2004 are estimated at $612 billion, according to the United Nations Conference on Trade and Development (UNCTAD) 4 Investment Commission 4 Investment Objectives Investment Commission 5 Investment Objectives Investment Objectives India’s $ 700 billion economy has been growing at over 7% per annum over the last 3 years. However, focused efforts to attract higher levels of investment are required if India wants to achieve the interlinked goals of consistent over 8% p. a. GDP growth, faster manufacturing growth, greater employment and better infrastructure.
The Investment Commission has attempted to define the investment goals (to achieve India’s economic and social objectives) and craft a strategy for achieving them. Current Investment Levels The investment levels in the economy over the last 4 years are presented in Table 1. Table 1: Investment in the Indian Economy Investment by 2001-02 Public Sector + Others 5 2002-03 $billion 2003-04 2004-05 27 32 45 61 Private Sector 27 29 41 57 Household sector 54 65 72 82 6 5 5 6 Total Investment (GDCF ) 110 128 164 209 GDP at Market Prices 4947 5247 600 694 24. 4% 27. 2% 30. 1% FDI (included above) 6 Investment as % of GDP 2. 3% st Source: Central Statistical Organization (CSO) Jan 31 06 Press Release Investment by the Public Sector is estimated to be about $ 61 billion in 2004-05. Total private sector investment in 2004-05 was approximately $ 57 billion with FDI of about $ 5 billion. For an over 8% p. a. GDP growth, with an assumed Incremental Capital Output Ratio (ICOR) of 4. 08, the investment needed is over 32% of GDP. In comparison, it is only in FY 05 that the total investment (GDCF) has increased to about 30% of GDP. Required levels of Investment To achieve a sustained GDP growth of over 8%, India will require over $1. trillion9 of capital investment over the next 5 years, across the public and private sectors as indicated in Table 2. 5 Includes investment by Government, PSUs, municipalities and errors & omissions. Gross Domestic Capital Formation; this includes ‘Valuables’ based on the latest methodology 7 GDP at market prices for 2001-02 and 2002-03 is at 1993-94 prices (old series) 8 The ICOR is currently about 3. 6, but is likely to increase with major investment expected in manufacturing and infrastructure. For forecasting required investment the ICOR used is 4. 0. 9 At 2005-06 prices, and with the assumed ICOR 6
Investment Commission 6 Investment Objectives Analysis of current and potential investment levels (detailed in the next section) suggests that, under current conditions, investment is unlikely to reach the required target levels. It will require multiple interventions from the government and support agencies to create an attractive investment environment and raise investment levels so as to meet the investment goals and GDP growth targets. Table 2: Investment Goals10 2004-05 2005-06 2006-07 2007-08 2008-09 $ billion 2009-10 203 242 263 290 323 350 6 8 12 15 17 20 Total Investment (Goals) 209 250 275 305 340 370 GDP 694 00 860 930 1,000 1,090 30. 1% 31. 3% 32. 0% 33% 34. 0% 34. 0% Domestic Investment FDI Investment as % of GDP Sectoral Analysis Studies were undertaken of 25 sectors, spanning Infrastructure, Manufacturing, Services, Natural Resources and the Knowledge Economy. The study of each sector covered the investment levels to date, plans for future investment and identified the deterrents to investment, whether related to policy or otherwise. Investment goals in each of these sectors were identified, over the next 5 years. The aggregate investment goal, across these 25 sectors, is expected to be about $525 to 550 billion11.
