Southern Indian State of Karnataka Expects 60% of Global Investment Plans to Succeed

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Researched by Industrial Info Resources (Sugar Land, Texas)--The government of the southern Indian state of Karnataka, which harbors the city of Bangalore, which is often called the country's Silicon Valley, received investment promises of more than $85 billion during the two-day Global Investors Meet (GIM) held in early June. Industry sentiments soared after the GIM concluded. The Karnataka government initially had been cautious about its projections, saying that it would be satisfied with even 55% of the memoranda of understanding converting into successful ventures. However, authorities have now revised this estimate to 60%.

"Sixty percent is a decent expectation," Satyanarayan Bhat, the deputy advisor to the Karnataka government, informed Industrial Info Resources (IIR). "One cannot expect 100% of the projects to fructify." He added that the actual effects on the ground would be visible by 2012-2013 for about 30% of the signees. "The remaining 30% will see their projects take shape over the next four years."

The state government signed 358 memoranda of understanding with companies from industry sectors that ranged from aerospace to electronics and telecommunications, and from petroleum processing to information technology. A total of 413 projects have been proposed, with the steel industry alone promising an investment of more than $47 billion. The power and cement sectors have agreed to investments amounting to about $5 billion and $8 billion, respectively.

Steel companies led the memoranda extravaganza, with 52 projects signed. However, Bhat points out that "steel projects in general not only have long gestation periods of around six to seven years, but also, it is not possible for all 52 memoranda of understanding to commission their projects successfully in a single state."

Bhat's observation refers to the land acquisition issues and mining rights problems that are likely to limit the number of steel plants that can have access to mineral and land resource pools within the state. "Some, therefore, will be forced to drop out of the race," Bhat said.

Mega-steel corporations, both Indian and international, participated in the GIM and signed memoranda of understanding with the government. The world's largest steel manufacturer, Arcelor Mittal (NYSE:MT) (Luxembourg City), signed a $6 billion memorandum of understanding for a 6 million-ton-per-year integrated steel plant (ISP) and a 750-megawatt (MW) power generation plant. POSCO (NYSE:PKX) (Pohang, South Korea), South Korean steel giant and Asia's most profitable steel maker, signed a memorandum of understanding for a 6 million-ton-per-year steel plant in Bagalkot.

The Janardhan Reddy-promoted Brahmani Industries Karnataka Limited (Bellary, Karnataka) signed a memorandum of understanding for a 6 million-ton-per-year ISP, along with a captive power plant, to be set up at an estimated investment of $7.5 billion in the iron ore-rich Bellary district of Karnataka. The plant will be established in two phases; the first will include a 1.9 million-ton-per-year steel plant and a 68-MW captive power plant.

While 40% of the signed memoranda could fail to deliver, the investment figure could witness a more prominent drop. This is because the dropouts are likely to be in the large-ticket sectors such as steel, power and cement, among others. Even the withdrawal of one steel producer means a reduction of $3 billion to $7 billion from the total investment planned.

No special investment pool is being planned by the government or the private sector players for any of the projects in the pipeline. "The funding will be private, through institutional routes and public offerings, among others. There will no special purpose vehicle for this," Bhat told IIR. This reflects the vastly improved investment atmosphere in the country. Foreign investment would also be a route, "but those are issues that can be dealt with later."

The government, however, is definitely considering other means of project facilitation, such as special subsidies, incentives, and encouraging value-added tax structures. "These are the things that may be offered," Bhat revealed to IIR.

All these project plans are still in the drawing board stage. However, if the GIM follows a similar investment spree witnessed earlier in the western Indian state of Gujarat, Karnataka, soon will be known for much more than being a hub for the aerospace industry or home to global technology services companies such as Infosys Technologies Limited (BSE: 500209) (Bangalore, Karnataka).

Industrial Info Resources (IIR) is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. IIR's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.