CFO India - April 2011

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&29(5 6725< ,1)5$6758&785( 63(&,$/ 18 MASTERS OF THE GAME CFOs in the infrastructure sector have to possess a unique set of knowledge and skill, say those who have been there, done that.

14 SUCCESSION PLANNING, A MUST L&T’s iconic CFO, Y.M.Deosthalee discusses the importance of ensuring continuity of thought and vision as far as the CFO’s role in any infrastructure project is concerned.

,16,*+7 28 ASIA’S TRILLION DOLLAR INFRASTRUCTURE OPPORTUNITY Foreign investors are finding more doors open than in the past. But the way forward is far from clear.

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Sujit Sircar, the dynamic CFO of iGate talks about the Patni acquisition and the other challenges he faced in his career so far.

INFRASTRUCTURE: BOOM TIME AHEAD? Infrastructure CFOs are excited about new opportunities on the horizon.

/($'(5¡6 :25/' 54 CRACKING A DEAL IN ASIA Understanding and following local culture and its peculiarities can make or break a deal in Asia.

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&$6( 678'< 50 FROM SICKNESS TO HEALTH When Gujarat State Fertiliser Corporation faced a shut down, how did its CFO and the team save the day? The then CFO, Gautam Sen, now Director-Finance of RCF, recalls the challenge

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The MD and CFO of Helion Venture Partners says too much focus on long-term planning worries him. ASIA’S TRILLION DOLLAR INFRASTRU OPPORTUNITCTURE Y p. XX

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COVER DESIGN BINESH SREEDHARAN

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There are many on the way, financial and regulatory but India’s hurdles infrastruc are gearing ture up for an growth phase exciting CFOs ahead. Pg XX

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MANAGING DIRECTOR: Dr. Pramath Raj Sinha

Time to ‘build’ a nation

WHILE IT IS NEVER AN easy job running the entire financial operations of an organisation, being the CFO of an infrastructure company may just be one of the toughest jobs in corporate India. What is it that makes this role so challenging as India prepares for what many consider, the biggest boom time for the infrastructure sector? Our aim this time is to highlight the myriad opportunities for growth that lie before the sector and to discuss how the CFO can play a pivotal role in that journey. Our research and interviews over the past few weeks have resulted in a number of revelations. To begin with, we realised that the skills required and the risks involved in the job were quite unique to the infrastructure sector. A quick poll of 30 CFOs from across sectors revealed that while those in the IT or banking or manufacturing sectors, all listed shortage of skilled manpower, rising salaries and technological changes as top risks, infrastructure CFOs had a different set of challenges – dealing with negative cash flow, complicated regulations and long gestation periods for projects – to name a few. The key focus of course was to highlight the opportunities and the challenges ahead and discuss how CFOs can best tackle them, so that, as our contributing editor Bennett Voyles quipped, India ends up with more projects like the new airports in Mumbai and Delhi, and fewer like the Commonwealth Games fiasco. Some of the findings were expected. In the poll of 30 CFOs from different sectors, infrastructure CFOs were alone in citing lack of speed as a major risk. Other issues such as regulation changes, soaring inflation and rise in costs of raw materials were challenges that infrastructure CFOs highlighted. Despite the hurdles though, most people we spoke to were unanimous in agreeing that the opportunities ahead for the Indian infrastructure sector were mind boggling. How a CFO plans his strategy and makes his moves, will determine, to a large extent, the success of his or her organisation in 2011. Read our cover package (Page 12) to know more. Of course all the regular columns like CFO Profile, I Think and Case Study are there as well. We hope you enjoy reading this issue.

EDITORIAL EDITOR: Anuradha Das Mathur MANAGING EDITOR: Dhiman Chattopadhyay CONTRIBUTING EDITOR: Bennett Voyles DESIGN SENIOR CREATIVE DIRECTOR: Jayan K Narayanan ART DIRECTOR: Binesh Sreedharan ASSOCIATE ART DIRECTOR: Anil VK SENIOR VISUALISER: PC Anoop SENIOR DESIGNERS: Prasanth TR, Anil T, Joffy Jose, Anoop Verma, NV Baiju, Vinod Shinde & Chander Dange DESIGNER: Sristi Maurya, Suneesh K, Shigil N & Charu Dwivedi CHIEF PHOTOGRAPHER: Subhojit Paul PHOTOGRAPHER: Jiten Gandhi THE CFO INSTITUTE EXECUTIVE DIRECTOR: Deepak Garg NATIONAL HEAD: Bindu Krishna SENIOR MANAGER: Shreya Pilani ASSOCIATE: Deepika Sharma SALES & MARKETING NATIONAL MANAGER (SALES): Pranav Saran (+91-9811777113) NATIONAL MANAGER (EVENTS & SPECIAL PROJECTS): Mahantesh Godi (+91-9680436623) NATIONAL MANAGER (ONLINE): Nitin Walia (+91-9811772466) ASSISTANT BRAND MANAGER: Arpita Ganguli CO-ORDINATOR (AD SALES, MIS, SCHEDULING): Aatish Mohite SOUTH: Vinodh Kaliappan (+91-9740714817) WEST: Sachin N Mhashilkar (+91-9920348755) For any customer queries and assistance please contact help@9dot9.in PRODUCTION & LOGISTICS SENIOR GENERAL MANAGER (OPERATIONS): Shivshankar M Hiremath ASSISTANT PRODUCTION MANAGER: Vilas Mhatre LOGISTICS: MP Singh, Mohamed Ansari, Shashi Shekhar Singh OFFICE ADDRESS Nine Dot Nine Interactive Pvt Ltd Kakson House, A & B Wing, 2nd Floor 80 Sion Trombay Road, Chembur, Mumbai- 400071 INDIA. Published, Printed and Owned by Nine Dot Nine Interactive Pvt Ltd. Published and printed on their behalf by Kanak Ghosh. Published at Bunglow No. 725, Sector - 1, Shirvane, Nerul, Navi Mumbai - 400706 Printed at Silver Point Press Pvt Ltd., A-403, TTC Ind. Area, Near Anthony Motors, Mahape, Navi Mumbai-400701, District Thane,

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APRIL 2011

CFO INDIA

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CFO 100 - a Clear Winner

The CFO 100 event was a gala success. Personally, it was a rare honour to be recognised by one’s peers and to be presented with a certificate by one of the legends of our profession. a The conference itself was excellent and some of the speakers like Dr Aroon Shourie, Dr Anil Khandelwal and Mr. Devdutt Patnaik were simply brilliant. —Rajesh Pasari, CFO-NetAmbit,Noida

04.11

Your voice can make a change: Share your view point on what’s happening in the community and your feedback on the magazine at cfofeedback@9dot9.in or editor@cfo-india.in

GREAT COVER STORY

THANK YOU!

The March issue of CFO India was an excellent read. It was a really timely cover story (India Rising) that dealt with five pressing issues that finance professionals across India will have to contend with in 2011. I especially enjoyed reading Dr Bimal Jalan and Mr Shankkar Aiyar’s columns. Mr Rajiv Lall of IDFC also raised some very pertinent issues. Hats off to CFO India for the extensive coverage to the issues.. —Shashank Lohia, General Manager, Finance,VPS Pipes,Mumbai

Thank you for profiling me in your February issue (Inking a Success Story, CFO India, February 2011) Many of my colleague and friends who either subscribe to the magazine or check it online, told me they enjoyed reading it. Can I request you to send me a few copies of the magazine? . —Sandip Chatterjee,CFO, DaiNippon Ink Corporation, India,Kolkata

AN ERROR It was good to read the Case Study on IBM : “ Tackling a Billion Dollar Plunge” in the March edition of CFO India magazine. However, the reference to “Billion” and a drop in “revenue” are incorrect. We did suffer a plunge but it impacted our profit margins and not our revenues, in millions of dollars. I would request you to kindly publish this corrigendum so that there is no confusion. —R Ravikumar,Director - Finance,IBM India/South Asia,Bangalore NOTE: The error is sincerely regretted. - Managing Ed

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CIRCULATION ISSUES This is to bring to your notice that I haven’t been receiving my regular copy of CFO India for the past two or three months. I enjoy reading the magazine and would appreciate it if you rectified the problem and ensured that I get my copy from this month onwards —Rostow Ravanan,CFO, MindTree,Bangalore

EYE OPENER It was illuminating to read about the challenges faced by India Inc in the months ahead. After reading the articles by Dr Suman Bery and Dr Bimal Jalan, I feel the next two years will determine how fast India grows to become a genuine economic superpower. The CFOs and the entire finance community will have to play a key role in this. —R.K Singh, Finance Manager,Ranjit Roadways,Gurgaon

04.11 !"#$%&

Six Indian-Americans in Forbes Midas 100

SIX INDIAN-AMERICANS FIGURE in The Midas 100, Forbes’ annual list of venture capitalists who bucked the trends of shrinking firms and declining returns to “create wealth and fund the new ideas that kept the US economy vibrant” in 2010. Topping the US magazine’s list of 2011 Top Tech Investors is Jim Breyer, 6

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whose Accel Partners’ early $12.7 million bet on Facebook (now worth $5 billion with a 10 percent stake) makes Accel Facebook’s second-largest shareholder after Mark Zuckerberg. Among the Indian Americans, San Francisco-based Aneel Bhusri “the enterprise software guru”, who worked as vice chairman at PeopleSoft before joining Greylock in 1999 is ranked number 15. Menlo Park, California based Rob Chandra comes next at number 26. “The three-time consecutive Midas member saw seven of his portfolio companies go public in the last three years, many of them in India where Chandra helped launch Bessemer’s operations,” Forbes noted. Boston, Massachusetts-based Sunil Dhaliwal follows at number 49. He led Battery Ventures’ investments in CipherTrust and Netezza, which went public in 2007 before IBM took it off the market for $2.9 billion last year. Two notches down Waltham, Massachusetts-based Neeraj Agrawal at 51 led Battery Ventures’s investment in Internet media company InternetBrands, which sold to Hellman & Friedman for $640 million last December. Ranked 71st is Indian-born engineer Vinod Khosla, who raised $1.1 billion in the teeth of the recession. Sameer Gandhi, ranked 81, brings up the rear. Gandhi joined Accel Partners from Sequoia in 2008.

WHAT’S AROUND ZONE CFObook .............................................................. Pg 08 Salmon Day .......................................................... Pg 08 YouTube overhauled ............................................Pg 09 Cosmic Risks ........................................................Pg 09

THE CFO POLL RESULT

Will raising the FDI cap bring more money into the infrastructure sector?

23% No

77% Yes

CURRENT POLL QUESTION

Do you think IFRS will enhance financial efficiency in your organisation? +,-./0,1/2-/111345,607-6-8-.34,9:;,<<

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HP steps up on information management IT MAJOR HEWLETT-PACKARD (HP) has launched an upgraded suite of information management products that will simplify capturing, managing and storing information. “These products bring the holistic approach to information management that will help companies in harnessing the power of information in order to take better decisions and deliver the right information,” HP Software and Solutions Director Vikram K. told PTI. The new products are HP Information Management Services, TRIM records management, Data Protector and Data Protector Reporter, Integrated Archive Platform and VIAP for virtual environments, Storage Essentials and HP Database Archiving. These products can be installed individually or collectively and do not require HP infrastructure for installation, he said.

A WORKPLACE ENVIRONMENT that allows employees to change when and where they work, based on their individual needs and job responsibilities, positively affects the work-family interface, according to a new research conducted by the University of Minnesota. Sociology professors Erin Kelly and Phyllis Moen base their findings on data from surveys of more than 600 employees and company records from Minnesotabased Best Buy before and after the implementation of a so-called “Results Only Work Environment” (ROWE) workplace initiative. ROWE redirected the focus of employees and managers towards measurable results and away from a set work schedule and location. Employees could routinely change when and where they worked without seeking permission from a manager or even notifying one. Moen and Kelly examined whether the initiative affects work-family conflict, whether schedule control plays a role in these effects, and whether work demands (including long hours) moderate the initiative’s effects on work-family outcomes. “The study points to the importance of schedule control for understanding job quality and for management policies and practices,” said Moen. “With these changes, employees gained control over the time and timing of their work in ways that benefitted them and, by extension, their families and communities,” Kelly told ANI. APRIL 2011

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What’s on your mind? Attach

Share Ravi Ramu is interested in new ventures, business deals and getting back in touch April 17 at 4.30 pm · Comment · Like

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Ravi Ramu thinks being a goalkeeper in hockey is a tough job

Zodiac: Pisces Political Views: Liberal

!>BH March 2010 to Present – President & CEO, Hothur Group. 2006-2010 – Director and CFO, Puravankara Projects Ltd 2001-2005- Director & Group CFO, Mphasis

April 12 at 9.05 pm · 5 people Commented · Like

Ravi Ramu believes that the nearly 4 million vehicles on Bangalore’s roads continue to grow like mice in a barn April 09 at 9.00 am · Comment · 2 people Like this

I Read...