Table 3 provides an overview of the Sectoral Analysis with the investment levels in each sector over the past five years, the likely investment in the sector based on current visibility, the investment goal for each sector and a qualitative view of the deterrents to investment. The qualitative view on the policy/ other deterrents to investment is as explained below: Low: The sector can achieve investment goals with only promotional support and removal of generic impediments to investment (such as inflexible labour laws, delays in approvals and clearances such as MoEF approvals etc. )
Medium: Sectors require some policy interventions in addition to promotional support High: Sectors require major policy interventions in addition to promotional support to enhance investments The table also indicates whether the deterrents are predominantly at the Central Government level (C), the State Government level (S) or at both levels (C/S). 10 GDP and Investment forecasts are at 2005-06 prices for FY 2006-07 and beyond Includes both public and private investment; these 25 sectors constitute a significant part of the Indian economy. The difference between this total and the $ 1. trillion goal mentioned earlier includes investment by Government, Municipalities, Defence, Railways and other sectors that have not been studied in this phase of work. 11 Investment Commission 7 Investment Objectives Table 3: India – Investment Overview All figures in $ Billion Policy/ other Total deterrents to Investment investment (Low/ Goal over 5 Medium/ High) years14 Total Investment in Completed Projects in past 5 yrs12 Investments announced/ underway13 20. 4 3. 82 1. 54 0. 13 13 53. 8 20. 2 5. 3 2. 9 15 High (C/S) Low (C/S) Low (C) High (C) Medium (C) 140 25-30 8-12 15-17 22 6. 98 9. 2 High (C) 25 7. 6 14. 0 Medium (C/S) 20-25 Textiles & Garments 0. 68 1. 5 Electronic Hardware Chemicals Auto Components Auto Food & Agro Processing Gems & Jewellery Services Banking & Financial Services Insurance Real Estate & Construction Retail Tourism Natural Resources Coal Metal Ores-Iron ore Metal Ores – Bauxite, Chrome, Manganese Oil & Gas Exploration Knowledge Industry Pharma & Biotech Healthcare Services IT & BPO Services 3. 22 7. 65 0. 53 1. 41 5. 0 7. 0 0. 77 Sectors Infrastructure Power Roads Ports Civil Aviation & Airport Telecom Petroleum & Natural Gas Manufacturing Metals – Steel & Aluminum Textiles Low (C/S)
Garments High (S) Low Low Low Low 17 35 5 13 0. 5 High (S) 10 N. A N. A Low N. A15 N. A N. A High (C) 25 N. A N. A High (C) 4-6 3. 61 7. 5 Low (C/S) 50 N. A 1. 65 1. 0 1. 0 High (C) Low (S) 5-616 8-10 1. 68 2. 1 High (C) Low 15 2. 3 1. 1 N. A 4. 1 Medium (C) 7-8 0. 8 N. A N. A 0. 2 N. A 5. 0 Low Low Low 7. 5 25 3-4 2. 5 30 10-15 Low Total 525-550 12 Source: Projects Today for Projects above Rs. 1 Crore completed as of Apr 1, 05 Source: Projects Today or Tata Strategic Management Group (TSMG) estimates. Typically calculated as a product of investment envisaged and the historical implementation ratio for the sector. 4 Source: Planning Commission, administrative Ministries, Industry Associations or reputed agencies (McKinsey, Ernst &Young, KPMG, TSMG etc. ) 15 Exports could increase by $15 billion 16 Excluding investments in the supply chain 13 Investment Commission 8 Investor Interactions Investment Commission 9 Investor Interactions Investor Interactions On an on-going basis, inputs were sought and representations reviewed from relevant stakeholders on issues impacting investment. The Commission has also attempted to facilitate major projects and address impediments faced by investors.
The Investment Commission proposes to individually contact select potential international investors who have been shortlisted following a detailed scan of global corporations. Inputs and Consultations The Investment Commission has interacted with relevant investors, with a view to facilitate or assist them in projects. The commission has also interacted with several domestic and foreign investors, international business delegations, government embassies and industry bodies. In several cases, the commission has also made specific recommendations to the Ministry of Finance and also to other Ministries/ State Governments.
The following is the list of key investor interactions of the Commission over the past year: 1. Business Delegations and/ or Ambassadors of key countries that account for almost all of inward FDI: Ambassadors/ High Commissioners of USA, UK, Japan, France, Italy, Australia, Netherlands, Austria Business delegations that were met by the Investment Commission were from all major trade and investment partners and included over 130 companies represented in the delegations as presented in Table 4 Table 4: Business Delegations met by Investment Commission Country Delegation Composition USA US India Business Council
USIBC senior leadership United UK-India Business Summit Trade officials + 32 companies Kingdom Japan Japanese Business Delegation 20 companies Minister for Production Activities Italian Ministry officials + 35 and Business delegation companies Italy Minister of Infrastructure and Minister + Confindustria officials Transport Australia The Global Foundation 15 companies Scandinavian Skandinaviska Enskilda Banken SEB + 43 companies countries (SEB) Conference 2. International and Domestic investors – the Commission has interacted with 64 investors across Infrastructure, Manufacturing and Services sectors, as listed in Table 5 3.
