SECRETARY PAULSON SPEAKS AT INDIAN INFRASTRUCTURE CONFERENCE

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SUBJECT: SECRETARY PAULSON SPEAKS AT INDIAN INFRASTRUCTURE CONFERENCE
HIGHLIGHTING INVESTMENT POTENTIAL


1. (U) Summary: At an Infrastructure Conference in Mumbai on
October 29, 2007, visiting U.S. Treasury Secretary Paulson
encouraged continued economic reforms in India, especially
transparent and independent regulatory frameworks. He
underscored India's need to develop a domestic corporate bond
market to facilitate long-term investment in infrastructure.
Indian Finance Minister Chidambaram said India needs to raise
infrastructure investment from 5% to 9% of GDP over the next
five years or to about $488 billion, with private sector
investment opportunity in India's infrastructure estimated at
around $150 billion. In addition to promising to broaden and
deepen the bond market, the Finance Minister invited US
companies to participate in the current bidding for the `ultra
mega power projects.' Despite these welcoming comments, and a
recognition of the great opportunities in infrastructure
investments, U.S. investors are still concerned about political
and economic risk and project implementation. End Summary.



U.S. and Indian Government Officials Emphasize India's Urgent
Need for Infrastructure

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2. (U) On October 29, 2007, Secretary Paulson and 30 U.S. firms
participated in a conference in Mumbai to highlight investment
opportunities in India's infrastructure. Organized by the
US-India CEO Forum, the Infrastructure Investment Conference was
attended by CEOs of some of the largest Indian companies as well
as senior Government of India (GOI) officials, including Finance
Minister P. Chidambaram and Deputy Chairman of the Planning
Commission Montek Singh Ahluwalia. In his speech, Secretary
Paulson emphasized the need to improve India's financial
infrastructure and expressed support for developing Mumbai into
an International Financial Center (IFC). Urging the Indian
government to continue opening and liberalizing the economy, he
underscored India's need to develop a domestic corporate bond
market to facilitate long-term investment in physical
infrastructure. The Secretary also highlighted the USG's
commitment to the civil-nuclear deal as an avenue for India to
obtain clean energy. The Secretary emphasized that a Doha
agreement is within reach, and the single greatest beneficiary
will be the Indian people. He concluded his remarks by pledging
to continue working with his Indian counterparts to limit
protectionist sentiment in U.S. and India.




3. (U) In his remarks, Finance Minister Chidambaram noted that
India needed to develop its lagging infrastructure to achieve
and sustain its continued growth. According to Chidambaram,
India needs to raise infrastructure investment from 5% to 9% of
GDP over the next five years. This is equal to $488 billion
over five years with roughly 30% of that expected to be financed
by the private sector. He admitted that the regulatory process
could be improved, as some dedicated infrastructure funds have
been held up, not for lack of funds but rather for a lack of
projects.



Finance Minister Defends Slow Capital Liberalization and Legal
Process

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4. (U) In the Question and Answer session, Finance Minister
Chidambaram defended India's slow-moving capital market
liberalization process. He maintained that capital market
reforms were being carried out at a slow pace to avoid shocks
and to prevent irreversible mistakes "that the Indian economy
cannot afford." He noted that several Western pension funds,
including CALPERS and the Norwegian national pension fund, and
insurance funds were already investing in the Indian capital

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markets. All registered funds are free to invest in India, he
continued. The Finance Minister added that the government is
only concerned about inflows made by unregistered entities, or
coming from un-regulated countries. Asked about the dollar's
global depreciation, Secretary Paulson declared that a strong
dollar is in the U.S. national interest and the market should
set the value of the currency. The Secretary emphasized that
India has let the market determine its currency rate and kept
inflation low as a result; his focus has been on China which has
not let its currency appreciate. He noted that economic
reforms have continued for the past 15 years in India,
regardless of the government in power.




5. (U) Responding to a question about the transparency of the
dispute resolution process in India, Chidambaram offered a
surprisingly strong defense of India's judicial process,
comparing it favorably to those of the U.S. or the U.K. He
noted that India was one of a few countries which recognized
"rule of law" and which had an "independent and well-functioning
judiciary." He assured the audience that there was no need to
feel that their disputes would not be resolved, adding that
India's arbitration system is "as good as any in the world."
Arbitration is conducted by a panel of international arbitrators
from Singapore, Hong Kong and London. The Finance Minister
added that India recognizes foreign awards and those awards are
enforceable in India. He specifically mentioned the Dabhol
power plant case from 1998, saying that it was resolved by 2005.
Chidambaram said he was told that it could have taken an even
longer time to resolve a similar case in the U.S. or the U.K.




6. (U) Questioned about the corporate bond market, Chidambaram
acknowledged that India had fallen behind in developing a
corporate bond market. He noted that, at present, the bond
market represents less than 1% of India's GDP, trading volumes
are insignificant, and process of issuance and clearing trades
is cumbersome. He said that he "has a list of things" that are
in process of being implemented to broaden and deepen the bond
market.




7. (U) One audience member suggested to Secretary Paulson that
an independent and equidistant regulator be created to address
the needs of all three stakeholders in a public/private
partnership: the public sector, the private sector and the
consumer. Secretary Paulson pointed out that in sectors where
government entities act as both regulator and providers of
financial services, independence is difficult to achieve, making
it difficult to attract private sector investment. The
Secretary suggested that greater regulatory dialogue between

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American and Indian regulators was a possibility. He
highlighted the need for transparent and independent regulatory
frameworks that are moving towards global consistency and mutual
recognition.