April 11 at 9.26pm · Comment · 3 people Like this

"EI=#%)>A B.Com – Loyola College, Chennai CA – Institute of Chartered Accountants of England and Wales

You can win by Shiv Khera

I Listen... Indian classical music April 07 at 7:15pm · Comment · 5 people Like this RECENT ACTIVITY Ravi Ramu likes CFO India and 2 others ...

Indian cricket team, Youtube videos of Greg Chappell march 17, 09:00 am · Comment · 11 people Like this

THE DEFINITION Having a ‘Salmon Day’ is the experience of spending the day working hard only to have your good work undone at the end of the day. It refers to the salmon’s way of swimming upstream only to be caught by fishermen in the end. THE USAGE If your colleague says he has had a salmon day, try and cheer him up. He has not eaten too much fish!

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BOLIVIA, A COUNTRY long suffering from rising temperatures, melting glaciers and extreme weather events, is set to pass the world’s first laws granting nature equal rights to humans. The Law of Mother Earth, when passed, is expected to usher in a radical new conservation policy against pollution and exploitation. It redefines the country’s rich mineral deposits as “blessings”, according to The Guardian. Perhaps, most beautifully, the law will enshrine nature’s right “to not be affected by mega-infrastructure and development projects that affect the balance of ecosystems and the local communities.” The proposed law underlines 11 new rights for nature. These include: the right to life and to exist; the right to continue vital cycles and processes free from human alteration and the right not to be polluted! 8

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PHOTOS.COM

Human Rights for Earth!

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YOUTUBE OVERHAULED? GOOGLE’S POPULAR VIDEO sharing website YouTube will soon be overhauled and turned into a premium content competitor with organised channels and professionally produced video. YouTube is trying to position itself to better handle the age of Internet-connected televisions, a report said, citing people familiar with the matter. YouTube is reorganising its home page around “channels,” or topics,

such as sports and arts. The website is working to include about 20 “premium channels” that would showcase five to 10 hours of professionally produced, original programming each week. The changes, which reportedly will cost YouTube about $100 million, should start to be phased in by the end of the year as YouTube looks to align itself with the growing trend of Internet-connected television.

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Maruti recalls 13K cars MARURI SUZUKI, THE country’s biggest car maker has announced that it will inspect the ‘Connecting Rod Bolt’ for 13,157 units of Swift Dzire (4505 cars), Swift (6841 cars) and Ritz (1811 cars) diesel cars with engines manufactured between 13th November 2010 and 4th December 2010. If the Connecting Rod Bolt is found defective, the company will replace the component free of cost. No other vehicles in the range or the vehicles exported by Maruti Suzuki are impacted. Maruti Suzuki dealers will contact owners of the cars. The new part has been despatched to the dealer workshops. “Users of Maruti Suzuki diesel cars purchased after November 13, 2010, can check the website www.marutisuzuki.com to ascertain if their diesel engine car is among the above mentioned vehicles. Customers need to fill in the engine number (D13A followed by 7 digits) on the computer screen. The engine number is embossed on the vehicle ID plate and also on the vehicle registration documents. Customers may also contact the nearest Maruti Suzuki dealer workshop to ascertain if their car is amongst the above vehicles,” the company said in a statement. Last year, Maruti had approximately recalled 1 lakh A-star cars for new fuel pump gaskets and O rings.

*.:;;#!* Cosmic Risks Astronauts anticipate more trips to the moon and manned missions to Mars. But exposure to cosmic radiation could be detrimental to their arteries, according to a study that appears in the journal Radiation Research. Using an animal model, they assessed the affect of iron ion radiation commonly found in outer space to see if exposures promoted the development of atherosclerosis (narrowing the arteries). They observed that cosmic radiation accelerated the development of the condition, independent of the cholesterol levels of the mice. “It is wellknown that prolonged exposure to radiation sources here on Earth, including those used in cancer treatment and atomic bombs, are associated with an increased risk for atherosclerosis,” said a research team spokesperson.

Apple VS RIM Apple came in the way of BlackBerry maker Research In Motion (RIM) getting its PlayBook tablet released earlier, according to a trade magazine. The Canadian wireless giant, which had announced the PlayBook much before Apple’s iPad 2, finally launched the tablet on April 19 in the US and Canada at a starting price of $499. But since RIM’s assembly partners were also committed to supplying touchscreen panels to Apple for its iPad 2, they did not have enough supplies to meet its demand, according to Digitimes.

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Facts & Trivia

EDUCATION: Holds an accounting degree from ICWAI and ICSI and is a certified black belt in Six Sigma FIRST JOB: At SRF Ltd’s Ranchi office PREVIOUS JOB: Global CFO at Tavant Technologies

PASSION: Technology

I AM NOT a big fan of long-term financial planning without keeping an eye on meeting short-term goals. There is an overwhelming trend in many organisations these days to focus only on longterm planning.

LACK OF SHORT-TERM PLANNING However, I feel too little time is being spent focusing on important shortterm goals and trying to achieve them, because it is more fashionable to make bigger, grander long-term plans. But, just like a cricket match is won by focusing on 10 overs at a time, CFOs of organisations need to look at building their houses step-by-step. One needs to meet short-term targets and achieve certain goals, to have the back-up and the ability to plan for long-term success. By not focussing enough on short-term 10

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NATARAJAN RANGANATHAN The Managing Director and CFO of Helion Venture Partners feels CFOs are spending too little time focussing on short-term targets – a fact that has him worried!

targets, some CFOs are letting too many low-hanging fruits go by. My view is simple – if you do not survive and do well in one year, what is the point of planning for five? I have seen many organisations and their finance teams focus less on profit-

“My view is simple – if you do not survive and do well in one year, what is the point of planning for five?”

ability in the near future. Sometimes, it is important to look at short-term viability as well. I believe CFOs need to focus more on this and look at profitability not just at the company level, but also at the ground level such as per transaction or per event. For instance, check if a store is going to be profitable in six months. Consider looking at event-wise profitability. Are you making enough at that level?

INCENTIVISE MIDDLE MANAGEMENT Secondly, instead of zeroing in on company profitability, I think we should look at gross margin levels as well. For instance, in a consumer services company, you may have 50 stores. The question a CFO should address is: how to provide adequate incentives to the middle management or cluster managers who head four or five stores in a zone.

RADHAKRISHNA

Now, in a traditional financial setup, a cluster manager’s variable pay depends on overall company profitability which, the manager may argue, is not entirely in his hands. The need is to make such variable pay depend on store profitability, so that a middle manager is able to make a difference in an area that is within his control.

This will automatically lead to a greater sense of belonging and improve performance. Such strategy will also bear fruit in the long-term.

FOCUS ON CASH Finally, I think a lot more focus needs to be given to the cash component. Again,

in my experience, some CFOs think there is no point in a 2 per cent cash discount, when it is possible to borrow from a bank at 10 per cent per annum. This may be a wrong strategy. One should collect cash upfront as much as possible. Why? Because if you do not, it may be directed somewhere else and ultimately affect your liquidity status! APRIL 2011

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India’s 75<67 :,7+ Destiny Is the the infrastructure sector in India on the cusp of a new era? BY BENNETT VOYLES

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n a country filled with tough finance jobs, being the CFO of an infrastructure company may be the toughest. In this issue, we look at what makes their role so challenging – the urgency with which better infrastructure is needed, the bottlenecks that are keeping it from moving faster, and ways in which the system might be improved. CFOs say many aspects of the process could be sped up. For instance, they felt projects could move along faster. In an informal poll of 30+ CFOs from different sectors, infrastructure CFOs were alone in citing lack of speed as a major risk. “You have to plan for regulation changes, soaring inflation and rise in costs of raw materials, realise that banks may not be willing to look beyond 3 or 4 years and finally, that a series of legal, environmental or other issues may at any time, delay your project,” Praveen Sood, the Group CFO of HCC told us. In fact, projects can take so long that Y.M. Deosthalee, Larsen & Toubro’s CFO, told us infrastructure CFOs should groom successors early in order to sustain momentum on projects between generations. Regulation is a challenge for many Indian businesses, but perhaps especially tough for infrastructure com-

panies. The politics of gaining the necessary approvals can be bogglingly complex, between government agencies, Parliament, 28 states, seven union territories and 380 major cities, any one of which can be a potential source of serious delay and cost. Some of those delays may just be an inevitable part of democracy, but others could be improved, experts say. Finally, much of the infrastructure challenge comes down to getting the right streams of cash at the right time. Although the government plans to steer $1 trillion into infrastructure over the next five years, funding still doesn’t seem all that easy to find. Some say the ultimate challenge is opening the market up to more foreign debt. But while there is discussion over the means, few argue over the ends. “Anybody who comes to India knows that there is a dearth of infrastructure,” says Rupa Vora, the CFO and director of the Infrastructure Development Finance Company’s fund initiatives. “It’s the biggest bottleneck to development really. Everywhere you go, you have so many people and too few roads, too few ports, too few anything.” The opportunities therefore, are huge. Is it boom time ahead for the sector? Turn the page and read our cover story to find out. APRIL 2011

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hy is succession planning or continuity so essential in the infrastructure sector, specially from a CFO’s perspective? The first point to note about any infrastructure project is that these have long gestation periods. Many projects take between 3 to 8 or more years to complete. Also, value realisation on an infrastructure project takes a long time. In the initial years, there is no profit at all. For instance, if you are building a road, usually the first three years are spent constructing the road

JITEN GANDHI

Y. M. Deosthalee, India’s senior-most CFO in the infrastructure sector, tells Dhiman Chattopadhyay why succession planning is crucial for the operational and financial success of any infrastructure project. Excerpts

#%89:";<%:= goals, estimates and the overall vision. This is why continuity of the thought process is so much more important in the infrastructure sector. What are the key things that an outgoing CFO must pass on to the next in line? There are certain specific things that a CFO must inculcate into his or her understudy, to ensure that a change in leadership does not unsettle a project’s financial functioning. For instance, it is essential to understand the difference between value and profit. A CFO should train the colleagues he feels may take over one day in such a way that they understand the way planning and course correction is done when heading a large, long-term project.

and the next five in recovering the cost. It is only after this that there is a return on investment. One of the crucial jobs of a CFO here is to keep an eye on the assumptions that were made at the bidding stage and act and adapt accordingly at every stage. So, ensuring continuity is not just extremely important, it is an absolute necessity. Having a smooth succession plan and mentoring possible successors about the vision and the thought process is crucial.

What are the other lessons, from your own experience? Another lesson I have learnt in my years as an infrastructure CFO is that we need to churn the portfolio constantly. A CFO in the infrastructure sector needs to understand the science of portfolio churning inside out. This will also demand continuity in the finance function, so that one person’s vision and decisions are understood in the right context by the one who follows. For instance, in recent !"#$"## years, we have sold our %&'()*+,&& stake in an airport, in a Y.M.Deosthalee is a large road project in KolkDirector and CFO at ata and in a flyover down L&T. He joined the south, in order to enter infrastructure giant other projects and areas. over three decades back and serves on Infrastructure in India A CFO should orient a the board of sevis still an evolving busisuccessor, so that he or eral business units ness. It has not matured. she understands why at L&T Look around and you certain decisions were will realise that a lot of taken at the start of a things are constantly project and what one changing – regulations, seeks to achieve. Of laws, policies, taxation, everything. course, succession planning is imporSo, your ability to bring about a positant in every business. But because tive change through efficient portfolio there are so many long-term projects churning is of paramount importance in this sector, it is essential that at any and it is crucial that continuity is mainstage, the CFO knows the reasons tained here. behind the initial financial projections, APRIL 2011

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POLL

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! ! ! ! !"#$%&'($ )#!#% What do CFOs of different sectors identify as the top risks in their jobs?