Industry bodies and associations – CII, ASSOCHAM, FICCI, NASSCOM, Gas Industry Group, Indo Belge Diamantaire Association Investment Commission 10 Investor Interactions 4. Central and State Government level interaction Key Ministries and Departments met – Coal, Mines, Environment and Forests, Shipping, Road Transport and Highways, Power, Petroleum and Natural Gas, Industrial Policy & Promotion, Civil Aviation Orissa Government team on issues relating to the need for improved/ enhanced infrastructure especially Roads and Railways given the planned investments in the state.
Karnataka government on facilitation of Metro Cash and Carry investment requiring amendment in the Karnataka APMC Act. Inputs from Ministries/ Departments – Civil Aviation, Power, Telecom, Agriculture, DIPP (on the recommendations contained in the Group of NRIs India FDI Initiative report). In addition, a comprehensive review was conducted of major investments (over Rs. 100 crores) made under the Automatic Route from early 2001 to end 2004. Sponsors / promoters of 15 major projects were contacted and their experience of investment in India through the Automatic route obtained.
Recommendations arising out of this survey were shared with the Ministry of Finance and are being implemented. Table 5: Interaction with International and Domestic Investors No Investor Sector/ Project International Investors 1 AES Power – Generation projects in Orissa and Chattisgarh 2 Alcoa Metals & Mining – Alumina/ Aluminum projects 3 Barclays Financial Services – Banking sector liberalization 4 BHP Billiton Metals & Mining – Mining policy and approvals 5 Blackstone Financial Services – Private Equity 6 Boeing Civil Aviation – Aircraft; Offset plans 7 British Airways Civil Aviation – Airlines; Increased flights with UK British Gas Petroleum & Natural Gas; City gas distribution 9 Citigroup Financial Services – Banking sector liberalization 10 Carlyle Group Financial Services – Private Equity 11 Carrera Group Textiles & Garments – Denim Jeans project 12 Coca Cola Food Processing – Beverages; policy issues Commonwealth Bank of 13 Financial Services – Banking licence Australia 14 Dairy Farm Trade – Retail sector policy 15 Dow Chemicals – India investment interest 16 GE Diversified – Energy Policy inputs 17 General Atlantic Financial Services – Private Equity 18 Getty Family Trust Real Estate investment 19 Hochtief Airport
Civil Aviation – Airports; Airport bid in India Hindustan Semi20 Electronic Hardware – Semiconductor Fabrication plant conductor 21 Huawei Electronic Hardware – Telecom equipment 22 IBM IT/ ITES – Labour policy/ flexibility Investment Commission 11 Investor Interactions 23 Intel Japan Bank for 24 International Co-operation 25 Lafarge 26 Leighton 27 LG 28 Lincoln Electric 29 Maersk 30 Macquarie Bank 31 Mapex 32 Metro Cash & Carry 33 Mitsubishi 34 Morgan Creek Capital 35 Morgan Stanley RE Fund 36 Nano Tech Silicon India 37 The Bank of Nova Scotia 38 Nokia 39 P&O Ports 40 POSCO 41 Rothschild Trust 42 Samsung 43 Sasol 4 Siemens Singapore Technologies 45 Telemedia (STT) Skandinaviska Enskilda 46 Banken (SEB) 47 Space TV 48 Trikona Capital 49 Total 50 TESCO 51 UPM-Kymmene 52 UT Group 53 Walt Disney 54 Wal-Mart India 55 Westfield 56 Woolworths Domestic Investors 57 Hindalco 58 IDFC 59 L&T 60 Nicholas Piramal PTC 61 Reliance Energy 62 63 Sterlite 64 Zodiac Clothing Co. Investment Commission Electronic Hardware – Semiconductor Assembly-Test plant Financial Services – Lending for Infrastructure and Japanese companies Cement – Limestone lease for new plant Real estate and construction Electronic Hardware – Mobile handset manufacturing
Welding Electrodes – Manufacturing plant in India Ports – Pipavav port investment Financial Services – licence Roads – BOT basis investment Trade – Wholesale; Karnataka APMC amendment Chemicals – Investment plans and port/ customs facilities Financial Sector – Investments Real Estate investment Electronic Hardware – Semiconductor Fabrication plant Financial Services – Banking sector liberalization Electronic Hardware – Mobile handset manufacturing Ports – TAMP and other sector issues Metals & Mining – Steel project in Orissa Real Estate investment Electronic Hardware – Mobile handset manufacturing
Energy – Technology for Coal/ Gas to Liquids Diversified – Investment plans for India Telecom – Investment in Idea Financial Services Media – DTH licence Real Estate investment Petroleum & Natural Gas – Refinery and Retail investment Trade – Retail Paper & Pulp manufacture Real Estate investment Diversified – Media, Hotels Trade – Retail Real Estate investment Trade – Retail Metals & Mining – Aluminium Financial Services – Infrastructure lending Diversified – Infrastructure, Heavy Engineering, Metals Pharmaceuticals – Regulation Power sector inputs Power – Hirma project in Orissa Metals and Mining – Alumina/ Aluminum, Copper
Textiles and Garments 12 Investor Interactions Projects and Representations Arising out of the Investment Commission’s interaction with investors, projects were identified for facilitation/ support; and representations17 on policy/ procedures or other impediments were either resolved through reference to the Finance Ministry or have been incorporated in the recommendations outlined later in this report. Projects The Investment Commission has recommended support to, and in some cases also facilitated, projects and investment proposals (aggregating about $ 28-$ 30 billion) which have been brought to its attention over the past one year.
