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NOVEMBER 5, 2006
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The Building Boom
Is an asset price bubble building up in the real estate market? Flats in posh Mumbai areas sell at the rate of Rs 50,000-70,000 a sq. ft. and housing plots in Gurgaon are going for Rs 1 lakh a sq. yard. This may sound like music to those who have been clinging on to their assets, it portends danger to buyers. The high real estate prices keep the majority out of the housing market and make the dream of owning a house more distant.

The Learning Curve
India's investment in education-as a percentage of GDP-is lower than not just of countries in the West but also some of the emerging economies, including China. The percentage of population in the relevant age group enrolled in higher education too is the lowest among countries with which it must compete. Clearly, there is a need to scale up substantially the physical infrastructure and attract better faculty by offering market wages.
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Business Today,  October 22, 2006
Lars H. Thunell/Executive VP/ International Finance Corporation
"We Are Here To Help The People And The Country's Development"

Before he took over as the Executive Vice President at the International Finance Corporation this year, Lars H. Thunell used to be the CEO of Skandinaviska Enskilda Banken ab (SEB), a north European bank with its headquarters in Sweden. He was in the financial services industry for many years before moving on to IFC. Ask the man how convinced he is about the India story and he tells you that he put in his own money in Indian funds three years ago. "I have not regretted it," he says with a smile. IFC, which promotes private sector in developing countries, has a host of investments in India and over the last one year has granted loans to companies like Tata Steel, DCM Shriram Consolidated and has acquired stakes in Apollo Hospitals, IDFC and (most recently) HDFC, to name a few. Recently in India on his first official visit (but not the first visit per se), Thunell spoke with BT's on IFC and India. Excerpts:

You have had a packed schedule in India. What has it been all about?

I was in Assam on Monday, Chennai yesterday, Mumbai today and Delhi tomorrow. In Assam, we had a look at the Tata Tea plantations to look for possibilities. This is about working on agricultural projects, improving yields, looking at how to use land and tourism opportunities as well. We also looked at Drishti-they are into it kiosks-which is an interesting project. They are into enabling of education with an IT focus. IFC, as you know, is celebrating 50 years of its existence this year and we opened our office in Chennai. We also signed an agreement with Suguna Poultry Farms, where we have invested $11 million (Rs 50.60 crore). In Mumbai, we have had a number of meetings with banks and people who are active in the infrastructure business. It has been a very good trip so far.

What strikes you the most about India? How do you think IFC has made a difference in the overall development story in India?

I was here about a year ago in my earlier job as the head of a Scandinavian bank. What strikes me about India are a few things. One is the tremendous energy and enthusiasm that we get to see in India and that is fantastic. A year ago, people talked about it and people now talk a lot about the manufacturing sector, which is a very significant shift. Finally, people say that they have succeeded in spite of the government. There are significant regulations here and people like McKinsey say that if you do away with some of those regulations, GDP growth rates would increase by 2 per cent. It must be understood that when you have rapid development as you have here, one of the things that happens is inequality. This happens between the rich and poor, for instance, where the gap will widen, which is normal in developing countries. It is important to manage that issue. You will also have inequality between urban and rural. Statistically, you just have to look at GDP per capita and see the difference between some of the states-that is quite high. With IFC's development mission, I think an area like power is our top priority. We believe that needs like these are tremendous and cannot be financed only by public money and we must have public-private partnerships. With our experience from other countries, we can structure some of these transactions. It tends to be long-term money, which the domestic banks could have a hard time providing.

"The tremendous energy and enthusiasm in India is fantastic"

You have given out money to some large business groups in India like the Tatas (this was a $300-million or Rs 1,320-crore, loan to Tata Steel in June last year). Which are the sectors that you are most interested in?

Yes, we have to look at some of the big groups like the Tatas who possibly do not need us any more. The loan we gave for Tata Steel is helping them in their expansion process. But if you look at the situation over the next couple of years, we will work more with second-tier companies and in areas related to agriculture. We want to work on the supply chain of agriculture. Since you have 60 per cent of your population engaged in agriculture, that obviously is an area we would want to focus on. Infrastructure and agriculture are important to us. On agriculture, I must clarify that it will relate to food processes and the logistics related to it. General manufacturing is also important. Normally for us, the financial markets tend to be big. In India, due to regulation, it is relatively small-only 10 per cent of our portfolio. In China, for instance, it is about 30-40 per cent. We would like to increase that number and work with the government in getting that bigger.

How do you, in the process, decide on who is worthy enough of your funding? In other words, what gets you to say "yes" to an investment?