TOP FIVE RISKS IN DIFFERENT SECTORS FROM THE FINANCE PERSPECTIVE

INFRASTRUCTURE

1.Delay in award of contracts due to litigation 2.Lack of speed in financial closure of projects 3.No coordinated strategy between Centre and state governments 4.Environmental issues 5.Cost escalations that are not compensated

What the Poll shows

Every business is fraught with risks. But as our quick poll with over 30 CFOs from different sectors showed, the risks, or the assumed risks, are very different in the infrastructure sector, compared to most other sectors. For instance, while CFOs in the banking, IT and manufacturing sectors all highlighted ‘rising cost of manpower’ and ‘retaining manpower’ as one of the top concerns, it did not figure in the list of top 5 risks that infrastructure CFOs came up with. Again, the speed of change in technology was viewed as a top risk by CFOs in banking and IT sectors, something that infrastructure CFOs considered less of a risk. The key risks that infrastructure CFOs have to deal with in fact, are almost entirely unique to their job, except for the uncertain nature of

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MANUFACTURING 1.Volatile raw material prices 2.High interest rates 3.Rising cost of manpower 4.Uncertain regulation reforms 5.Lack of positive cash flow

INFORMATION TECHNOLOGY 1.Rising salaries 2.Unclear tax laws 3.Entry of MNC players 4.Fast-changing technology 5.Inflation and currency volatility

BANKING

1.Retaining talent 2.Updating internal controls 3.Technological changes 4.Rapid regulatory changes 5.Operations

changes in policy and regulations that seems to have all CFOs, cutting across sectors, worried. What then are the key risks for an infrastructure CFO? Clearly litigations, environmental issues, long gestation periods, different laws in particular states, delay in awarding contracts and the fact that long-term financial planning is tough because of unpredictable escalation in costs due to a variety of reasons – make up the top risks that keep an infrastructure sector CFO on his toes. As Praveen Sood, the group CFO of HCC put it: “You have to plan for regulation changes, soaring inflation and rise in costs of raw materials, realise that banks may not be willing to look beyond 3 or 4 years and finally, that a series of legal, environmental or other issues may at any time, delay your project. It is not an easy job at all.”

'()*+#,-(+.# CORE SKILLS INFRASTRUCTURE

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CFOs in any sector have to be on top of their game. But an infrastructure CFO also has to learn commercial aspects of deal making, tackle negative cash flows and be a convincing communicator. DHIMAN CHATTOPADHYAY 18

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eing a CFO in the infrastructure sector is not the easiest of jobs. Not by a long stretch of imagination. For one, the job forces you to learn things they may not have taught you during the Chartered Accountancy course. Things like learning how to structure a contract for the supply of bitumen for a road project, be able to run an organisation with negative cash flow for a sustained period of time or to gaze into the crystal ball and plan for unforeseen risks. As India prepares for what promises to be its biggest decade in infrastructure growth, all eyes will be on Chief Financial Officers of the country’s infrastructure firms to see how they capture this opportunity and tackle the challenges. Given the diverse and scattered nature of infrastructure projects and the myriad challenges of the job, there are some key skills and knowledge that

an infrastructure CFO must possess, to manage this monumental opportunity successfully.

KNOW YOUR REGULATIONS Shirish Navlekar who, as CFO, spearheaded the financial operations of the multi-crore Delhi International Airport (DIAL) project, admits that the job forced him to add many new skills to his armoury. “The first realisation for me was that as a CFO in the infrastructure sector, I needed a far greater understanding of regulations and policies than I had before. Moreover, since many regulations are amended from time to time, one must always be ahead of the game, taking strategic decisions, sometimes anticipating a policy change, so that a project does not run into legal hurdles or overshoot its cost estimates,” says Navlekar.

'()*+#,-(+. Changes in policy, particularly as far as environmental issues are concerned, is indeed a key challenge, agrees Praveen Sood, Group CFO of HCC. Sood has experienced such hurdles first-hand with the Lavasa township, one of HCC’s much-talked about projects, running into environmental hurdles, sending cost estimates for the project completely haywire. “As an infrastructure CFO, you have to be prepared to deal with last minute policy changes and adapt accordingly,” he says.

READ THE SMALL PRINT This might sound like instructions for those buying mutual funds, but CFOs in the infrastructure assure us, it is equally important for them to know how to structure and read a contract. “It is a key quality you must acquire. Whether it be for the supply of bitumen or steel or a contract with a government agency, understanding how contracts work is key for a CFO. It helps you make correct cost projections, set realistic deadlines and, of course, rationalise cost for a project,” says Navlekar. The former DIAL CFO, now CEO of Aristone PE, speaks from experience when he says, “In some other businesses, one may give more importance to those items which are larger in volume, as opposed to those which are what we call ‘aggregates’ or less important items. But in infrastructure projects, it

from a finance perspective and structure those contracts very carefully.” “He has to be astute in commercial aspects of business and depending on what the core projects are, have in depth knowledge about the power merchant market, coal costs, road toll collection structures, EPC agreements and BOT agreements. This is unique to an infrastructure CFO’s job portfolio,” says Prabal Banerji, CFO of Adani Power.

The first realisation was that I needed greater understanding of regulations and policies.” —SHIRISH NAVLEKAR, FORMER CFO DELHI INTERNATIONAL AIRPORT

is quite often the opposite. For instance when building a road, bitumen is obviously the key ingredient, since without it no road is complete. However, unless and until we get bricks and other tertiary material that creates the bottom layer of the road, there is no road at all! So, as a CFO, I had to ensure that I give equal importance to the ‘aggregate items’

He has to be astute in commercial aspects of business and have in-depth knowledge about EPC and BOT agreements.” —PRABAL BANERJI, CFO, ADANI POWER

NO STRUCTURED PLANNING But what makes an infrastructure CFO’s job especially challenging in the current scenario - when boom times beckon – is the knowledge that there is little scope for structured financial planning when committing to large projects. “Unlike, say, the manufacturing sector, where I have worked before, there is less chance of structured planning here. You can never be sure of how much a project will end up costing,” says D.V. Prasad, Vice President and Head of Finance, Essar Projects. Agrees Sood: “I think the major challenge in my current job (Sood has worked in the retail sector before) is learning to develop an innovative financial strategy keeping a huge number of risks, some of them impossible to predict, in mind.” Uncertainty in financial planning also stems from the fact that sometimes, banks too may change their interest rates or want to restructure the terms of a long-term loan package. “It is not easy to get loans for 10 years and that is what you need for an infrastructure project,” says Sood.

TACKLE NEGATIVE CASH FLOW With most infrastructure firms hoping to successfully bid for a share of the numerous new projects that the government has announced, another issue that CFOs will have to deal with is negative cash flow. Infrastructure projAPRIL 2011

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)*+,-./0*-1 ects have long gestation periods and by nature they need to invest capital in the first three to five years, without any returns on investments. “An infrastructure CFO must be adept at tiding over negative cash flow scenarios,” says Banerji, adding: “It is imperative that he knows how to co-relate special infra debt fund build-up and how to refinance and take out existing loans at lower cost. He also needs to devise innovative strategies to fund longterm loans in view of the lengthy gestation period.” “Learning to work with a constant negative cash flow is something CFOs in few other sectors have to face. So we need to have special funds available to meet all contingencies. My theory is: do not just have a plan A and B but a plan C and D as well,” advices Sood of HCC.

IMPROVE BANKING RELATIONS Ensuring a steady cash flow while a seven-year-long project strives to meet its deadlines means infra CFOs have to keep their bankers happy as well. “For most of us, infrastructure projects are spread all across the country. We need to be able to centralise all expenses, if possible, to bring down costs. One of the aspects here is to be able to reduce the number of lenders from, say 8 or 9, to a maximum of 4 banks. We need to create umbrella bank guarantees,” says Prasad. Banerji stresses that the infrastructure CFO also needs to have that special ability to raise money. “Equity financing from private equity and the international markets are a must. So, the CFO here needs a special aptitude to raise capital,” he adds.

ENSURE DEADLINES ARE MET Ultimately, though, the success of any project lies in meeting deadlines and getting high returns on investments (RoI). For this to happen, CFOs need to 20

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We need to have special funds to meet all situations. Don’t just have a plan A and B but a plan C and D as well.” —PRAVEEN SOOD, GROUP CFO, HCC

implement a lot of financial discipline. “Discipline is important everywhere but none more than in our sector since working within a time frame is crucial. Otherwise the cost of a project may escalate beyond control,” says Sood. This may mean going beyond the call of duty and even checking if trucks delivering

XXe means Three skills running a Rs are important: 6000 crore flexibility, an innovative corporation so streak and great as to makout, communication corporation so skills.” then efficient.” —Y.M DEOSTHALEE, CFO, L&T —V SURESH, CFO, ESSAR POWER

key raw material are coming on time, and have necessary financial documents to arrive at their destination without delays, says Navlekar, who had to deal with many such situations during the Delhi International Airport project. Perhaps India’s most respected and experienced CFO in the infrastructure sector, L&T’s Y.M. Deosthalee sums it up best when he says, “Primarily, apart from the many core skills that a CFO in any sector needs to possess, three skills are important for a CFO in the infrastructure sector: flexibility, an innovative streak and the ability to communicate any message convincingly. The person needs to understand valuation and negotiate quickly to beat other bidders to the post. This means he needs to be flexible and adapt fast. Innovation is also important because one needs to come up with creative ideas about what kind of margins one should have for a project or a different way to look at valuation. Finally, as policies and regulations for this sector are changing even as we speak, a CFO needs to be a powerful advocate of what he is pushing for so that he is able to put across his views to representatives from government agencies or banks at any point.” Clearly, the challenges before infrastructure CFOs - as India awaits its biggest boom in infrastructure - are enormous. And to be able to take their organisations forward (and bid for and complete new projects) they need to possess or acquire some of these key skills, fast.

OPPORTUNITIES

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These are the best of times for the infrastructure sector in India. Though there are many financial and regulatory hurdles on the way, infrastructure CFOs are gearing up for a trilliondollar challenge. BY BENNETT VOYLES

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uilding India a modern infrastructure may be the largest investment opportunity on the planet right now. The Indian government‘s plans, in fact, call for an investment of more than $1 trillion over the next five years. Worryingly, however, like many trillion-dollar opportunities – cold fusion; anti-gravity boots; eternal youth – the demand is clear but the execution may be tricky. No one knows that better than the Chief Financial Officers of India’s infrastructure companies. In fact, it may well be that only the CFO, who is involved in every stage of a project – from proposal to construction to exit – understands just how many things can go wrong. What might improve the process? Infrastructure company CFOs, bankers and other industry experts have a number of ideas that they say could make their jobs easier. Whether the project is building a power plant or a port, a railway or a road, developers hit similar snags over and over again. Some problems, such as corruption, may be hard to eliminate, but other elements, such as the speed of land acquisition or the haziness of contractual boilerplate, could be much improved.

Making the grade Even with money flooding into infrastructure funds today, it is still not that easy to get a deal funded. Rupa Vora, the CFO and Director of the Infrastructure Development Finance Company’s (IDFC) fund initiatives says she clears around five of every hundred deals she checks. Typically, applicants fall short in one of three ways, says Vora. Often, Vora says, a company is family-owned and do not want to give up much equity. However, when the valuation is too high, she cannot accept the deal, as she needs to return 15-20 percent a year to IDFC’s investors. Second, the execution risk may seem too high. Family companies, in particular, sometimes simply lack the management talent needed to execute the project. Third, the backers do not have a good exit strategy. As an equity investor, Vora says, she needs to be able to give the money back to the investor at some point, and applicants often have not thought that stage through.

