India's infrastructure barons: Part 2

GM Rao speaks about his future plans for Delhi airport and why he is modelling GMR Infrastructure on companies like Macquarie Airports and Ferrovial.
IndiaÆs inadequate infrastructure is a sore point for investors the world over. This is the second interview in a series we are running on how the current government is trying to change the situation. A consortium led by GM Rao, including Fraport and Malaysia Airports Holding, has been awarded the Delhi airport. We talk to Rao about his plans.

How did you get into infrastructure?
I turned to infrastructure accidentally with no vision and no goal. I set up a power plant, the first in Tamil Nadu. Then I set up a barge mounted project in Karnataka, which when commissioned was the world¦s largest and another 370 MW power project in Andhra Pradesh.

In 2003 I partnered with Phaneesh Murthy to set up a BPO, Quintant Services with plans to focus on banking, insurance, card services and investment banking. Within six months I had an opportunity to cash out of this venture which I did as I had now decided to enhance my focus on infrastructure. With this goal in mind I sold my brewery and leased my jute business. I realised my time was at a premium and I could not do justice to so many things.

I had perceived an opportunity in airports in 1999 itself. At the time the Hyderabad government wanted someone from the private sector to set up a new airport. The traffic then was low and there was lacklustre interest. Bidders put in bids with a subsidy element and our demand for subsidy was the lowest.

In 2000 I won portions of the Golden Quadrilateral highway project. We were a first time entrant in roads and had stiff competition from established players such as Larsen & Toubro, Gammon India, Punj Lloyd. The project was structured on a BOOT basis and our bid was significantly lower then our nearest competitor.

Why did you foray into airports?
I am very optimistic on airport traffic. Our country has a huge pool of human resources. We are fast establishing ourselves as a knowledge management centre and back office to the world. Cities like Dubai and HK have grown around their airports. I foresee a time in the future when we no longer need to levy a landing charge because we will have enough alternative sources of revenue.

We perceive an opportunity for India to become a one stop destination. Why should passengers use cities like Dubai, Bangkok, Singapore as a gateway to India? In India the service orientation in the private sector has always been high. Couple this with the changing economic profile of the country and we are poised on the brink of quantum change. Further, tourism, both inbound and outbound, is increasing tremendously. Low cost airlines have converted a lot of first time travellers to air.

What made you bid for Hyderabad airport?
I saw tremendous future although initially the process was slow and there were times we contemplated walking out. We had to acquire 5400 acres of land and resettle 1000 families. These things are never easy.

We are now in the midst of construction and our vision was correct. The traffic to Hyderabad has increased manifold. At the time of bidding, it was four million for 2008, at award of project, it was five million, at financial closure, it was seven million and midway through construction, it has been increased to 12 million. During the first quarter of the current year, we witnessed 42% growth.

From being a regional hub the city has now become an international hub. This has happened partly through our time and effort. We have participated in international events such as Routes Networking Event to market the city as a hub. We have highlighted the advantages of the climate which provides visibility for landing 365 days a year. Hyderabad is also the geographical centre for India within a 2 hours flying time to all the major cities in India.

To date the India airport awards have been mired in controversy. What makes you believe the going will be easier in the future?
World over airport privatisation is a contentious issue. In India the process may seem as if it was fraught with controversy but Fraport tells us they found the transparency high and our judicial system efficient. The government proactively solicited our feedback on the process was run and we are confident that next time it will be smoother.

Airport development is today an economic compulsion for the country. Every infrastructure sector in the country be it power or telecom which has opened to the private sector has had a learning curve. I believe the opportunity lies in the adversity. We are among the businessmen seeking to benefit from the second wave of reforms in India. Infrastructure projects require vast amounts of both capital and patience.

What are your further plans in the airports area?
We are awaiting further airports specifically Chennai and Kolkata. World over airport developers such as Macquarie, BAA. Fraport manage multiple airports. We are working towards that model.

How are you financing your airports?
Financing for our airport projects has been from domestic banks. Financing has been easily available and every time we seek bids for loans the order book is 3-4 times over-subscribed. For the Delhi airport project we had to provide a financial commitment of Rs40 billion ($897 million) which was picked up 75% by ICICI Bank and 25% by Punjab National Bank. We have also used financial engineering to the extent possible in our projects. For example, we have securitised the future receivables of our road projects and prepaid loans.