We are, as some people would call us, a social enterprise. Our overriding mission is development and helping create opportunities for the poor. But as a company, we must make money. So, we look at every project from those two perspectives. You could ask if there is a conflict between these two. The reality is that there is a positive correlation between the two. For instance, a successful company can create more employment. It can afford to spend more money on corporate social responsibility. They are more committed and, therefore, there is a positive correlation. In that sense, the conflict is much less than we think it is. We would look at both these things apart from our additionality, as we would call it. What this means is that if things could be done by the private sector, in general by regular banks, for example, we should not be there. Yes, they are grey areas and we tend to focus on something different.

If one looks at IFC in India, the tilt is more towards lending as compared to picking up a stake in a company or equity participation. What is the rationale for that?

Yes, but that is something we would like to change. It is interesting when you go back in time. When we started 50 years ago, the vision was more like a venture capital institution. If you look at the last 50 years, however, it has been more a project finance or debt finance house and over the last couple of years, we have increased our participation in equity. We are in the process of increasing that even more. As we look at the economic cycle that we are right in with all the liquidity, we can add more value than by providing mere risk capital. That's what we are trying to do. We had a discussion in Washington the other week on our equity strategy in general. Today, about 20 per cent of our new commitments are in equity on a worldwide basis, and I would like to move that to 25-30 per cent. We did a total of $7 billion (Rs 31,500 crore) from our own account last year and if you look at it from a total mobilisation point of view, it was close to $10 billion (Rs 45,000 crore). Of the $7 billion, $1.5 billion (Rs 6,750 crore) was on equity.

There are a lot of options for Indian companies to raise money. Even mid-tier companies raise monies from the overseas markets or go public. Why would someone come to IFC?

We provide debt with longer maturities. Again, there are some companies that are not ready to be listed since it involves a lot of requirements like governance. Very often, we get invited to help with the structure of the governance, which, in fact, aids the process of listing-this is like a pre-IPO process. The other thing is helping on bilateral standards. Finally, we have a very good network abroad. We could help companies in risk-sharing and getting contacts overseas. If you take a particular industry, sugar, for instance, we have done a lot of work in Brazil. We do not want to be the cheapest. We want to be the one you come to for other reasons.

"Our mission is to help create opportunities for the poor"

India's reform process has been on for 15 years. What is your own observation of this period? Do you think you have missed out on investment opportunities during this decade-and-a-half?

What you see is a growth rate that has been picking up. There are also success stories like it and pharma. You also see cases of a lot of companies going abroad and the kind of things they are doing there. To me, it is clear that we missed out on the whole Business Process Outsourcing (BPO) story. I was not here then and so I don't know if it was a conscious decision (laughs).

You have participated in the telecom story, though, through an investment in Bharti.

We have invested in telecom in a number of countries. That has been successful for us and we have invested in companies in Africa like MTN and Celtel. As an organisation, we did not miss that opportunity at all. But in the case of BPO and it, we missed it. Well, from a development perspective, they did pretty well anyway (laughs).

If there has been one key lesson that you picked out from India in the last 15 years, what would that be?

I would probably think education would be the answer to that one. I am not an expert at this but I think India's progress in it has been a big thing. This has provided you with a skilled labour force, which has come from high-quality engineering colleges. In India, today, people are at a table doing something all the time. That has come from training and education and your progress on that has been fantastic. A lot of countries are looking at India and hoping to create it centres.

You do work across the globe and have had the chance to see a lot of countries. Which market, to your mind, resembles India the most? Any worries at all?

I don't think there is any market which is like India. Again, it is a different market and is difficult to compare. I think India is a continent rather than a country. We are here to help the people and the country's development. We can perhaps, in a humble way, do transactions that can help this. That is our role. From that perspective, I think the country and government are doing a lot of things right. I have a lot of respect for the step-by-step kind of strategy when it comes to deregulation which is better than a revolutionary change. From what I hear from the business people, they would be comfortable with a faster pace of reforms.

Has India been your toughest market?

No, I don't think so. The toughest markets are those that have gone to pieces. Things go in cycles and there have been a lot of tough situations. Argentina, for example, or Turkey in 2002 or Thailand in the midst of the Asian crisis were difficult times. Africa has been very tough and there you have post-conflict countries like the Republic of Congo. That is a tough market from a security point of view. The infrastructure is missing, there are no people to be trained and there is no banking system. For a country with 60 million people, there are 6,000 bank accounts. There is nothing at all. That is tough since you have to figure out what to do to help the poor people there. That is a challenge.




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