ANZ CEO Forum Intercontinental Hotel New Delhi, India David Twine December 2002

1. India’s attractiveness as an investment destination. Myths, perceptions and the reality.Sectoral analysis and case studies ANZ CEO Forum Intercontinental Hotel New Delhi, India David Twine December 2002

2. Introduction As an element of investment due diligence and risk assessment, we sought to explore India’s attractiveness as an investment destination based on: • actual government stances and actions (as opposed to rhetoric), and; • case studies of foreign investors and how they have fared in India.

3. To examine the hypotheses ….. ‘Success’ or ‘failure’ is determined by … • the nature of policy evolution for the industry segment; • being an MNC or otherwise; • specific company’s operating style and/or strategies.

4. Approach Examine how: • Companies in different sectors have evolved; • The sectoral categorisation reflects the policy evolution in India i.e. • where domestic and foreign participation has always been allowed • where domestic private participation was and/or is allowed • that were only open to government agencies.

5. Framework Macro: Era and sector correlation. Assess its impact Govt. and policy makers Specific political parties outlook and perspective Media and other institutions’ roles. A Company’s Success or failure • Market place acceptability: • Market share • Competitive scenario • Acceptance by society • Brand building / recognition NGO / other bodies Specially for resource sector

6. Case studies done in … • FMCG • Automotive • Power • Gas • Refinery • An overview on India’s economic liberalisation and current thoughts on disinvestment have been provided to qualify the analysis

7. Presentation Structure • India’s economic liberalisation • Common concerns • Myths and perceptions • Sectoral analysis and case studies • Implications • Current thoughts on privatisation • India: environment for investment

8. India’s economic liberalisationHistorical perspective • Pre 90’s, industrial development followed a socialist model. Key sectors (infrastructure, steel etc.) were nationalised, others were licensed; • Private capital flows were discouraged by a tight regulatory regime, which restricted foreign ownership, technology transfers and portfolio investments in companies operating in India; • Foreign capital flowing into India consisted of aid, commercial borrowings, government debt and bank deposits from Non Resident Indians.

9. India – the last decadeKey sectors opening up to foreign investment and privatisation • 1991 saw the beginning of economic liberalisation in India Key sectors opened to foreign and private investments • Power and energy 1991 • Telecom 1993 • Banking • Durables • Automotive 1996 • Insurance 2000

10. Current scenario • Restrictions for Foreign Direct Investment (FDI) have been removed from most industries, barring a select list of hazardous and environmentally sensitive industries • Foreign exchange regulations have been simplified further

11. Common concerns (1) Stringent FIPB approval process • In the early years of liberalisation, the FIPB (Foreign Investment Promotion Board), under the Ministry of Commerce and Industry kept a strict vigil on investments; • Any company wishing to set up operations in India had to go through long and tedious procedures to obtain a clearance; • Today however a significant shift in mindset is seen; from ‘seeking a reason to holdback’ towards ‘finding reasons to approve’.

12. Common concerns (2) • While the Board still has policies and guidelines governing investments in certain sectors, these are not as stringent as they were previously. • Flexibilities are built into the system for: • substantive investment and commitments – not for marginal investors; • ‘genuine’ proposals, e.g. not for products with no intention to manufacture domestically.

13. Common concerns (3) Press Note 18 (FIPB) • This note disallows companies having a JV in India to qualify for automatic approval to set up a 100% subsidiary. • Provisions exist that equally protect MNCs against their Indian counterparts ‘bullying’ them

14. Common concerns (4) • Policies protect the Indian manufacturer • The reality however is … • India is one of the original signatories to GATT and is committed to WTO agreements in full spirit • QRs on almost all items have been removed • FDI restrictions on most items have been removed as well • However the government would stretch the commitments to protect India’s concerns as any other country would

15. Myths and perceptions Harassment and corruption • Bureaucratic interference does slow down and frustrate business operations • Corruption and often harassment are de-motivating

16. Myths and perceptionsHarassment and corruption But, • a strong and pro-active judiciary has emerged in the recent past (note its role in relation to the Narmada Dam construction which is rife with controversies amongst NGOs and project leaders); • Extremely strong Central Vigilance Commission (CVC – reporting directly to the President of India) is making a beginning to ‘clean up’ the system.