8. (U) In the following session chaired by Mukesh Ambani,
Chairman of Reliance Industries Limited, Montek Singh Ahluwalia
addressed the current state of India's development (Note: His
address drew on themes expressed in an interview with McKinsey
that has been published at the following weblink:

http://www.livemint.com/2007/11/05002031/8216 We8217re-clear
ly-hea.html). Al Hubbard, the Director of the U.S. National Economic
Council, discussed the strong and strengthening U.S.-India
relationship, touching on defense, the environment and Doha as
areas where further progress could be made. He also pressed for
action with regards to the civil nuclear accord, stating the
window to complete the deal is closing. Asked about
infrastructure development in the U.S., Hubbard noted that U.S.
has its own challenges in ensuring transparency; in particular,
he pointed out that some companies have tried to lobby Congress
to change the winning bidder for certain projects. Asked

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whether, the government had too large of a hand in
infrastructure development, Ahluwalia replied that
infrastructure development is being done in different ways in
different states and in different sectors. In particular, he
noted that the development of "minor" ports had been deregulated
in order to introduce competition with the "major" ports, which
remain regulated by the central government.



Poor Response for GOI-touted Ultra-Mega Power Projects

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9. (U) During the Question and Answer session, Finance Minister
Chidambaram conveyed that for the four 4000MW "ultra mega power
projects (UMPP)," bidding had been aggressive. However, the
Finance Minister expressed surprise that U.S. companies had not
bid on these projects. He specifically invited U.S. companies
to participate in either the construction or financing of these
projects. The innovative financing methodology that these
companies could bring would bring down the cost of power, he
maintained. In a separate panel discussion, Sanjay Reddy, of
the GVK Group, explained the lack of interest in these ultra
mega power projects. He observed that the power sector requires
large capital investments, but are risky due to the political
environment surrounding them. (Note: His group did not bid on
UMPPs despite experience in building power plants.). Responding
to an American investor's question about project delays, Reddy
noted that this is largely due to a lack of large construction
companies in India.




10. (U) At a session of the leading bureaucrats from four
Central Government ministries- Civil Aviation, Urban
Development, Power, and Road Transport - each emphasized that
projects in their respective sector were open to investment by
domestic and foreign investors. Responding to a questioner who
termed the UMPPs to be "Soviet Style," Anil Razdan, Secretary of
the Ministry of Power, informed the audience that these projects
were inspired by China's recent build-out of power capacity. He
spoke admiringly of how the Chinese added 100,000 MW of power
capacity last year while India's total power capacity is about
120,000 MW.



Enormous Opportunities for U. S. Investment

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11. (U) During a panel discussion of Indian infrastructure
companies, Rajiv Lall of IDFC said that there is an acute
shortage of infrastructure services and that U. S. companies
could make large returns on investment by providing
infrastructure services to Indian companies. He also noted that
Indian entrepreneurs have an advantage over international
entrepreneurs mainly due to an "information asymmetry." There
is a golden opportunity for smart financial capital from
overseas to team up with this domestic talent, given the depth
and quality of Indian entrepreneurial talent and management
expertise, he added. In a separate session chaired by James
Lambright, Chairman of the U.S. Export-Import Bank, leading
American institutional investors - Richard Frank of Darby
Overseas Investment, Joseph Azelby of JP Morgan, Emil Hendry of
Lehman Bros, and Tracy Wolstencroft of Goldman Sachs - all
concurred with Lall and said they would prefer to partner with
local entrepreneurs and leverage on their talent, skill and
knowledge of local conditions. They added that no international
company could think of not investing in India, given its strong
economic fundamentals and the size of its market. They
emphasized that "a wall of money" was ready to invest in Indian
infrastructure if more projects were approved.


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12. (U) During the closing session of the conference, B.K.
Chaturvedi, a member of the Planning Commission, contradicted
the remarks of the Finance Minister by stating that, from his
perspective, he saw more projects than investment capital. When
pressed about this point from the audience, he emphasized that
major institutions, like the Wall Street investors who had
spoken earlier, seemed to be looking only at large projects;
there are many smaller projects that have not come on the radar
of these investors, he said. He admitted, however, that in the
recent past, project scopes were not up to international
standards but he thought that this problem had been corrected.
Dinesh Chandiok of Tata Realty and Infrastructure noted that the
more pressing need was to develop urban infrastructure. The
added pressure on urban infrastructure due to the increasing
migration from rural to urban areas and the lack of investment
in urban infrastructure has created a "mismatch between the
quality of life demanded and what is available," he added.




13. (U) Comment. This Infrastructure Conference was useful in
highlighting the many areas where U.S. and Indian investors and
officials agree - and disagree - on infrastructure investment
opportunities in India. All participants agreed on India's
strong economic fundamentals, and the need for massive
infrastructure investment, as well as regulatory changes that
would attract this investment, such as those that would create a
broader, deeper corporate bond market. However, there is a
disconnect between U.S. investors and the Indian government on
the utility of India's dispute resolution and arbitration
system, as well as risk assessments for large projects like
the ultra-mega power projects. While the UMPPs are an essential
part of the Indian government's infrastructure strategy, U.S.
investors so far have shown little interest in these "Soviet
style" projects. Considering the GOI's dismal record in
implementing large infrastructure projects, post believes that
the percentage of India's infrastructure needs that come from
public/private partnerships should be much higher than the
projected 30 percent. The recent quarterly report by the GOI's
Ministry of Statistics and Program Implementation suggests that
out of a total of 866 public infrastructure projects, across 13
ministries, 218 have no specified completion date and another
297 are running badly behind schedule - over 16 years in extreme
cases. The Ministry estimates that delays have increased
project costs by 37%.
OWEN