The issues faced by the project/ proposal, the Investment Commission recommendations and the current status of the project is summarized in Table 6. Table 6: Projects being facilitated Category/ Sector Project/ Proposal Estimated Investment (Project Cost) Issues Current Status $400-500 million Capacity addition plan stalled, needs resolution with Govt. of Orissa (GoO) (disputes between AES & GoO/ GoO entities) $1 billion Expedited clearances and facilitation required at GoI & Govt of Chattisgarh level Stalled at GoO level due to requirement that new capacity must sell output to Gridco (GoO company)
Facilitation in process $12 billion Key issue – GoO draft Power Policy with imposts, especially on export of power. Clearances and facilitation required at GoI & GoO level IC supported this project – however, little progress till date $220 million Maersk acquisition of Indian promoter (SKiL) stake in GPPL was contingent on repayment of a loan from Gujarat Govt. and their support to transaction. Transaction completed with support from Gujarat CM and lenders Infrastructure Sectors Power Power Power Ports 17 18 AES plan to expand OPGC18 capacity in Orissa by 500 MW AES 1000 MW Generation project in Chattisgarh
Reliance Energy 10,000 MW Hirma Power Project in Orissa Gujarat Pipavav Port Ltd. (GPPL) Maersk led project i. e. without a specific project or investment proposal AES owns 49% of OPGC (originally the SEB generation arm) in Orissa. Investment Commission 13 Investor Interactions Category/ Sector Telecom Project/ Proposal STT consortium investment in Idea Cellular Estimated Investment (Project Cost) $180 million (equity investment) Issues Current Status Stalled on interpretation that Temasek has investments in both STT and SingTel (investor in Bharti) Investment not made because of Government policy
Issue on export of ore component of mining lease. Funding for infrastructure not available with GoO. IC recommended strong support to the project Inverted Customs duty issue MoU signed, other project issues under discussion with GoO Agreement on terms not reached. 1st Project moved to alternate country; India being considered for the 2nd project Pending with the Madhya Pradesh courts Manufacturing Metals – Steel POSCO 12 MMT Steel project in Orissa $10 billion Electronic Hardware LG Mobile handset manufacturing $800 million19 Semiconductor manufacturing Intel – Chip (IC) Assembly Test facility $250 million (Phase I)
Primary issue is the request for ~$ 100 million as capital grant/ subsidy. Also 50% subsidy on power cost, warehouse and employee housing subsidies. Chemicals Dow Significant (estimated $10 billion) Legal issues relating to Union Carbide legacy. Need GoI intervention Citigroup, Barclays, Royal Bank of Nova Scotia Commonweal th Bank and Macquarie Bank $2- $3 billion (equity investment) Need policy changes (greater freedom in adding new branches, FDI in Indian Private banks) to increase investments. Delays in issue of Banking licence to Commonwealth Bank; delay in transfer of licence to Macquarie Bank Requires policy hange by GoI Metro Cash & Carry $400 million APMC amendment by Karnataka Govt. required – to permit purchase and sale of agri/ fresh produce. IC urged APMC amendment. Action assured by Karnataka Govt. – no amendment to date Issue resolved. Project being considered by LG Services Banking Banking Trading – Cash and Carry Wholesale 19 – Licences issued; IC took up the matter with RBI By LG only, additional investment anticipated by vendors: $200-300 million Investment Commission 14 Investor Interactions Category/ Sector Retail Real Estate & Construction Media Project/ Proposal Wal-Mart, Tesco Trikona Capital, MSREF,