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$+($'" Challenges & Opportunities LAND ACQUISITION One of the most basic challenges may be getting hold of land. It is a democratic country, CFOs say, and people often object to the displacements most major infrastructure projects require. Although the government does have the right of eminent domain, in practice, people opposed to a project can tie it up in the courts for years. Non-legal fights against land acquisition can lead to serious delays as well – particularly if Naxalite guerillas are part of the picture. Ironically, according to G Raghuram, professor of public systems at the Indian Institute of Management at Ahmedabad, policymakers now argue that Naxalism feeds on isolation, and one of the best cures will be more roads.

SOLUTION:

Certain issues go far beyond the boundaries of the company. Here’s what goes wrong – and what people involved think can be done about it.

One measure that would be useful in the power sector, according to V. Suresh, CFO of the Power Business Group at Essar Power Limited in Mumbai: “If the Centre could start invitations to bid only after most of the prerequisites, including land, have already been worked out, then projects can come up in time and with minimal cost. This is something the government should probably do on a proactive basis,� Suresh says.

If the Centre could start bid invitations only after most prerequisites have been worked out, then projects can be time efficient.� —V SURESH, CFO, ESSAR POWER

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70k

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REGULATORY APPROVALS Regulatory approvals are another frequent source of trouble. Often, infrastructure proposals require the sign-off of many different agencies – approvals that may or may not be forthcoming – and until every ‘I’ is dotted, banks will withhold their loans. Some of this is foot-dragging out of suspicion of the private sector, says IIM’s Raghuram. Other times, the government still has not decided what its policy should be. “For example in roads we are still debating whether we want large players or we also want to ensure that new players come in,� he explains. Institutional inbreeding can also play a role. The regular rotation of civil servants between departments seems to lead to a broader outlook, which is translating into relatively faster approvals for ports and roads. Meanwhile, railway managers are much more set in their ways. “The bold language of public private partnership is there but I do not think they appreciate what it means organisationally or professionally,� Raghuram says.

SOLUTION: Some of these problems will only be worked out with more experience, Raghuram says, but one major improvement would be the development of clearer, more standardised contract language. The Planning Commission is reportedly working on such model concession agreements now. Some regulators are also trying to build in greater speed in other ways, by saying, for example, that an applicant should consider an approval granted if it does not receive notice by a certain date after an application is made, according to Raghuram. At the same time, Raghuram says, a more consultative approach could be helpful. Often, he says, the agency putting out a bid will think it knows what would be best, but could come up with a better solution if it consulted other stakeholders. Clarity is enormously useful, CFOs say, particularly in areas such as infrastructure where expectations need to be managed carefully. “One key thing which needs to happen is to make the rules of the game clear and create easier entry for private players,� says Shriniwas Joshi, CFO of Manpalu, a for-profit education and services company.

One key thing which needs to happen is to make the rules of the game clear and create easier entry for private players.�

The kilometres of national highway , planned by 2016

CORRUPTION Complicating matters still further are under-the-table requirements of some regulators and other gatekeepers. India is reportedly one of the worst countries in the world for corruption, which could make infrastructure, with the investment of vast sums of public money, a golden opportunity for graft. Indeed, such cases as the bridge collapse at the Commonwealth Games in Delhi suggests even major, high-profile projects are not immune.

SOLUTION: Corruption is hard to overcome. With a trillion dollars at stake, there are bound to be some gatecrashers. As the American bank robber Willy Sutton replied when asked why he robbed banks, “That’s where the money is.� Even China, despite its general high marks for infrastructure, has had its own problems with what one former government official calls “bean curd projects� – infrastructure built with substandard materials. At the company level, Richard Dailey, Managing Director for the Mumbai office of Kroll, a global security service, suggests being wary of middlemen, particularly those who were formerly employed as officials. “Their role is often simply to use their connections with officials, often in an inappropriate manner, to obtain licenses and regulatory clearances,� he says.

—SHRINIWAS JOSHI, CFO, MANPALU

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Their (middlemen) role is to use their connections, often in an inappropriate manner, to obtain regula regulatory clearances,� —RICHARD DAILEY, MD,KROLL, INDIA

Although many chalk up corruption as a cost of democracy, Raghuram argues that the contrary is more true: corruption will be reduced not with less democracy, but more. “‘We need to increase the base of stakeholders who get consulted in a project,� he says. Others argue that the problem is so deep it is not likely to be brought under control soon. Eric M. Uslaner, a professor of government and politics at the University of Maryland, who has studied the question of how societies become clean, says it seldom happens. The only three cases he has found were small states faced with an external threat, such as Hong Kong with China or Singapore with Malaysia, and Botswana faced with white supremacist governments in South Africa and Rhodesia. More often, Uslaner says, cleaner practices emerge only as a country grows more educated. Skilled labour tends to be the enemy of political machines. With education, people no longer need to rely on the political machine for their livelihood. One positive byproduct is the fact that skills are useful for themselves as well – which is one reason, Joshi argues, they should be considered part of infrastructure. “Even though education does not deal with machinery or roads etc., I think it is an important facet of infrastructure because if anything has to be implemented, you require people, skills and resources. From that aspect, education is a key social need,� says Joshi.

FUNDING Despite all the hype around Indian infrastructure, it has been surprisingly difficult to attract a high level of foreign investment. Beyond the general issue of corruption, noted earlier, foreign investors have other obstacles with which to contend. “The big challenge for India has always been attracting foreign debt capital,� says Kalpana Morparia, President of JP Morgan Chase India. One is because of the exchange control rules, which restricts access to foreign debt markets, says the Mumbai banker. The second is uncertainty regarding construction, the riskiest part of any infrastructure project.

SOLUTION: The government is now trying to find ways to make it easier for foreign debt to operate in the market, such as lowering the withholding tax on interest payments. “We will see a few more policy changes as we go along, but I think it is a good start,� says Morparia. Another positive step would be the development of a bond market for infrastructure debt. A long-term bond with transparent pricing would be helpful in attracting foreign investors, says Arun Kedia, CFO of Adhunik Power & Natural Resources Limited of Kolkata. Finally, when it comes to shipbuilding, K Narayanan, CFO for the India and Indonesian Operations of the Archean Group of Companies in Chennai, says the ability to provide dollar-denominated financing would be helpful, as Indian owners now suffer a competitive disadvantage because of the rising rupee. But Raghuram sees foreign funding access as more a political than a logistical question. “We need to grapple with how much of that [ foreign investment] we are comfortable with,� he says.

A long-term bond with transparent pricing would be helpful in attracting foreign invesinvestors.�

—ARUN KEDIA, CFO, ADHUNIK GROUP

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COORDINATION

Even when a project is complete, bad system planning can undermine its overall value. A new port can improve efficiency much more if it is well-connected with road and rail lines. “Often the focus is merely on the main infrastructure,� says CFO Hariharan D. Iyer of APM Terminals, “But in order to become successful, you need to have the support infrastructure.�

SOLUTION:

“You need to have mechanisms which look at all-around aspects of growth,� says Iyer, who is based in Mumbai. In this respect, he says, China is “a pretty good model.� When the Chinese build a port, they also build the support infrastructure along with it, he says.

$55bn Worth of projects yet to be awarded from the 11th Plan

GROUNDS FOR OPTIMISM Despite the many challenges ahead, infrastructure CFOs and other sector experts seem optimistic that many of the current problems that keep infrastructure development bumping slowly forward will eventually be smoothed over. There are good grounds for their optimism. For one thing, people want it – a fact that counts in a democracy. Political pressure on the government to deliver better 26

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You need to have mechanisms which look at all-around aspects of growth.� —HARIHARAN D. IYER, CFO, APM TERMINALS

$47bn 50% Budget allocation for infrastructure growth in 2011-12

of the money expected from the private sector

Companies often do not have a good exit strategy. I need to be able to give the money back to the investor, and applicants often have not thought that stage through�. —RUPA VORA, CFO & DIRECTOR, FUND INITIATIVES, IDFC

infrastructure is likely to grow, as millions of citizens ask why the same nation that produces Nobel prize winners and worldbeating companies must tolerate roads and other systems that are reportedly worse than some war-torn nations. For another, it just makes too much economic sense. Between the millions of educated middle-income Indians who waste countless hours on bad roads or coping with electricity shortages, and the millions of other Indians bad infrastructure makes poorer, more

ill, and more ignorant – virtually everyone gains as infrastructure improves. Ultimately the issue may be less whether India succeeds or fails in its infrastructure campaign than how long it takes to achieve. As Raghuram says of the potential for the rail bureaucracy to truly accept working with private partners, “I am sure it will eventually happen. The question really is, can there be other interventions that will make it happen faster?�

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,'-.*/ !"##$!%$%&%'$()&%$"*+$ The idea for our cover story this month was born at IDFC’s annual conference for its portfolio companies’ CFOs a few weeks ago – a gathering of individuals who run the finance function for India’s leading infrastructure companies. For someone like me, who has been associated with CFOs across sectors over the years and watched their challenges alter, this was like a throwback in time. While the rest of the CFO world obsesses about talent and technology and strategy – the infrastructure world continues to worry the hardest about the Government and what it will (or won’t) do next! What lies beneath and will it ever change? Infrastructure, the world over, has challenges as a sector. But what is peculiar to India – in addition to the standard concerns around long gestation, need for special purpose vehicles, long term funds availability – is the risk introduced into the equation because of the interface with the Government. India’s infrastructure CFOs worry incessantly about changing regulations and rules, corruption and the vagaries introduced by a public-private partnership (PPP) model. No doubt PPP is the preferred way to enter infrastructure. The need for land and the related displacement, the importance of regulation and a favourable policy framework, public or sovereign guarantees for long-term funds – all make the presence of the Government as a partner – valuable and desirable. But is it a little like the ‘kiss of death’? Does the problem lie with the presence of Government – either as an active regulator or indeed a partner in a project – as opposed to the nature of the infrastructure sector? Possibly. To begin with, successful partnerships are between people or organisations, where both bring something to the table. Sometimes even between ostensibly mismatched entities – one very

large, one very small, one very young and one very old etc – but individual strengths are clearly acknowledged. The Government, sadly, does not overtly acknowledge that anybody brings anything worthwhile to them. It is their benevolence that nudges them to allow others to participate in their ‘nation-building’ or ‘public service’ mandate. A stance that has limited place in a world of growing complexities and even larger needs… More importantly, there is a crucial role that ‘trust’ plays in every partnership or interaction. Stephen M R Covey has a compelling new book titled the ‘Speed of Trust’. He says trust enhances speed and speed is the hallmark of winning entities in a dynamic operating environment. An attribute that we find completely missing from the two parties in a PPP... Companies say that high-trust organisations are known first and foremost for sharing information openly and, equally, for tolerating mistakes (as a way of learning). A description of the Government cannot be further from this. Unfortunately, the ‘trust deficit’ is mutual. Neither party willingly grants the other the ‘benefit of doubt’. Is there any wonder that it is next to impossible to complete these projects on time? Is there a chance that things might change in our lifetime? And how?Often the answers lie in ‘collective wisdom’. So, what do you think? Anuradha Das Mathur, Publisher CFO India

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ASIA’S TRILLION DOLLAR INFRASTRUCTURE OPPORTUNITY Foreign investors are finding more open doors than in the past. But the way forward is far from clear. NAVEEN TAHILYANI, TOSHAN TAMHANE AND JESSICA TAN

PHOTOS.COM

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espite bright economic prospects, most emerging Asian countries—China, India, and the Association of South East Asian Nations (ASEAN)—continue to suffer from underdeveloped infrastructure. In India, for example, electricity generation is 16 percent to 20 percent short of what is needed to meet peak demand, thanks to persistent underinvestment and poor maintenance. In Indonesia, infrastructure investments dropped from 5 percent to 6 percent of GDP in the early 1990s to 2 percent to 3 percent of GDP for much of the last ten years. We estimate that the consequent deterioration in energy, transport, housing, communications, and water facilities has restrained economic growth by 3 to 4 percentage points of GDP. We believe that situation is about to change. Across the Asian region as a whole, we calculate that around $8 trillion will be committed to infrastructure projects over the next decade to remedy historical underinvestment and accommodate the explosion in demand. Traditionally, most Asian infrastructure projects have been funded by governments or domestic banks. Foreign investors were mostly excluded. Those that were allowed to participate faced severe restrictions, including complex regulatory and legal regimes, uneven workforce quality, and occasional political interference. In the wake of the financial crisis, however, we have started to see signs that global private capital is increasingly welcome.