17. Summary of key issues • Economic development in India initially driven by financial bankruptcy • Today however it is increasingly driven by: • International commitments - WTO; IMF; etc. • Pressures of foreign governments; • Lobbying by industries • by a small political establishment that seeks to do what is economically right and fiscally responsible. • Foreign Policy is now being drafted along economic considerations - countries with economic clout will leverage access to markets

18. Sectoral Analysis Where foreign investment has always been allowed Case: FMCG

19. FMCG in India: Policy development (1) • MNCs have been allowed to operate in India ever since its independence in 1947. Most international big players have had operations in India, e.g, • Hindustan Levers had manufacturing facilities • Colgate and Nestle had only trading activities • In 1978 however the government reserved several product categories only for the small scale manufacturers • Further, MNCs were asked to reduce equity stake to 40% or else to leave the country

20. FMCG in India: Policy development (2) • Government’s perspective on this sector was - these products are luxury items and therefore do not warrant encouragement • Later in the 80’s, governments policies of higher excise duties on toiletries and cosmetics made the environment difficult in this sector

21. FMCG in India:How it all opened up • Local players who did not have technology and capital could not provide good quality products and remained ‘in-competitive’ • MNCs were better equipped to sustain higher costs and benefited from the controls. They were able to spread out to reach larger masses • In the post 1991 era, duty rates have been slashed, there has been a progressive reduction in excise duties and licensing restrictions have been eased

22. FMCG in India:Today • Foreign FMCG companies dominate most product categories • Few national level Indian FMCG companies exist, mainly in niche segments • There is a large and fragmented ‘unorganised’ sector, which, sheltered under government incentives competes with the organised sector on price and availability (but not quality)

23. FMCG in India:Indian organisations • As a fragmented and unorganised industry it has been difficult for the industry to meet mass consumer needs; • To cater to all consumer needs required investments and technology as well; • Most Indian companies never had the capabilities to meet these expectations; • The FMCG sector even otherwise has not been a priority for big industrial houses like Tata, Reliance etc.

24. FMCG in India: How the operating environment changed • In 1978 due to the policy of protecting the small scale sector the environment turned hostile towards the then big players in the market. Many like Coca Cola did leave India • However, there were others like Hindustan Levers who adapted to the changing environment and stayed on demonstrating a long term commitment

25. Case studies were carried out for the following companies (but are not included in this pack) • Hindustan Lever • Coca Cola • KFC • McDonalds

26. FMCG sector in IndiaSummary • Almost all leading players are MNCs. • Indian companies exist in niche and regional segments only • Indian consumers consider the overseas FMCG organisations as ‘Indian’ as the local companies • Success for the companies has come from long term commitment towards the Indian market and adapting themselves to its diverse culture

27. Sectoral Analysis Where foreign investment has been allowed post liberalisation in 1991 Case: Passenger Cars

28. Passenger Cars in IndiaHistorical perspective (1) • Untill the 1940’s, passenger cars were only being imported into India • In 1946 Premier Automobiles Limited (PAL) became the first manufacturer of cars in India by assembling Dodge DeSoto and Plymouth cars • Later in 1949 another Indian company, Hindustan Motors (HM), started manufacturing cars

29. Passenger Cars in IndiaHistorical perspective (2) • Until this time foreign companies operating in India were allowed to assemble cars • In 1952, the government set up a tariff commission to develop an indigenous automobile industry • Foreign companies which were assembling cars and did not have plans to manufacture in India were asked to shut down • As a result General Motors, Ford and others left India • The next three decades saw only two models on Indian roads -- Ambassador (from HM) and Padmini (from PAL)

30. Passenger Cars in IndiaPolicy controls • These restrictive set of policies were mainly aimed at building an indigenous auto industry • But further controls that were imposed related to production, distribution and even extended to fixation of prices of cars and dealer commissions. This started affecting the Indian manufacturers as well

31. Passenger Cars in IndiaChanging environment • In early 1980’s Maruti Udyog Limited (MUL), a Government of India JV with Suzuki of Japan was set up • This became the turning point in the Indian auto industry. Most controls were abolished during this era • Though the govt. liberalised policies by announcing foreign collaborations for technology and finance, these policies mainly favoured MUL. Other Indian manufacturers like TELCO, PAL and HM were denied permissions by a strict FIPB.

32. Passenger Cars in IndiaPost liberalisation • In 1993 the industry was de-licensed and gates were opened for foreign investors to set up operations in India; • As a result Daewoo, Hyundai, Ford, Mitsubishi, General Motors,Honda, Fiat, Toyota have set up their manufacturing units; • With the advent of technology and newer models that these companies brought in, Indian manufacturers faced stiff competition.

33. Passenger Cars in IndiaPost liberalisation (2) • This has resulted in PAL having closed its operations and HM’s share in the market has continuously been on the decline • The only Indian manufacturers now are TELCO and Mahindra. • Overall the industry is dominated by MNCs.

34. Passenger Cars in IndiaMNC success India (1) • All MNCs have invested heavily in India • Companies like Daewoo and Ford have their manufacturing plants planned for exports from India as well • For instance Ford has built a plant that conforms to ISO 14001 and has a capacity to produce 100,000 cars per annum • Most MNCs are addressing the Indian consumers needs in terms and quality. They have altered their car designs and included variants to cater to their tastes.

