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Key Sectors of FDI in India: Roads and Railways

By Dezan Shira & Associates
Posted: 1st May 2013 09:33
The Indian government has clearly indicated that infrastructure development remains the nation’s top priority. Recognizing that a steady supply of power along with efficient transport infrastructure will help revive the Indian economy and boost productivity, the government has set up plans to increase gross capital in infrastructure over the next several years to over US$500 billion worth of investments. Given that the agriculture sector is well protected under current governmental policy regulations, and that the services sector is already well established through IT, business processing offices (BPO) and banking, infrastructure development is a critical area for opportunity.
The government plans to fund these projects through public private partnership (PPP) investments. Infrastructure projects in the power and road sectors will be major beneficiaries of this arrangement. Road and railway components have a high potential to attract foreign investment, and there are a large number of state-level PPP projects in the government’s pipeline that have already been awarded.
This article will take a close look at foreign direct investment (FDI) in road and railway infrastructure development in India. As the government encourages greater participation of international investors in India, both of these areas are presented as valuable investment opportunities.
Roads are the dominant mode of transportation within India, with the country having one of the largest networks of roads in the world. It totals 4.2 million kilometers and carries almost 90 percent of the country’s customer traffic and 65 percent of its freight.
The density of India’s highway network, at 0.66 kilometers of highway per square kilometer of land, is similar to that of the United States (0.65) and is much greater than that of China (0.16) or Brazil (0.20). However, most Indian highways are narrow, of poor surface quality and are heavily congested. Furthermore, 33 percent of India’s villages do not have access to all-weather roads.
Indian road construction projects have become a lucrative and emerging investment opportunity for numerous international giants. Projects include:
  • The National Highways Development Project (NHDP): largest highway project ever undertaken by India. Currently being implemented by the National Highway Authority of India (NHAI) with the aim the upgrade and renovate India’s major highways.
  • The Golden Quadrilateral: four-lane pan-India highway ring connecting Mumbai, Delhi, Kolkata and Chennai.
  • The North-South–East-West (NS-EW) Corridor: four lane expressways which will run from Srinagar in the northwest to Kanyakumani in the south, and from Porbander in the west to Silchar in the east.
These projects will collectively add about 13,000 kilometers of four-lane highways to India’s roadways. By 2016, in conjunction with other projects, India will increase its total road network by 66,590 kilometers.
Several multinationals have taken the lead in assisting the growth and reform of India’s highway infrastructure, and various international companies such as Berhad (Malaysia), Deutsche Bank (Germany), Emirates Trading Agency (Dubai), the Isolux Corsan Group (Spain), Italthai (Thailand), Baelim (Korea), Dyckerhoff (Russia), Widmann AG (Germany), IJM Corporation, Road Builders (Malaysia), Kajima and Taisei (Japan) have already invested. These companies have acquired equity stakes of anywhere between 10-51 percent of various highway projects floated by the National Highway Authority of India (NHAI) and other state governments. For toll roads, 100 percent FDI is permitted and income tax breaks for periods of up to 10 years are available, making this sector highly attractive for foreign investment
Facts and Figures:
  • Share of FDI inflow: 6.36 percent (refers to all construction activities, not just roads)
  • Share of PPP by value: 46 percent (INR 1,767.2 billion, US$32.45 billion)
  • Share of road PPPs awarded through international competitive bidding: 43.2 percent (INR 763.4 billion, US$14 billion)
Investment Incentives:
  • Simplified policies with transparent procurement procedures;
  • Model Concession Agreement (MCA);
  • Standardization Viability Gap Funding up to 40 percent of project cost based on competitive bidding for each project;
  • Tax concessions: complete tax holiday for any ten consecutive years out of 20 years of the concession period;
  • Retention of tolls by the concessionaire for BOT (Toll) projects;
  • Duty-free import of high capacity and modern road construction equipment;
  • Greater equitable allocation of risk;
  • Strong dispute resolution mechanism;
  • Robust institutional and legal establishment help for investors;
  • Revenue sharing in the form of negative grants and concession fees; and
  • Protection of the concessionaire from the risks of additional toll ways and competing roads
Investment Opportunities:
  • Roads, bridges and bypasses;
  • Consultancy services;
  • Major highway contracts under international competitive bidding (ICB);
  • Collaborations for equipment manufacturing;
  • Equipment leasing;
  • Design engineering;
  • New technology; and
  • New management techniques
FDI Policy:
  • 100 percent FDI permitted in the road sector
Key Indian Players:
  • Gayatri Projects Limited;
  • IRB Infrastructure Developers Limited;
  • IL&FS Transportation Networks Limited; and
  • Hindustan Construction Company
Investments are needed to improve India’s railway tracks, rolling stock and delivery times. At present, passenger trains can manage an average speed of 50 km/h, while freight trains average just 22 km/h. The country has the world’s fourth largest rail network, which is Asia’s second largest (behind China), and it has long been regarded as the backbone of India’s socioeconomic growth.
The government intends to add 25,000 kilometers to its railway network by 2020 by way of PPP. Despite current low PPP participation, the government has recently announced a new initiative to facilitate and increase such financing and investments.
Previously, containerization was operated under a state monopoly, CONCOR. Facing the increasing containerization of cargo and freight, this sector has now been liberalized and is open to competition. Private sector entities may now either partner with or compete with CONCOR.
Government-owned Indian Railways has identified the following initiatives to help transform the viability of Indian rail into a commercially acceptable and operational model:
  • Introduction of new generation fuel-efficient, recyclable and low-emission trains to generate certified emission reduction credits;
  • Renewal of 44.5 million pre-stressed concrete (PSC) sleepers set for open line work;
  • Technological upgrades and modernization for greater operating efficiency;
  • Dedicated freight lines to reduce consumption along major thoroughfares;
  • Establishment of 200 remote railway stations as ‘green energy stations’ powered entirely by solar energy;
  • Providing a solar lighting system at 1000 manned level crossing gates;
  • Development of PPP in new routes, railway stations, logistics parks, cargo aggregation and warehouses;
  • Development of 100 budget hotels with private participation in the vicinity of railway stations;
  • Installation of Wi-Fi to provide wireless broadband access at 500 stations;
  • Introduction of marketing rights for advertising on railway tickets and reservation charts;
  • Establishment of integrated logistic parks on unused lands;
  • Development of agri-retail hubs, cold storage houses and multi-purpose warehouses on surplus land;
  • Training of railway managers to meet future challenges through setting up an international management institute in New Delhi;
  • Renewal of over 2,941 kilometers of rail (which will require 3.39 million tons of rail steel) and the renewal of over 2,382 kilometers of pre-stressed concrete sleepers;
  • Implementation of a dynamic pricing policy, tariff rationalization, non-peak season incremental freight discount scheme and empty flow direction freight; and
  • Discount schemes, loyalty discount schemes and long-term freight discount schemes to boost capacity utilization levels.
Facts and Figures:
  • Share of FDI inflow: 0.14 percent (INR 11,906.6 billion, US$260 billion)
  • Share of PPP by value: 0.4 percent (INR 15.7 billion, US$288 million)
This article was first published on India Briefing.
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
For further details or to contact the firm, please email or visit

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