Rothschild & Getty Trusts Space Ltd. TV Natural Resources Mining Lafarge India Mining Lease for Cement plant Estimated Investment (Project Cost) $200 million+ Issues Current Status Keen to enter if FDI permitted Requires policy change by GoI Potential investors facilitated $300 – $500 million equity investment (with leverage $1 billion+) Introductions and facilitation for investment opportunities in Mumbai by IC $650 million SACFA approval from Dept. of Telecom pending for over 2 months SACFA received $ 200 million Lafarge bid for Mining lease tender of Himachal Pradesh government. Lafarge informed that award may be ased on extraneous considerations. IC supported Lafarge case to Govt of HP. Total Identified Investment approval Lease awarded India Cements $28- $30 billion (approximately) Other Representations The Investment Commission has also endeavoured to facilitate the removal of hindrances and roadblocks faced by investors through recommendations to the Finance Ministry. The representations made to the Investment Commission and their current status or action taken is presented in Table 7 Table 7: Representations to the Investment Commission No Company 1 Mitsubishi Chemicals 2 Coca-Cola Investment Commission
Action Taken/ Current Status Lack of a full fledged Customs office Staff increased. Full fledged in Haldia Port resulting in delays customs office in 2006 Increase requested in equity stake in FIPB cleared increase in Indian company beyond 51% by Coca stake Cola Inc Sales tax incentives lapsed after Incorporated in IC report introduction of VAT Discriminatory labelling of soft drink products sought to be imposed by Facilitation in progress Rajasthan High Court judgement. Representation/ Issue 15 to Investor Interactions No 3 4 5 6 7 8 9 10 11 Company Nokia Representation/ Issue Customs notification for SEZ delayed
Action Taken/ Current Status Notification approved, being issued Recommendations regarding the draft Gas Industry Petroleum & Natural Gas Regulatory Incorporated in IC report Board Bill and the Natural Gas Group Pipeline Policy TAMP responded to issues TAMP should not fix price ceiling, raised by P&O/ IC – no P&O other issues relating to Ports resolution Hochtief Regarding Mumbai and Delhi airport IC brought to the attention of Airport privatization process the FM General Recommendations relating to PE Incorporated in IC report Atlantic investments in India Large no. of approvals, time BHP Billiton
Incorporated in IC report consuming process for mining lease Concern about inflexible labour laws, proposed reservation in the private Incorporated in IC report IBM sector Tax free imports and exports, various Indo-Belgian other facilitatory measures such as no Requirements met through Diamantaire needless investigations/ harassment SEZ Bill by officials Nicholas Investigation by the Narcotics Control Resolved – investigation Piramal Bureau dropped Investment Commission 16 Investor Interactions Potential Investors & Issues Select investors in each sector were identified as part of the “specific target” approach.
The list of these investors, including existing investors targeted for enhanced investment and new investors, is presented in Table 8, along with the key issues or deterrents to investment in each sector, based on feedback from investors. Table 8: Potential Investors20 and Deterrents Potential Investors Sector Existing21 New A. Infrastructure 1 Power 1. CMS 1. Norsk Hydro 2. Singapore Power 2 Roads 3 Ports 1. Dubai Ports 2. PSA 4 Civil Aviation & Airport 1. Unique Zurich 5 Telecom B. Manufacturing 1 Metals – Steel & Aluminium 20 21 1. Bouygues, France 2. Select Japanese & Korean Companies 1.