What are your plans to maximise returns from your investment in the airports?
We are studying the best model for every airport related business ¡ real estate, hotels, warehousing, fuel, maintenance, advertising, cargo. In areas where we do not have the requisite skills and experience we induct a partner. For example, in Hyderabad we partnered with Menzies for cargo and Accor for hotels.

What is your background?
I am the only one of seven siblings who is a technical graduate. Our family was traders. My father divided his assets between us and we got Rs300,000 and a truck each. We pooled our resources and started a business trading jute. This was in the seventies when India was shackled by the license raj. I was always interested in backward integration to have control over jute supply. This we managed to transfer the license of an existing jute mill in Tamil Nadu and built a mill in my native village in Andhra Pradesh.. The mill did well and provided us with the cash and confidence to pursue other ideas. We took whatever licenses we could get in our region and ended up with licenses for a brewery and a ferro alloys business then in the nineties we forayed into the sugar business.

Your name is well known in connection with Vysya Bank. How did you get involved?
I got into banking by accident. Vysya Bank was a community bank with a low capital base of Rs6 million. In 1984, it IPOed. The issue was not fully subscribed and I picked up the balance. I was inducted on the board. The following year Vysya Bank made a rights issue, which was again not fully subscribed.

Around the same time my family decided to divide our business. I liquidated jewellery, sold land, used my proceeds from the family split to raise money and became a major shareholder in Vysya Bank. I had a vision that to own a majority stake in a bank will be very special and with banking becoming important, it was the right time to be in the banking industry in India.

How did ING acquire Vysya Bank?
I increased focus on Vysya Bank after chairman and managing director Ramesh Gelli left in 1991. I left my village and moved to Bangalore. I decided to induct an equity partner to grow and imbibe best practices. Bank Brussels Lambert of Belgium took initially a 5% stake then hiked this to 10%. I always treated BBL as a strategic partner, despite the minority stake. With its help we invested in technology and cleaned up the balance sheet to enhance focus on core banking. We also acquired a local life insurance license with ING.

In 1998 ING acquired BBL worldwide. Then in 2002 it approached me to hike stake in the bank and buy me out. Pursuant to this I also sold my stake in the life insurance joint venture to Rajan Raheja.

To what do you attribute your success in infrastructure businesses?
I believe my background in banking has stood me in good stead in infrastructure. I knew what it was and was not possible to finance at an early stage of the bid. I also believe the unique distinction of knowing India during the license raj and post liberalisation has been an advantage. I have been trained to understand how to extract value out of an opportunity.

In emerging markets things do not happen in one year. We have been investing in infrastructure for 15 years. We had an early mover advantage in roads and airports. Our vision of the future now is very clear. We will continue to establish a leading presence in two businesses ¡ agriculture and infrastructure.

You have chosen to house all your infrastructure businesses in one company, GMR Infrastructure. Why combine them?
I studied a number of companies like Macquarie, Australia and Ferrovial, Spain to determine what kind of corporate structure will work best for our long term ambitions and our investors. I felt housing businesses with different cash flows and durations ¡ airports, roads, power ¡ provided risk mitigation and reduced asset liability mismatch.

Why did you IPO GMR Infrastructure?
Mine was the first IPO by an infrastructure company in August,2006. Out of a total of 11 projects six were operational at the time I IPOed. I diluted only 20%. Indian investors were not familiar with the holding company structure or the sector with the result that the foreign portion was over subscribed 8 times while the domestic portion achieved only one time subscription.

I listed my company to allow Indian retail investors to participate in my infrastructure story. I believe I am creating assets of national pride. I also felt a listing will force us to be more transparent and instil the highest standards of corporate governance.

Yours is a family owned business. How do you ensure high corporate governance standards are maintained?
I know that family owned businesses do not always inspire confidence in investors however it is also a fact that in the west very highly regarded and well managed companies are family owned and run. We have consultants advising us on the best strategy to adopt for family ownership. We will shortly launch a family constitution which we are currently developing. This will address issues of conflict resolution and succession which can make investors nervous. We will also set up a family council and in the long term we aim to separate ownership and control.

What is your vision of the future?
My vision of the future is we move from being a ômanagementö family to a strategic family and finally an investment family. I have already professionalised my agriculture, energy and roads businesses. My airports business is not yet mature; it is still in development mode. We intend in the long run to take a back seat.
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