35. Passenger Cars in IndiaMNC success in India (2) • Today these companies have successfully convinced the Indian government to protect them from imports of used vehicles in India, even though such vehicles could be from their parent company

36. Case study was carried out for Ford company (but is not included in this pack)

37. Passenger Cars in IndiaSummary • With only two private India operators and a Public sector undertaking, the sector remained closed for foreign investment for a long time • Today however the Indian operators are no longer in existence and the industry is lead by foreign companies • Certain policies did favour Maruti for a few years, but with dis-investment of public sector companies on the cards a level playing field is now clearly in place. • The industry is more capable and competitive and the consumer is a major beneficiary.

38. Sectoral Analysis Where foreign investment has been allowed post liberalisation in 1991 Case: Power and energy

39. Power sector in India (1) • Until early 90’s power generation was undertaken exclusively by the public sector and select Indian organisations • The door to Foreign Direct Investment was opened in 1992. Indian delegations travelled the globe to attract investors • Nearly a decade after the sector was opened up, the progress is abysmal. Of about 50 projects sanctioned, including a tranche of so-called “fast track” projects, less than one fifth have been commissioned

40. Power sector in India (2) • Many large players like Cogentrix have pulled out of the country completely and Enron (the most famous of all) is on the verge of pulling out • Today there are hardly any success stories upon which to comment in this sector – either of a foreign company or Indian • The Enron project has the ‘distinction’ of bringing out a number of lessons in the otherwise uncharted recesses of the Indian power sector • A case study on Enron and PowerGen discusses the issues in this sector

41. Case studies were carried out for the following companies (but are not included in this pack) • Enron • PowerGen

42. Power sector in IndiaSummary • Only one major foreign power plant having been able to start operations in India affirms an environment that is extremely slow – so slow that several high profile companies have been sufficiently discouraged and de-motivated to exit • In this sector neither enough Indian or foreign companies have been able to demonstrate material success • Successful Indian and foreign ventures exist in the mini power generation segment.

43. Sectoral Analysis That were only open to Government agencies Case: Gas sector

44. Gas sector in India • Indian consumption of natural gas has risen faster that any other fuel in the recent years. Use of Natural Gas in power generation and the Indian government’s encouragement to build gas-fired electric power plants has been the main reason • Given that a large gap exists between the domestic gas supply and demand, India remains a large importer of gas. The imports are facilitated via ship or cross border pipelines.

45. Gas sector in IndiaOpening up of the sector • Until the beginning of liberalisation in 1991, this sector was completely regulated • Thereafter the sector was partially opened with permission granted to parallel marketers to sell LPG • Given the overall reliance on imports, India is investing heavily in the infrastructure required to support the same, by building LNG import terminals and pipelines

46. Gas Sector in IndiaEnvironment today • The FIPB has already approved almost a dozen prospective LNG import terminal projects; • However, to keep the demand and supply situation under control, GoI believes that not all terminals should be built according to the approved schedule, as their combined capacity would exceed the projected demand • GoI has thus frozen approvals for new terminals. (This unfortunately presupposes that all of the approved projects will materialise, and on schedule and at the approved capacity – this is not remotely probable or possible).

47. Gas sector in IndiaCurrent players (1) • The largest state government projects have been established by Petronet – a JV between Oil and Natural Gas Commission (ONGC), Indian Oil Corporation (IOC), Gas Authority of India Limited (GAIL), National Thermal Power Corporation (NTPC) and Gaz de France • Under this plan each of the state firms hold a 10% stake, the Gujarat state government would hold another 5% stake. The rest is offered to private investors.

48. Gas sector in IndiaCurrent players (2) • Other projects include consortiums such as: • British Gas and NTPC • Siemens and CMS energy, Woodside petroleum and Unocal • Total Fina Elf with Tata electric and GAIL • Shell has received approval for an LNG import terminal at Hazira, Gujarat • Reliance Industries also has plans of an LNG import terminal at Jamnagar, Gujarat - near its oil refinery

49. Gas Sector in IndiaEnvironment today (1) • But, the progress on most of these is slow, due to the government’s lack of experience in negotiating and entering agreements, e.g. Power Purchase Agreements, Financial Guarantees, Escrows • Another problem with the current climate in LNG imports is the lack of a coherent regulatory structure • India is currently working on a new legal framework for natural gas – the Gas Regulation Bill.

50. Gas Sector in IndiaEnvironment today (2) • This bill seeks to set up a regulatory body for natural gas and to allow for exclusive distribution rights in some areas to guarantee a market for new gas projects • Although the bill has been drafted it is yet to be discussed by the Indian parliament. It is a long way from becoming law.