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GROWING DEMAND FOR OUTSIDE CAPITAL More than 80 percent of the demand for infrastructure investment in emerging Asia over the next ten years will come from energy and transport, the sectors most critical to supporting heightened economic activity. Exhibit 1 shows the full breakdown. Our analysis suggests that much of this new investment will be in advanced technologies. For example, Asia may leapfrog developed economies in its adoption of clean-energy technologies, thanks to falling costs and improving effectiveness. Several countries, such as China and Malaysia, have sufficient financial depth in their domestic private-capital markets to meet their infrastructure funding requirements (Exhibit 2). Foreign investors should therefore focus on countries such as India, Indonesia, Thailand, Vietnam, and the Philippines, where the financial markets have less capacity. Although the environment is changing, even in these countries the bulk of infrastructure investments will likely remain effectively closed to private investment. The obstacles are varied. Many governments, for instance, have ill-defined PPP policies that, because of their vagueness, inhibit private participation, while capital controls frequently deter investors who worry that they may

Exhibit 1

Energy and transport sectors will provide much of the demand for infrastructure investment. Investment needs for Asia’s identified and pipeline infrastructure projects, 2010–20, $ trillion

Annual growth rate in investment spending, 2008–18, %

0.4

2.5

8.1

Infrastructure (global)

6.0

Infrastructure

1.1

8.2

4.1 Clean energy (global)

10.9

Clean energy Energy

Transport

Telecom

Water and Sanitation

2.3x

Total

18.9 18.9

Source: Asian Development Bank; Clean Edge; World Bank Private Participation in Infrastructure (PPI) Database; McKinsey analysis

Exhibit 2

9.0 Foreign capital required

5.0

4.0

Vietnam

3.5

Brazil Turkey

3.0 2.5

Pakistan

2.0

Russia Colombia Peru Tunisia

1.5 1.0 0.5 0

Thailand

Philippines Indonesia

4.5 Gap in infrastructure spending,1 %

The combined effects of increased stimulus spending and reduced tax receipts have increased deficits, with the result that restrictions on foreign investment are easing and a growing number of projects are being carried out under public–private partnerships (PPP). We estimate that over the next ten years fully $1 trillion of the $8 trillion of projected infrastructure projects will be open to private investors under PPPs. The questions for owners of global capital are how to identify the opportunities, how to mitigate the main risks, and how to develop appropriate entry strategies.

Romania 0

20

Mexico

Nigeria Slovakia Bulgaria

40

60

India

Egypt Hungary Argentina

Malaysia Chile

China

Morocco Croatia

Funding can be largely sourced domestically

South Africa

80 1001 20 1401 60 1802 00 2202 40 2602 80 3003 20 3403 60 Financial depth,2 %

1 Gap in needed vs actual infrastructure spend as % of GDP, 2009. 2Value of bank deposits, bonds, and equity as % of GDP, 2009. Source: McKinsey Global Institute

not be able to repatriate their cash flow. Weak regulatory or legal systems intensify the risk, and while shallow or illiquid capital markets make private investment necessary, they also complicate exit strategies. Exhibit 3 calculates the effect of restrictions on Foreign Direct Investment in India, Indonesia, the Philippines, Thailand, and Vietnam. Despite all this, Asia remains an exciting place for infrastructure investment over the next ten years. India alone is set to spend $500 billion on projects from 2007 to 2011, thereby

raising its infrastructure investment from 4 percent to 8 percent of GDP per annum. Domestic capital markets will finance some but not all of this demand: as in other parts of the region, global investors will have an opportunity to fill the gap.

KEY RISKS TO BE MANAGED Once they have decided to invest, foreign firms must overcome several risks. Thanks to political pressures, environmental considerations, and local issues, APRIL 2011

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#%(#-.) there are often long delays between planning and project approval; this can severely affect capital deployment and productivity. The Hangzhou Bay Bridge project in China, for example, was held up for 10 years, and the Bandra-Worli Sea Link in Mumbai, India, required more than 20 years before approval was finally given. As in other parts of the world, infrastructure investors in Asia should have long investment horizons and should be prepared to have capital locked up for many years. They need to be wary of—and ensure they make changes to—partnership agreements that are often poorly structured and drafted due to a lack of skills or experience in government departments. They should plan for the possibility of continuing political, legal, and regulatory uncertainty with respect to foreign ownership restrictions, capital controls, and partnership terms. During the 1997 Asian financial crisis, for example, several countries suddenly imposed capital controls, which in some cases were only lifted many years later. And global investors must find ways around capital markets that lack the full range of financial instruments for risk mitigation. For example, the foreign-exchange (FX) markets for some

Exhibit 4

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Exhibit 3

Restrictions vary on private-sector participation and foreign direct investment. Max private

Max FDI

Max FDI <50%

United States 1 Power

100

Airports

100

Ports

100

Roads

100

Railways

100

Telecom

100

Water

100

Irrigation

100

100 100 100 100 100 100 100 100

United Kingdom 100 100 100 100 100 100 100 100

100 100 100 100 100 100 100 100

India 100 100 100 100 100 100 0 0

Indonesia

100 74 100 100 100 2 74 0 0

100 100 100 100 100 100 100 100

95 49 49 95 55 49 3 95 100

Vietnam 100 0 100 100 100 49 49 100

Max FDI <30%

Thailand

100 0 49 49 49 49 0 100

100 100 100 100 100 100 100 100

100 100 100 100 100 100 100 100

Philippines 100 100 100 100 100 100 100 100

100 4 40 40 100 100 4 40 100 4 100 4

1 No

Limitations. However, Critical Infrastructure Projects Are Subject To Congressional Review. For Building Railway Infrastructure; Rail Operations Are Run Solely By Government. Applies To Fixed-line Infrastructure; Limit For Mobile Infrastructure Is 65%. 4100% For Greenfield Projects; 40% For Brownfield Projects. 2100% 349%

Source: Ministries And Government Departments For Investment Planning And Business Development

emerging Asian currencies might not be liquid enough to allow full hedging of a currency exposure, while local derivative instruments may be insufficient to offset particular risks. Offshore products or structures domiciled in financial centres like Sin-

gapore and Hong Kong could be a solution when local currencies are illiquid. One example is the use of a Singaporean dollar fund (or fund of funds) that then invests in, say, Vietnamese infrastructure assets. The currency risk between Vietnamese Dong (VND) and the Singapore dollar (SGD) is mitigated by a simultaneous synthetic contract that is renewed annually. While this does not completely do away with the currency risks, it reduces the volatility significantly. Another option is to set up a holding company in a tax-friendly jurisdiction rather than have the investment in the underlying infrastructure special-purpose vehicle (SPV), which is a domestic asset. The fund-raising entity enters into a contract outside the country, which at least partially helps to reduce the sovereign risk. Third, partnerships between foreign players and a dominant local institution—SBI-Macquarie Fund in India and the CIMB-Principal fund in ASEAN are two examples—can help.

#%(#-.) SELECTING THE RIGHT FORM OF PARTICIPATION In addition to mitigating the inherent risks, investors must choose the right participation model if they are to maximise. Exhibit 4 explains the choices, several of them suitable for use in a PPP. Foreign investors and institutions typically follow an equity-led entry strategy in the initial years, since their local balance sheets tend to be insufficiently capitalised to support debt-led models. Domestic and regional banks, by contrast, typically use their strong local balance sheets to engage in debt financing. In recent years, savvy financial institutions with a well-rounded suite of financial services have begun adopting integrated models for infrastructure investment. For example, besides funding the construction of an airport, an integrated player might also offer transaction banking services and insurance to the airport operator. Such crossselling can deliver significant value, as our research suggests an estimated 40 percent of potential revenues from infrastructure projects come from nonlending sources (Exhibit 5). Even better, this extra value opportunity comes with relatively little additional risk—after all, the operation of an airport, or indeed

The Asia Story Energy and transport sectors will provide much of the demand for infrastructure development In much of Asia, demand outstrips financing Restrictions vary across Asia on private-sector participation and FDI There are eight infrastructure participation models across Asian economies Approximately 40 per cent of the potential revenues from infrastructure projects come from non-lending sources

Exhibit 5

Approximately 40% of the potential revenues from infrastructure projects come from non-lending sources. Revenue pools generated, 2010–141 Product category Advisory1

Revenue pools, $ million

As % of total pool t

Preproject advisory and project appraisals are offered by most players at a low price to get a foothold into the deal

t

Interest rates have been below prime, yielding net interest income of 200–250 basis points Maturities are 12–15 years

48

7,103

Lending

Comments

59 t t

Transaction banking

3,180

27

Debt fund-raising

190

2

Equity fund-raising

94

1

t

t

Equity fund management

774

General insurance

536

Total

11,925

1 Includes

t

Syndication is the prominent (90%) debt-raising tool A few big developers also carry out debt arranging by themselves

t

Penetration of public and private equity ross sectors, depending on promoter pr

t

Private-equity players will hold 10–30% of equity across sectors, and the majority of the equity will earn both management and performance fees

t

Infrastructur the general insurance pie

6

4

Bank guarantees are used extensively during construction Trust and retention accounts and collection services are used during regular operation

Power, Ports, Roads, Railways, Airports, Storage, Gas, and Water Sectors.

Source: Interviews; Planning Commission; McKinsey analysis

a power plant, once up and running, is relatively straightforward compared with getting it built in the first place. It is critical, however, to note that infrastructure investment requires significant dedication of time, organisational resources, and management focus. The example of Macquarie Group provides a good illustration of how a global infrastructure-investment business can be built. Macquarie first developed its expertise in infrastructure by capitalising on the wave of Australian privatisation of national infrastructure in the 1990s. Armed with the knowledge built up, Macquarie then launched its international expansion. Despite its expertise, however, it still took Macquarie more than six years for infrastructure to become a significant international platform. Along the way, it has developed sophisticated riskmanagement techniques to oversee activities in disparate markets. Despite the challenges and risks, Asia’s infrastructure growth over the

next ten years is an attractive opportunity for global investors and financial institutions. There will be more than $1 trillion of infrastructure projects open to foreign investment, and further value can be captured by offering a full range of associated financial services besides lending. To tap into this growth, global capital players must select the appropriate participation model and dedicate sufficient resources to build up their expertise and familiarity with Asian infrastructure markets. NAVEEN TAHILYANI IS A PRINCIPAL IN MCKINSEY’S MUMBAI OFFICE, WHERE TOSHAN TAMHANE IS AN ASSOCIATE PRINCIPAL; JESSICA TAN IS A PRINCIPAL IN THE SINGAPORE OFFICE.THIS ARTICLE WAS ORIGINALLY PUBLISHED IN MARCH 2011 ON THE MCKINSEY QUARTERLY,WWW. MCKINSEYQUARTERLY.COM. COPYRIGHT (C) 2011 MCKINSEY & COMPANY. ALL RIGHTS RESERVED. REPRINTED BY PERMISSION. APRIL 2011

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iGATE’s Crisis

At 41, Sujit Sircar is not just one of the youngest CFOs in India, but one of the most talked about, especially post iGate’s acquisition of Patni Computers, where he played an instrumental role. DHIMAN CHATTOPADHYAY

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ONE BILLION DOLLARS IN revenue, a 40% growth on gross margins, and the historic acquisition of Patni Computers–2010 has seen Sujit Sircar, the 41-year-old CFO of iGate India, making headlines more than once. However, his early days as CFO of the tech firm, was a true baptism by fire. His appointment in August 2008 in fact came on the back of a tragedy. “It was my darkest day. I had known Ramachandran (Ram) our CFO at the time for many years, and had worked closely with him during iGATE’s corporate restructuring. Ram was a great boss and had entrusted me with a lot of responsibility. His sudden death shocked me. I was the last person with whom he had spoken. It was a very difficult period,” he recalls. Ironically, the same month saw Sircar get his biggest career break, when iGate CEO Phaneesh