Evergreen 2. Hutchinson Whampoa 1. BAA 2. Changi 1. BT 2. China Telecom 3. Deutsche Telecom 4. SK Telecom 1. Alcan 2. RusAl Key Issues/ Deterrents Renegotiation/ reopening of PPAs Delays in clearances and approvals – e. g. MoEF approval, fuel linkages Projects too small (2,000 MW), coastal plants based on coal and gas (~1,000 MW each) and hydel of average 250 MW capacity Coal to be the fuel of choice for setting up generation capacity • Ten year PPAs on competitive bidding on tariffs In energy rich States, discourage policies that impose additional charges on generation and export of power
Improve output of existing assets – Reduce theft, Improve PLF, Operate idle plants, Increase hydel peaking capacities – could increase power availability by 11,000 MW Expedite the implementation of large Hydel projects, by review of environmental norms/ clearances, if necessary • Joint development of Nepal’s estimated potential of 80,000 MW • Projects in the North East (e. g. Siang Hydro project in AP) and in the North (HP, Uttaranchal, J&K) Enhance Transmission capacity to facilitate flexibility of energy transfer – especially on the East North and East West corridors • The Tala Project could be used as a PPP model
Reform distribution to energize investment in generation, by: • Dividing state distcoms into manageable-sized business units; operate on commercial lines with transitional support for pre-determined period • Encouraging PPPs in distcoms based on the Delhi model Ensure Regulator autonomy36 (It is suggested that Power be considered by the Government as a National Thrust Area – outlined in the Looking Ahead section on page 45) Coal Investment Goal – $15 billion by 2010 Given India’s large reserves of 240 billion tonnes, it is assumed that coal would be the major source of energy, especially for power generation.
Despite its vast reserves, India produces only 360 Mtpa of coal. An investment of about $30-40 billion is required over the next 10 years ($15 billion by 2010) for India to double its annual coal production apart from modernizing existing mines and developing related infrastructure. Current visibility on investments in this sector is less than $2. 5 billion. Impediments Monopoly of CIL is the largest impediment to investment in this sector. The dominant incumbent is not only perceived to be inefficient, but also carries a poor record of quality, quantity and on-time delivery of coal 35 36
Especially Environmental approvals, fuel linkage Detailed in the Cross Sectoral recommendations Investment Commission 26 Recommendations Restrictions on private and foreign investment (except for captive consumption) Recommendations Carve out specified viable mining blocks from Coal India Ltd (CIL) for captive exploitation. Alternatively, encourage the subsidiaries of CIL to induct strategic partners from leading mining companies – partners could develop existing blocks on a production share basis • Offer all mines that have been closed by CIL to the private sector – in case there are viable recoverable reserves
Adapt the NELP model for private sector participation in Coal mining by offering good quality coal blocks for bids: • As in NELP, award to be based on a quantitative evaluation of financial package/ bid, technical capability, financial capability and work programme • Fixed Royalty payments per tonne extracted, as currently notified, to be offset against upfront bid amount37 Institute a “use or loose” policy for all blocks, to prevent hoarding and ensure best competitive use Permit 50% FDI under the automatic route
Permit merchant sale of coal by coal mines Oil & Gas Investment Goal – $30- $35 billion by 2010 India imports over 65% of its crude oil and almost 45% of its gas – with demand growing at 67% p. a. An equitable and sustainable policy regime with an independent regulator needs to be put in place to enhance private investment and especially FDI. While the refinery segment is expected to see large investment, areas such as gas pipelines and city gas distribution need greater investment.
An estimated $ 30 billion across all elements of the value chain (E&P: $78 billion, Refining: $10-12 billion, Retail: $2-3 billion and Gas Distribution: $5 billion) is required to meet the expected demand in this sector over the next 5 years. Current commitments and plans account for only $13. 3 billion. Impediments Administered pricing mechanism resulting in distortions in pricing and unpredictable returns Dominance of PSUs at all points in the value chain – perceived lack of a level playing field as policies appear to favour PSU incumbents
Restrictions on FDI/ minimum investment clauses especially in marketing Recommendations Permit 100% FDI under automatic route in all segments of the value chain from Petroleum and Natural Gas exploration to retailing without subsequent divestment of 26% or any 37 Upfront bid amounts would be paid to respective State Governments Investment Commission 27 Recommendations upstream investment criteria Tender and award City Gas Distribution (CGD) licences for Local Distribution Companies to invest in retail gas grid/ distribution networks • Offer CGD in cities38 through competitive bidding39; use the Phased Competition model.
Enact Petroleum and Natural Gas Board Bill and the Natural Gas Pipeline Policy • Set up Regulator speedily, thereafter Phase out APM – subsidy for LPG and Kerosene should be funded by a surcharge on all refining output, both in the Public as well as private sector units. 2. Roads Investment Goal – $25–30 billion by 2010 Execution of the NHDP needs to be speeded up. Greater efforts need to be made to attract large international investors and contractors – by better outreach, offering tender blocks that are larger and with specifications that ensure long term quality of the assets created. Excluding development
