Raising India: Why More Infrastructure Isn't Enough

Investors are funding airports, roads and utilities. But basic services are lagging

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Chiara Goia for Time

India: Working on the power grid in Mundra

The revolution here began with a handful of salt. In the 1990s, during the early days of India's economic reforms, the American agriculture conglomerate Cargill had the idea to turn the wide salt pans of Kutch, near the port city of Mundra in the western Indian desert, into a production and shipping hub for packaged salt. Cargill found a local partner in Gautam Adani, whose family owned a small textile firm. Adani spent $11,000 in 1993 on land around Mundra, a minor stop on the 600-year-old Indian Ocean trade route, to use as a potential site for the venture. Cargill ultimately backed out of the deal, leaving Adani with 4,500 acres of barren, marshy land. The last nine miles to the port were submerged.

Adani made the most of it. In 1998 he built a new jetty with four multipurpose berths for handling bulk cargo. By 2003 he had added a container terminal and a 40-mile railway linked to the national network. Mundra is now India's largest private port, capable of handling 100 million tons of cargo a year and diverting business from much larger terminals like Mumbai. Mundra also became a base for Adani's expansion into the much more lucrative markets for coal and power plants.

Last July, investment banks including Morgan Stanley and Merrill Lynch bought 8% of Adani Enterprises for $586 million, a deal that values the company at more than $7 billion. The port is now home to two thermal power plants, one of them the largest in India. Adani was 31 when he acquired the land; at 48, he is the seventh richest man in India. Says Adani: "I always had big dreams about Mundra."

Adani is one of a new band of big dreamers and entrepreneurs who have moved out of traditional industries and into roads, power plants, airports and seaports--the bustling new business of nation-building. India needs infrastructure desperately and is willing to pay big--huge, in fact--to the people and companies that will make it happen.

India's future depends on it. The government will commission $500 billion of infrastructure spending between 2007 and 2012, and $1 trillion in the five years after that. India's policymakers believe that poor infrastructure is the only thing standing between India's healthy 7%-to-8% annual growth rate and those elusive double-digits.

Mind the Gap

To close that gap, India has embraced private financing of infrastructure to an unprecedented degree. More than a third of infrastructure finance now comes from the private sector, compared with just 5% in 2003, and that stake is getting bigger. Rajiv Lall, who advised the Chinese government on macroeconomic policy in the 1990s and then moved to Wall Street, is now CEO of IDFC, India's largest financier of private infrastructure. India's boom, he says, is different. Private companies aren't just building India's infrastructure; they are buying it. "It's privately managed, privately owned infrastructure," Lall says. "And I think for that scale of private-sector involvement, you really have to go back to 19th century United States."

This gold rush, like that of the U.S., is powered by risk-taking, optimism and opportunism. It's a source of constant conflict and great contradictions, explaining why gleaming highways rise up effortlessly while decent sewer lines do not. There's a risk that infrastructure asset bubbles will form--overfunded, underused toll roads, for instance--while basic services languish. How this tension is resolved will determine what kind of economic superpower India will become.

India was once infamous for state control, but when the door to entrepreneurs finally opened, newcomers like Adani walked in. His 4,620-MW plant at Mundra is operated under a public-private partnership: 70% of the power is committed to state utilities, while 20% goes to long-term purchase agreements with special economic zones. The rest can be sold at market price. Unless you completely goof up on fuel, Adani says, it's a sure bet. "From the first day that we start generating, we start making money," he says.

Another big entrepreneur, G.M. Rao, moved from power to airports. He grew up in the village of Rajam, in the southern state of Andhra Pradesh. The son of a gold and jute trader, Rao tried various businesses before moving into infrastructure after India liberalized the power sector in 1998. Speaking from his headquarters at the Delhi airport in a conference room named for Neil Armstrong, Rao describes how his company, GMR, won the bid to build the Hyderabad airport despite never before having bid for, let alone built, an airport. He needed an established airport operator as a partner, so Rao flew to Kuala Lumpur to woo the Malaysian airport authority. The two power plants he had already built didn't impress. "It took almost three months," Rao recalls. "We went there, we convinced them. Mahathir [Mohamad, then Prime Minister] had a very bad view of India. He'd had a very bad experience earlier." Malaysia took an 11% stake in the Hyderabad airport and in three other GMR airports.

On the ground, private road building in India really took off only in 2004, when the government changed the public-private formula: instead of collecting tolls for a fixed amount of time, private operators would get 100% of toll revenues, in exchange for a lump-sum payment. The $207 million payment made by IRB for the Mumbai-Pune Expressway toll is "still the largest up-front payment to be received by the government in a single contract," CEO Virendra Mhaiskar says proudly. That deal was so lucrative for IRB that the government changed the game again, this time to revenue sharing, so that it now collects 38% of the $6 million that IRB's Surat-Dahisar highway generates every month. Today the company operates 3,700 lane-miles of toll roads, earning $90 million of profit on $395 million in revenue and the attention of foreign investors, including Blackstone and Wellington, which hold about 12% of the company's stock. Mhaiskar is a billionaire at age 38.

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