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$.(+,$.-+( FIRST JOB Handling acrossthe-organisation internal audit at Wipro in Bangalore. BIG BREAK Leading the IPO in 1997 for iGATE in the Indian market. A HA MOMENT Signing the Patni acquisition deal against all odds in January 2011 LITTLE KNOWN SIDE When I am really stressed, I go and watch mindless soaps or films on TV. The stress goes away in 30 minutes DREAM To make iGATE among the top three revenue earners in the industry APRIL 2011

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!"# !"#$%&' Murthy appointed the then 38-year-old as the CFO of the company’s India operations. Now, at 41, this sports-loving ‘young’ CFO has come a long way, having led iGate not just to its best ever financial performance in 2010, but also to the acquisition of Patni Computers. Back in his growing years Sircar studied at the world’s ‘most populated’ academic institution, South Point School in Kolkata. “My parents’ dream was obviously to see me become a doctor or an engineer. But I did not want 1+1 to equal 2 every time! I liked the idea of 1+1 becoming greater than two,” he says. The finance bug, it seems, had already bitten him. After studying commerce at St Xavier’s College, Sircar did his CA in 1993. That he passed his CA at one go was largely because he was in love. “I had fallen in love with my classmate in Class X and finishing my studies quickly was the only way I could get married at the earliest. I completed my CA in 1993 and got married in 1995,” he says. An early indication perhaps of his restless and ambitious nature. Life moved at a fast clip after that. At his first job interview, impressed by the young man, the iconic CFO of Wipro, Suresh Senapaty, offered him a job in Bangalore. “For the next 10 months, I traveled around India taking care of internal audit at Wipro,” he says. Soon, Wipro signed a JV with British Telecom and Sircar was assigned the job of handling finance of the JV from Wipro’s side. “I was just 10-months-old at Wipro. It was a huge promotion,” he says. The watershed year was in 1998 when iGATE made an offer Sircar could not refuse. The US headquartered iGATE Corporation was looking to go the IPO route in India and they wanted Sircar to lead that initiative. “The challenge motivated me and I felt it was a great platform,” he says. The decision wasn’t easy, particularly when it meant leaving his mentor Suresh Senapaty. “I still remember Mr. Senapaty telling me, ‘how could you leave such a great job and take a big risk by joining a small company?’ It was a tough call,” Sircar says. Nevertheless, he took the plunge and spent the next 11 months handling the IPO at iGATE. Soon iGATE India became the flagship business and the cash cow of iGATE Corporation. In retrospect, it seemed a great move. Then the slowdown hit the IT industry just at the turn of the century. iGATE India saw 34

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the exit of four CEOs in a short period and the company was disintegrating at a fast pace. For the first time in his life, Sircar felt unsure. “But I kept telling myself that only rats run away.” he recalls. His persistence paid off. The charismatic Phaneesh Murthy joined iGATE and within a year, the company saw a dramatic turnaround. “Up until then, I was only handling Indian share holders. He wanted us to see ourselves as part of a global entity and not just the Indian arm. Suddenly, we started thinking big,” Sircar says. All his experience stood him in good stead

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“Given the size of the deal it was like wanting to buy a Ferrari with a credit card. It was daunting. What got us through was the self confidence that we had developed.”

when, months after he took over as CFO, the global economic crisis hit. “Recession was at its peak in August 2008. I went to the board in the OctoberDecember quarter and told them that the immediate outlook was bleak. In fact January-March 2009 was one of the worst quarters for iGATE,” Sircar recalls. Looking back however, he says it was a great time to learn. He was thrown into the deep end and some decisions paid off big time for iGATE. “We took a lot of key strategic decisions. We did not compromise on profitability and put in place a robust risk-management programme. That paid dividends within the next six months,” he says. July-September 2009 turned out to be one of the best quarters for iGATE. Net income registered a 78% growth and share prices moved up from $2 in 2009 to $25 towards the second half of 2010. From a low point, iGate’s finance team

had turned things around dramatically in the same year. By March 2010, the firm had $1 Billion in revenues and seen a 40 per cent growth on gross margins compared to the previous year. Of course, the biggest achievement for Sircar and his team so far has been the acquisition of Patni. “In 2010, Phaneesh called me over the phone from Fremont and told me that Patni was a possible option. Overnight, this became a dream for me. Not once did I feel we would fail. We believed in ourselves and were confident,” he says. Sircar feels this was possibly the most complex deal in the Indian IT industry, not just because a smaller firm was taking over an organisation more than twice its size but also because of the financial structuring of the deal. Sircar also believes that if the post M&A integration goes well, the iGATE-Patni transaction will go down in history as a

landmark event for the industry. All this flurry of activities over the past two years has meant he has had very little free time on his hands, but that has not kept this aviation enthusiast from making it to the venue every time there is an aviation show. “I wanted to be a pilot and do something great for my country. As a child I was inspired by reading about the life of Netaji Subhas Chandra Bose,” he says, smiling. His love for sports and adventure also remains undiminished today. On weekends, when he’s not out on long drives with his wife and two daughters, he is either playing cricket for his office team or running marathons. In fact he recently ran a half marathon and successfully completed it. Perhaps it is this love for adventure and sports that has made this 41-year-old so successful, relatively early in life. APRIL 2011

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TOMORROW’S BALANCE SHEET Integrating strategies for corporate responsibility and evaluating their impact is becoming critical to business. A Chartered Institute of Management Accountants study puts things in perspective.

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ERVYN KING, THE architect of corporate governance development in South Africa, and widely regarded as a world authority in this field, believes the financial crisis has created a momentum away from compliance-based systems towards more value-creating ones, with a performance focus, based on principles. Businesses, however, are still using a 150-year-old model that assumes nature has unlimited resources and that waste can be absorbed. The new economy we are entering is ‘business as unusual’ and about making more with less. Today governance, strategy and sustainability are inseparable. Companies need long-term sustainable strategies that they can demonstrate to their stakeholders. A recent Accenture/UNGC research finds that a business can do well by doing good, but not until basic sustainability practices are fully integrated into the way business is done, both strategically and operationally. Amongst the challenges business leaders face are the lack of

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professional capabilities to fully understand, manage and assess corporate value, not least because current metrics are elusive in assessing the return on long-term investment in sustainability. The positive and negative impact a business has on society is becoming as important as traditional performance metrics. Why? Studies are showing an authentic commitment to sustainabil-

ity enhances financial performance in the long term, both through savings, risk mitigation and adding value. The most commonly used accounting practices cannot easily reflect this value, neither fully helping companies to capture it, nor tracking its presence or loss. As a result, the value that sustainability brings to a business is not necessarily picked up by current accounting practices.

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7KHUH LV DOZD\V D ULVN DURXQG UHJXODWLRQ ,W LV KHOSIXO LPSURYLQJ FRUSRUDWH FRQGXFW EXW LW FDQ DOVR EH XQKHOSIXO LQ WKDW LW FDQ EH SXUHO\ D SDSHU GLVFORVXUH Over the past decade or so, there have been many advances in metrics and reporting methodologies, primarily in the area of corporate responsibility reporting, and particularly in the area of carbon management. However, this is not satisfactorily embedded in the business or the main accounts. Businesses around the world are waking up to the fact that acting in a sustainable

manner makes good business sense as this can result in more successful operations that generate reliable cash flows. Society also needs responsible commercial organisations to generate the tax revenue needed to run public bodies, provide employment for citizens and to produce the goods and services needed to fuel the economy. There are organisations that are

already tackling such integration, the Tata group being one.

CONVERGENCE There is recognition that many different reporting systems and indices are proliferating globally. It is a growing market, but without much consolidation and with a varying focus on differAPRIL 2011

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%,* 3,&785( ent sectors. For example, in the development of ISO 26000, there may have been up to 70 different agencies setting standards with no clear co-ordination. At the same time, with the increase in global mergers and acquisition (M&A) activity in the past decade or so, many separate companies and types of industries with different operating processes, are now part of one big enterprise. It is a huge challenge, even within one company, to centralise on one particular tool. Even within a particular sector, for example the extractive industry, it is very difficult to compare like with like in relation to corporate reporting. Today, backward reporting continues to be the focus because that is what shareholders and investors currently require. However, innovative organisations are beginning to use non-financial information to inform strategy and success. Tacit knowledge will increasingly inform decision-making and there will be lessons to be learned from the pioneers, which will assist convergence. This convergence, however, is unlikely to be as formal in nature. The more financial reporting is standardised, the more complex it becomes and the less it is understood. The current financial crisis is evidence of this. A shift is also taking place from relying on benchmarks and indices, to creating further understanding of value drivers and having confidence in business decision-making and related business performances, in assessing outcomes. There will still be a need for a sectoral core of indicators for companies to report against. What is important in both cases is ensuring a consistency of approach and introducing management systems that support a social and economic ‘tool box’, connecting key functions across a business, such as human resources, procurement and risk management, in addition to the various operational units. Management accountants are in the unique position of marrying the financials and dragging sceptics who demand numbers into the world of less formal information. Many will need to be shown 38

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The Tata Index Tata, which was founded in 1868 as a trading company in Mumbai, India, has grown into a global corporation with market capitalisation of nearly US$80bn in 2010. Since its inception it has always been aligned to social development, based upon voluntary, as opposed to obligatory, commitment. Tata Group established the Council for Community Initiatives Committee (TCCI) in 1996 to examine a group-level approach to the assessment of the company’s external impact in alignment with corporate core values, systems and practices. The Tata Index was created with the United Nations Development Programme in 2003 to provide guidelines for Tata companies looking to fulfill their social responsibilities. It is built around the Tata Business Excellence Model (TBEM), an open-ended framework that drives business excellence in Tata companies. The TBEM has an innovative way of understanding everything by consensus, using semi-qualitative methodologies that translate into numbers. This methodology is based on convergence, reflecting not just an individual’s opinion but the collective opinions of both internal stakeholders as well as external partners. At Tata, value is seen as an opinion and assessing it is based upon the leverage of collective wisdom. Its measurement system is ratified by a large number of assessors embedded across the group,

new methods to help them understand how to introduce measures into nonfinancial areas. As ‘business as unusual’ increases, so too will convergence on new principles of reporting, the rise of identifying and assessing value drivers and a shared understanding of how this can be done.

COMMITMENT VS COMPLIANCE National and international regulation,

which in turn drives universal engagement. Companies,on the whole, can be very good at processes, evaluating them and their immediate outcomes or results and this can be captured on a balance sheet. However, there is really no way of showing what the impact of an outcome of a particular operation is in the longterm, and that is the challenge that all the reporting initiatives face. This is why the Tata Index has a third dimension of impact. This relates to human wellbeing, and uses semi-qualitative methodologies based on consensus. Tata recognises it is very difficult to move away from objective areas such as number-based benchmarks to tacit, ie, more implicit information. Yet, it argues that such elements can be brought into figures, not as an end but as a means for further improvement, which feeds back into Tata’s development of the business model. Tata also adopts reporting methodologies from the Global Reporting Initiative and ISO 26000 where applicable, and leaders from Tata also have input into the development of such metrics at an international level. However, they recognise that while there are too many reporting methodologies and indicators at present, the convergence of principles is beginning to happen. The IIRC, which Tata is also contributing to, may be able to help move this agenda forward at a global level among the finance community.

together with the growth of a global civil society lobbying and campaigning around business issues, have created an increase in the use of metrics and nonfinancial reporting. At the same time, there has also been a false confidence in an approach based on benchmarking and indicators to assess outcomes, without a full understanding of true value and practice. It is commonly noted that many best practices are reliant on the commitment of the corporate culture. It is

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%,* 3,&785( part of the fabric of the organisation, you can tell it when you walk through the door, the values are so embedded that the external reporting is a byproduct. External reporting becomes an easier part of these organisations’ existence because it spills out of what they do anyway. Reporting merely to comply with legislation is not what drives leading organisations to operate in the way they do. Many leading companies, in the interest of long-term success, will act ‘above the law’ in all the different geographical locations they operate in. For these firms, it is part of their ‘whole’ and they are more comfortable when they are not bound by specific metrics and numbers and when they are exploring increasingly qualitative means of assessing performance and impact. They are very aware of the impact, not only on their operating environment, but on their supply chain, enterprise development, health and safety of employees and the wider community. They understand the need to be open about what is working and what is not, in order to move on and the fact that trust and reputation are critical in underpinning their longterm success. Successful implementation is, in effect, driven by personal beliefs and values and shared culture. The ‘best in class’ organisations are already moving beyond what is expected of them, yet the value of regulation, at both national and international levels, cannot be underestimated. There

