Back in 2008, on a typically foggy January morning in the Indian capital of New Delhi, one of the country’s leading businessmen, Ratan Tata, chairman of the $70bn Tata Group, launched the world’s cheapest car, the Nano, with a price tag of $2500.

It was an achievement that drew admiration from around the world, with many proclaiming that the Nano would enable millions of people to purchase a car for the first time in their lives. The media, on the other hand, was quick to attack Mr Tata with questions on safety, price and sales. Like any other seasoned chief executive, Mr Tata handled the questions articulately, but when a journalist questioned him on poor roads and spiralling traffic across India, his tone darkened. “Building roads is not the responsibility of the private sector, and car-makers can’t stop manufacturing cars if the roads are not good,” he said.


His response sent a clear signal to the government that India’s business community and foreign direct investors were demanding better infrastructure, particularly in the case of roads. While sales of the Nano have been sluggish to date, the fact remains that more Indians are now able to purchase cars and the country’s infrastructure is being put under even more strain.

Infrastructure programme

Mr Tata’s message to the government appears to have been heard loud and clear. India’s government plans to make a massive infrastructure investment over the next few years at a cost of $22bn, according to estimates by Kamal Nath, India’s road transport and highways minister. In a recent report, global consultancy firm PricewaterhouseCoopers projected the total investment to be far higher, closer to $92bn when foreign investment was factored in. Since the road-building project began, foreign investors have been buzzing with interest. Banking giant JPMorgan has pointed to the Indian venture as a real opportunity for foreign investors. To date, the government says that the most enthusiastic investors have been from Canada, France, Spain, Germany and, to a lesser extent, Japan.

The Indian road network of 330,000 kilometres is the second largest in the world and consists of expressways, state highways and district and rural roads. Their condition varies greatly. In some areas, namely the north and west, the national highway network is in relatively good condition. However some roads, even in more developed areas, are riddled with potholes and in some parts of the country roads are simply non-existent. Consequently, traffic has become an increasing problem as the growth of the country’s population and economy has greatly outpaced the development of India’s infrastructure. For example, the road journey from New Delhi to Agra, a tourist haven and home of the Taj Mahal, is only about 200km long but can take anywhere from three to six hours. Trains fare slightly better and are able to make the trip in between two and four hours.

Trailing behind

While more attention has been paid to upgrading India’s roads since 2008, they are still a long way from perfect, and many Indians readily admit that the country is trailing far behind the progress that its economic rival China has made in this area. Perhaps it is not entirely fair to compare India with China in this regard, as China’s government is not bound by the strictures of a democratic system, but there is undoubtedly a serious development deficit between the two countries when it comes to infrastructure.

Nonetheless, Mr Nath is targeting a construction rate of 20km of new roads a day. Currently, he estimates that the country is building between 13km and 14km a day. While this is still some way from the target, it is far more than the 3km to 4km that was being built each day prior to 2008.

Mr Nath says: "We’ve set ourselves huge targets and we hope we’ll be able to meet them. The biggest challenge is our own capacity to manage this huge programme. If you have 200 projects in the country, you require 200 project directors. And you can’t have a project without having a bid. You can’t have a bid without things such as feasibility reports. And that’s why our biggest challenge is building our own capacity.”

Road construction looks to be focused largely in the northern and western regions of the country. However, officials familiar with the government’s plan point out that a significant part of the road and highway upgrade will take place in the south, particularly around the urban areas of Chennai, Bangalore and Hyderabad.

Kavan Bhandary, chief executive officer at Indian FDI consulting firm Sparta Strategy, has been working with the government in helping it formulate its plans for construction and the policies that will make it easier for foreign investors to participate. He has also been in talks with numerous foreign firms and says that to date about 40 foreign groups have confirmed their participation. Mr Bhandary says: "[Road construction] is happening everywhere, but really it is the south that needs it the most. That is where the most economic activity has been happening recently. Economic development in the south is happening very fast, and the infrastructure demands are much higher than in the north and west.”

Welcome barriers?

Development projects in the more remote eastern parts of the country will certainly take place, but it is understood that there will be less activity in this region. The reasoning behind this is that the government is planning for most of the roads and highways to have numerous toll barriers, mainly as a way to reward and entice foreign investment and fund the projects and their future maintenance. In India, tolls are very frequent in the north and west of the country, sometimes as often as one every 100km, but in the east they are far less prevalent. It is believed that collecting tolls and enforcing this system in the east will be more difficult, and therefore there will be less interest from investors.

As such, foreign investors, which the government believes will be primarily institutional investors such as pension funds and private equity firms, will have numerous opportunities within the glut of road and highway projects. The investment model will most frequently be what Indian officials and business leaders describe as a 'toll-based scheme', whereby investors put down a certain sum of money and are in return promised a percentage of the tolls collected on those roads over a given period. Tolls in India vary greatly, and can range from 35 rupees to 125 rupees ($0.77 to $2.75) for a single pass. Multiple passes are available for discounted rates but, nonetheless, there is the potential for huge revenues from tolls in a country with hundreds of millions of drivers.

When it comes to the eastern region, highway investment opportunities will follow what is called the 'annuity model'. In this case, the government takes bids from investors, the proceeds of which are used towards the projects, and the government in turn promises to pay back the investor a certain sum of money. While this model is generally considered to be far less lucrative than the toll-based option, its advantage is the lower level of risk, as a concrete return on the investment is guaranteed by India's government. The toll model is subject to fluctuations as it is completely dependent on the terms of the deal and how many cars pass by. Rajhoo Bbarot, managing director of Indian firm Atlanta Infrastructure, says his company is investing through both models as a way to diversify risk.

Getting involved

While investment risks in these projects can be diversified, there are still a number of issues facing potential foreign investors. One of the most contentious issues has been over land acquisition; in certain projects local communities are claiming either that they were not fairly compensated or that they have been unwillingly uprooted from their homes. Future maintenance of these roads has also been a problem in the past, with critics saying that money goes into the development of roads, but that plans to maintain their quality are insufficient. And, of course, there is the tiresome issue of corruption, which has appeared relentlessly in the Indian press after huge scandals hit the country's telecommunications sector.

But Arvind Mahajan, a partner at the global infrastructure division of consultancy firm KPMG, believes India's government has made progress on these issues and that investors have better protection than in previous years. When it comes to corruption, he believes that the government has made the bidding process more transparent, and he also points out that larger deals will face more scrutiny from the public. He believes progress has been made on land acquisition and maintenance too. More specifically, he says that in many cases the government is meant to acquire at least 80% of the land that will be used for roads, so that when a bidder comes along for a concession, these issues are already ironed out.

Find a partner

What consultants, businessmen and the government seem to agree on is that the best path forward for foreign investors to avoid any of the potential pitfalls is to go about their investment with a local partner. The complexities involved in greenfield investment in India are numerous, and this can open the door to corruption or worse.

Mr Mahajan says: “For foreigners it is inevitable that they will want to set up a partnership with an Indian firm. We would advise that [they get] this is in place well before they even make a bid.

"Projects are increasing in size, in both road mileage and the amount of money involved, and the government is asking for qualifications and criteria that are much more stringent. The competition for these larger bids is more limited because the demands are hard to meet. But the largest concession attracted 11 bids, and most of those had local partners.”