Recommendations Sustainability issues must be embedded in business models, organisational strategy and decision making processes so they can be captured and reported on. Senior managers and business leaders must increase their understanding of the demands and issues, and share learning with the wider sector and engage with stake stakeholders. New skills and tools are needed. Non-executive directors should act as custodians of sustainability, with the particu particular duty of ensuring that their executive col colleagues are building a sustainable business. External reporting should be a by-prod by-product of the business. Internal information

is still much to do in bringing others in the marketplace on board, to raise the game of poor performers, critically those who create negative impacts, with the potential risks for their shareholders, stakeholders and the wider economy, including other companies in the same sector. However, it must be remembered that many companies will be resistant to change unless there is a massive, early, short-term competitive advantage. Creating the environment for that advantage is the goal and governments have a key role in

Benefit or Cost? When a company invests in infrastructure in a developing economy, perhaps as part of a contract with local government, or to gain access to a site, this can be recorded and reported as an input and investment. But how is the true value shown eg, the creation of local employment, local services and skill development, or alternatively the longer-term nega negative consequences, perhaps creating bad environmental conditions, or distorting local markets? What on the one hand can be viewed in metrics as an investment can ulti ultimately be a cost. In many organisations, there is still a disconnect between a corporate agenda and a societal agenda locally, regionally or globally. Regulation can help drive the performance of the worst performers towards the best performers, which will benefit the company’s position in the long-term.

gathering needs to avoid costly role dupli duplication or unnecessary data capture. Management accountants should be encouraged to ensure that businesses measure performance to an appropriate timescale to assist in the delivery of sus sustained and sustainable success. Finance professionals are encouraged to engage directly with developments in integrated reporting with key stakehold stakeholders internally and externally, and develop relevant skills, knowledge and tools. Businesses should create a dialogue with government and civil society

enabling that, within their own markets and collectively through forums such as the G20. A positive side-effect of collecting and using data can be a related change in behaviour within an organisation, galvanising performance in so far as things that were not managed before become better and more consistently managed. Once there is data on trends, the management begins to worry about it and takes action. As a result, in the beginning, even if there is not a high level of external satisfaction, there is a gradual internal improvement in performance. In a whole range of areas of corporate regulation, there has generally been a journey from voluntary procedures to legislation and regulation to normative behaviour. Health and safety, labour standards and financial accounting itself has gone through this process. Regulation helps push the agenda forward. There is always a risk around regulation. It is undoubtedly helpful in levelling the playing field and improving corporate conduct, but it can also be unhelpful in that it can be purely APRIL 2011

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%,* 3,&785( a paper disclosure. It is always more informative to know that a company is run well rather than a company that has been told to run well. The aggregation of data from large corporations operating across different geographical locations can also dilute understanding; certain information can mean nothing when aggregated globally, whereas at a local level it means everything! Because there has been an increase in reporting, there is subsequently more data to draw on to build a picture about corporate impact beyond just the financial. The value of this is that it takes the learning forward – what is working and what is not, what is being used and what is supplementary, and also what is not being shown and what should be. The key question to ask is ‘do we want to understand businesses better or spend a lot of time comparing data?’ These are the challenges bodies such as the IIRC will be exploring, to help further the debate and encourage convergence. Comparison and pure compliance should not be the primary plan. Tackling the issue of finding new ways of assessing the corporate community is still at the stage of experimental innovation with those who are committed leading the way.

SUMMARY It is essential that the corporate reporting system not only allows, but actively promotes, this new corporate philosophy, which is required to drive business forward as it battles to meet 21st century challenges. The longer large numbers of businesses fail to show real commitment, the more likely a straitjacketed approach will be deemed to be necessary, however inappropriate. The actions of commercial organisations are already mistrusted and, in many circles, the term ‘corporate behaviour’ has become synonymous with greed, self-interest and detachment from the wider world. Nevertheless, there are many com40

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The Prince’s Accounting for Sustainability Management information is the linchpin for developing better corporate reporting. Conventional reports and accounts can focus excessively on a company’s shortterm financial performance. They pass over broader factors, such as the sustain sustain-ability of the business model or the com com-pany’s social and environmental impact. In particular, the way that ‘nature’s capi capi-tal’ is depleted – by the consumption of fossil fuels or the emission of greenhouse gases, for example – typically gets ignored. Where companies do disclose such infor infor-mation, it is seldom presented in a way that is connected with the strategic direc direc-tion and financial performance of the company, clarifies the risks and opportuni opportuni-ties or permits year-on-year comparisons. The Accounting for Sustainability (A4S) initiative, in which CIMA plays an active role, seeks to redress the balance by cre cre-ating a far-reaching connected and inte inte-grated reporting model. Chartered Man Man-agement Accountants are well-placed to collate and present this vital data, much of which will be the top slice of routine management information. And their ethi ethi-cal code means that they must present it objectively, whatever the pressures from elsewhere in the organisation to distort unpalatable facts. In August 2010 the A4S and the Global Reporting Initiative (GRI) launched the International Integrated Reporting Com Com-mittee (IIRC). The initiative has global reach and is a collaboration of established accountancy institutions, standard setters

panies that have successfully adopted business strategies that recognise wider societal needs, yet are still focused on long-term sustainable profitability. Very positively, reporting is evolving. It has to be value-driven, has to be embedded in the business, and cannot be driven alone by indicators. Leading companies now are not only asking

and leaders in corporate governance, busi business ethics and sustainability. Currently, there is no global standard for measuring and reporting on environmental, social and governance performance. The IIRC has been created to respond to the need for a concise, clear, comprehensive and comparable integrated reporting frame framework, structured around the organisa organisation’s strategic objectives, its governance and business model and integrating both material financial and non-financial infor information. The objectives for an integrated report reporting framework are to: Support the information needs of longterm investors by showing the broader and longer-term consequences of deci decision-making Reflect the interconnections between environmental, social, governance and financial factors in decisions that affect long-term performance and condition, making clear the link between sustainabil sustainability and economic value Provide the necessary framework for environmental and social factors to be taken into account systematically in reporting and decision-making Re-balance performance metrics away from an undue emphasis on short-term financial performance Bring reporting closer to the informa information used by management to run the busi business on a day-to-day basis. SOURCE: www.accountingforsustainability.org

themselves how do we deal with wider society, but how do we validate and prove it in practice? Companies need to show that their stories are more than lip-service when a global public is increasingly sceptical and social media are forcing ever more transparency. More and more firms are coming together to understand how best to do it.

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HEALTHCARE: IS INFRASTRUCTURE STATUS THE SOLUTION? JOYDEEP NAG

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ven after 63 years of Independence, India’s healthcare is yet to become universal. The healthcare agenda has shifted goal posts from “Healthcare for all by 2000” in the ‘80s to “Healthcare for all by 2020” now. We have tried to solve our problems through governmental intervention to Public Private Participation (PPP) or just private enterprise, but we are yet to reach the optimal bed capacity or the skilled manpower capability. There is no doubt that work has been done. We can claim success in eradicating small pox and covering good ground in polio and leprosy, but with modernisation and complexity, disease profiles have changed. Cardio Vascular Diseases (CVDs), cancer and diabetes are on the rise. Given the disease growth and our stated intent, the gap of healthcare, as it stands today, is a large one. India’s bed ratio of 0.7 beds per 1000 of population compares poorly with a world average of 3.96 or even China’s 2. To move the needle to 2, it would require an addition of 1.3 million

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beds at an average cost of US$80 billion. Additionally, India would need to double doctors from 0.7 million to 1.5 million, triple nurses and scale up paramedics from the current 2.5 million to at least 10 million. This would require setting up of more medical educational institutions, with an added outlay.

REASONS FOR INFRASTRUCTURE STATUS Therefore, the question is how do you bridge this yawning gap? The answer is three fold: Increase access, reduce costs and improve quality. The best way to reach these goals is simple: treat healthcare as an infrastructure project. INCREASE ACCESS: Given the population of a billion and a country with a wide geographical expanse ‘reach’ is important for both skilled manpower and hardware equipment. India still lives in its villages. Cognisant of this, the government has promulgated Section 80IB of the Indian Income Tax Act

for 100 per cent deduction of profits up to 5 years for new hospitals with 100 or more beds in T2-T4 cities or rural areas. But, lifecycle costs for medical care are at least seven to ten years and five is just not enough. Therefore, an increase in tenor will be a natural remedy to drive investments in T2 and lower areas . An increase in tenor in 80IB by itself may not stimulate investments. The government should give infrastructure status to the healthcare sector, allowing tax deduction on profit for ten consecutive years or allow an organisation to choose a certain number of profitable years of operation as tax deductible. This flexibility is in line with capital investments under infrastructure sector under 80IA. This would obviously move the needle of investments, versus 80IB allowing deductibility for the first five years of operations, when hospitals are usually struggling to break even on a free cash flow basis. Therefore, the need of the hour is to provide infrastructure status to healthcare, to speed up investment and increase reach.

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Besides, the fiscal benefits would also unleash monetary and banking benefits softer rates for loans, driving investments to every corner of the country. Growth in tier2 and tier3 towns can only be addressed with increased supplies of doctors, nurses and paramedics. Large investments in the form of private nursing colleges and medical teaching institutions are possible - provided investors are willing to put their money in such ventures. This is definitely possible, if 80IA status stretches to and covers training institutions. COST: Good IT we all know, in healthcare terms, eliminates trials of prog-

nosis and diagnosis by retrieval of a patient’s history. To many, medical IT is still an IT solution for patient billing but there is so much of IT in early and quick healthcare that the process of understanding of IT will still be a long discovery. The poor state and upkeep of records increases the cost of medical intervention – especially in a country where the patient does not have enough to pay for the medical costs. Therefore, it is important to maintain records in digitised form to increase its archival qualities and drive cost and efficiency. It is imperative, at least in the government hospitals, to start healthcare IT projects on a large

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network basis, to connect and create IT infrastructure and to fund it through private means. 80IA will be a great help in all these projects if the terms of reference can be broadened. QUALITY: To achieve world class standards, multinational investments, particularly FDI is important. Tax incentives and easy liquidity is a direct lure in all such investments. Unless scale, speed and quality are woven into each other, the nation will fail in solving the puzzle of healthcare. Given all this, it is apparent that healthcare is a national problem. The answer lies in luring investments to this area and what better way to do it than granting infrastructure status. The question is, will what works for roads, work for healthcare? Why not give it a chance? This time it may just work! JOYDEEP NAG IS CFO SOUTH ASIA AT GE HEALTHCARE

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CORPORATE RESTRUCTURING NEEDS A NEW APPROACH New realities call for new techniques — particularly when attempting to turn around worn and now irrelevant business models. Two recent corporate examples illustrate the stark differences DAVID NILES

PHOTOS.COM

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rior to the recent great recession, restructuring efforts traditionally focused on balance sheet and cost considerations. Companies targeted for turnaround suffered from an over-leveraged balance sheet and bloated cost structure and were prescribed a heavy-handed overhaul. These restructurings were rigorous, but theoretically simple: refinance debt structures, shake up management, cut corporate jets, reduce redundancies in the workforce, shutter unprofitable product lines and so on. As tough as these tasks have been, today’s increasingly complex business environment requires a more robust restructuring strategy. Today companies must move beyond the old restructuring model and toward a whole system framework — one that combines traditional balance sheet treatments with anticipatory strategy, aggressive market analysis and comprehensive operational improvement initiatives. 44

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Borders Group Inc., the beleaguered media retailer that recently filed for bankruptcy, is a prime example of a firm clinging to the old restructuring model as it faces new and complex challenges — and failing as a result. On paper, the firm’s plight appears typical: an over-leveraged balance sheet rife with burdensome and ill-advised real-estate investments, an inefficient sales force and a plethora of accumulating debts.

Borders responded to these ills with several rounds of management restructurings, closure of hundreds of branches and by attempting to restructure its debt. In other words, a typical restructuring two-step. But these efforts fell short. Investors declined to contribute new capital, publishers refused to restructure their contracts and emergency loan commitments (including a $550 million financing package from

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GE Capital) failed to stem the firm’s downward spiral. Under these crushing pressures and despite its restructuring efforts, Borders filed for Chapter 11 bankruptcy protections in mid-February. What went wrong? Why did yesterday’s tried-and-true restructuring approach fail Borders? First, the company did not prepare for a financial downturn, even as public concern over an emerging financial crisis grew. The global economic meltdown then decimated profits in even the most resilient of retail businesses.

Second, and perhaps more critically, Borders did not anticipate — or react to — tectonic shifts in its customer and revenue profiles. The explosion of online book sales and the e-reader revolution (as pioneered by Amazon’s Kindle platform) were disastrous for Borders, a company whose main profits are derived from the sale of hard-copy media in store locations. Given these events and the reality of the market here in 2011, Borders’ decline is not only unsurprising, it was inevitable. But what could the company have done differently? What steps might

Borders have taken to prepare for these unforeseen outcomes? It is easy to play Monday morning quarterback and hindsight is always 20/20, so it is not the intention here to downplay the difficulty of making decisions in the face of complex problems. That being said, other companies have successfully managed through similar situations following a new model of restructuring that includes:

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A proactive and discriminating “heads-up” business strategy — one that prepares for shifts in customer APRIL 2011

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!"#$%&'(!') and competitor behaviour and gives consideration to low-probability, high consequence events; Balance sheet management that positions the firm to weather shifts in the financial environment and in revenue profiles; and An operational improvement programme that drives efficient production and distribution of goods and services. The value of this whole system restructuring strategy would not stem from these elements as they are taken individually. After all, these approaches are standard fare in the business world. Rather, the worth of these elements would derive from their mutual reinforcement in the restructuring process. For example, a well-tended balance sheet and risk structure that shields a company from price shocks should provide management with greater strategic headroom and the liquidity to undertake operational improvements in tough times. Similarly, operational improvements that yield higher quality or cheaper products should subsequently drive new outlooks on the competition and balance sheet management and so on. In this capacity, restructurings should seek to coordinate and align strategy, financial management and operations.

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THE NEW RESTRUCTURING IN ACTION This concept is not just a theory for the business journals, but rather a practical framework that companies are employing today with great success. There is perhaps no better example than Ford Motor Co. — the only major United States automotive company that did not require emergency bailout funds from the federal government. As direct competitors such as General Motors Corp. continue to struggle in spite of billions in federal bailout aid, Ford has flourished. What distinguished Ford’s approach? Unlike its competitors, Ford followed a more robust restructur46

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Companies must move beyond the old restructuring model, towards a whole system framework. Borders Group Inc., the beleaguered media retailer that recently filed for bankruptcy, is a prime example of a firm clinging to the old restructuring model. Ford on the other hand followed a more robust restructuring effort, augmenting the traditional approach with a consumer-driven business transformation. The factors confronting each were the same: both companies faced a sharp decline in sales and an outmoded business model. Borders neglected these complexities with its narrow restructuring efforts. Ford, embraced this new landscape by complementing the traditional restructuring approach with a whole system strategy. Ford also positioned itself to react to and capitalise on new opportunities.

ing effort, augmenting the traditional approach with anticipatory strategy, a consumer-driven business transformation and operational excellence. Ford CEO Alan Mulally joined the company in September 2006, just prior to the onset of the global financial collapse. Cognizant of growing concerns over the trajectory of the U.S. Economy, Mulally immediately set about reinforcing Ford’s balance sheet structuring with $23.6 billion in secured financing. The new CEO tied this financing to sound assets in anticipation of potential upheaval, commenting that it would give Ford “a cushion to protect from a recession or other unexpected event.” By early 2009, Mulally had also eliminated $10.4 billion in debt by paying off debt holders with cash and

stock, thus reducing borrowing by 40 percent. In 2007, the price of gasoline hit $4 per gallon in tandem with the ensuing global financial collapse. In response to lighter check books and seizing on the burgeoning “green technology” movement, consumers dramatically shifted their automotive interests toward fuel efficiency and price economy. Understanding that Ford’s customer profile was changing, Mulally reinvested in a suite of strategic business transformations aimed at bolstering Ford’s efficiency and competitiveness. He first invested aggressively in the design and production of low-cost, ultra-high efficiency vehicles, while pushing out higher consumption and luxury vehicles to make room in its inventories. Mercury, a waning icon

!"#$%&'(!') of American automotives, was shut down while Ford’s luxury and high-end brands (Aston Martin, Jaguar, Land Rover and Volvo) were sold to overseas corporations. Simultaneously, Mulally transformed Ford’s factories into “flexible production units,” capable of implementing manufacturing and process changes with greater agility. There were two advantages to this decision. First, factories capable of implementing on-the-fly changes to their production processes and focuses are better prepared to respond to fastpaced changes in consumer demands and interests. Second, this production model improved oversight and management of product quality and safety practices, a goal that Mulally had emphasised early in his tenure. These efforts were synergetic. Mulally’s traditional but pre-emptive balance sheet reinforcements not only positioned Ford to weather dreary sales through the recession in the absence of federal aid, but also created the opportunity for reinvestment in a new factory model that created value at the top and bottom lines. More critically, Ford’s emphasis on lowcost, high-efficiency product lines allowed Ford to capture substantial market share as consumers turned their backs on competitors’ gas-guzzling, premium priced options — a shift that Ford prudently anticipated by paying close attention to its changing consumer market. Lastly, Ford’s improved capabilities in terms of product quality and safety

())*+ A financing package from GE capital to the tune of $550 Million failed to stem Borders’ downward spiral

(,-./ Ford’s new CEO quickly restructured the firm’s balance sheet, with $23 Billion in secured financing oversight capitalised on heightened consumer expectations in the wake of Toyota Motor Corp.’s safety problems, while the new operational emphasis on flexibility has prepared Ford for future shifts in consumer interests. The results were dramatic: in 2010, Ford’s market share increased to 18 percent (double the growth of the overall industry), and earnings jumped to $6.6 billion — the company’s most profitable year since 1999.

COMPLEXITY COMPOUNDS PROBLEMS Despite the dramatic divergence between Ford and Borders, the critical

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factors confronting each were the same: both companies faced a precipitous decline in sales and the headwinds of an outmoded and overburdened business model. Moreover, both encountered a new level of complexity in their business environment as greater intricacies in the global economy made economic projections more unpredictable, while at the same time rapid technological innovation p r o d u c e d e v e r- m o r e c a p r i c i o u s consumers. Borders neglected these complexities with its narrow restructuring efforts. Ford, on the other hand, embraced this new landscape by complementing the traditional restructuring approach with a whole system strategy. By employing preemptive balance sheet manoeuvrings in its restructuring, Ford provided itself with the valuable liquidity and financial stability required to weather the improbable and unpredictable. But more than that, by building agility, efficiency and forward-thinking strategy into its business model, Ford also positioned itself to react to and capitalise on new opportunities. This more holistic approach should serve as a touchstone in the new business environment. Indeed, as incomes shift and technologies advance with greater velocity, consumers will look to engage products and services in ever evolving ways, and businesses must be well-positioned to react. Scenario planning, aggressive market analysis and operational efficiency — in tandem with traditional restructuring efforts — should be considered the norm in this era of increasing volatility. Current headlines about Borders are a stark indication of the alternative. DAVID NILES (DNILES@SSAANDCO. COM) IS PRESIDENT OF SSA&CO. THIS ARTICLE WAS FIRST PUBLISHED IN THE FINANCIAL EXECUTIVES INTERNATIONAL, APRIL 2011 ISSUE. © 2011 FINANCIAL EXECUTIVES INTERNATIONAL | WWW.FINANCIALEXECUTIVES.ORG

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!"#$%&''()* +*,-') 1&23)4 A serious cash crunch was strangling Gujarat State Fertiliser Corporation in 2003, when CFO Gautam Sen and his team stepped in. Now Director-Finance of RCF, Sen recalls how the challenge was met.

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hallenges are a part of any job, but when the ‘challenge’ is one that involves saving a company on the verge of closure, protecting the jobs of employees and preparing a plan to turn around its fortunes – it calls for a special set of skills. Back in 2003, as the then Director-Finance of Baroda-based Gujarat State Fertiliser Corporation (GSFC), Gautam Sen faced such a situation, one he calls the toughest challenge of 50

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his career. Nearly a decade later, the now Director-Finance of Rashtriya Chemicals and Fertilisers (RCF) recalls those tumultuous and often nerve-racking days.

THE CHALLENGE GSFC was always a dividend-paying, profit-making company, where even the state government had a 26 per cent stake. Then suddenly in 2002-03, a series of problems led to a crisis, pushing the company to the brink of disaster. “It all started when a new subsidy policy

forced us to pay back Rs 291 crore to the government. Even though we were to pay this money in two installments, it caused a serious liquidity crunch. We had more than one ongoing project, so a steady cash flow was of importance,” recalls Sen. The company’s loan portfolio at the time was Rs 1470 crore against a share cap of Rs 79 crore. Interest burdens rose and projects were stalled. The company suffered losses of over Rs 200 crore in both 2002-03 and 2003-04.

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!"#$%&'()*! THE CHALLENGE: Turning around a company on the verge of a shutdown TIME PERIOD: April 2004 to March 2005

PEOPLE INVOLVED: CFO, the entire finance team and others KEY TAKEAWAYS: There is no substitute for action and effective communication.

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<=&()*3>('-??3"&/'()*(/&')2/)( ,-'"%&''(@")4*-)(@2")"%A(B*/(*-)C ')2%>"%A(?2D0&%)'E(8*(/&2''-/&( )4&0F(G(02>&(2(#*0?/&4&%'"H&(( '#4&>-3&F(A-2/2%)&&"%A()4&0( ?2D0&%)("%("%')2330&%)'EI As GSFC tottered on the brink, Sen decided it was time for action. He met the then Bank of Baroda chairman and figured the best way out was to take the Corporate Debt Restructure (CDR) route. The entire loan portfolio was to be restructured. “It was not that simple,” says Sen. Firstly, the main ammonia plant of GSFC was in trouble due to an ongoing economic slowdown. Secondly, a majority of GSFC’s plants were mixed feed – 50 per cent naphtha and 50 per cent gas. “The trouble was that the price of naphtha was six times higher than that of gas. We didn’t have the money to run these plants if we had to buy more naphtha,” he remembers. Sen realised a potential shut down was in the offing. 52

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“Overseas supplies were hit and we also defaulted with our main German bankers,” he says.

MEETING THE CHALLENGE By early 2003, the CDR operation began in earnest and Sen’s team created a watertight presentation to establish the ‘potential viability’ of the organisation, as desired by the Reserve Bank of India. “With the RBI stamp of approval in our pocket, we developed a package for loan restructuring,” says Sen. To begin with, GSFC told those who had provided unsecured loans that they would have to give the firm a 50 per cent waiver on the principal and a total waiver on interest for 2003-04. “Lenders realised

this was the only way they would get back their money, so they agreed,” he says. Secondly, those who wanted quick payment were given a schedule for three years and told they would have to lower the interest rates. “Again, luckily we could convince most lenders about the net present value (NPV) of the company and they agreed to our proposal,” Sen recalls. Crucially, deals were struck with GAIL and Gujarat Gas at this stage to buy additional gas from them to replace the more expensive naphtha in the plants. Pipelines were put in place and gas started flowing – all within months. Cost of production reduced dramatically. “I also visited our bankers in Germany to restructure the unsecured part of the loan,” says Sen. Of course, there were niggles on the way. For instance, cash flow problems remained for some time and suppliers had to be coaxed into restarting business without waiting for outstanding payment. “To reassure them, I made a comprehensive payment schedule, guaranteeing them payment in installments,” Sen recalls. By mid-2004, things were looking up again, remembers Sen. And look up they did. From losses of over Rs 200 crore in the previous two fiscals, GSFC reported a Rs 42 crore profit in 200405. “As a team, we worked wonders,” Sen concludes.

THE LEARNINGS Sen is proud of the fact that during the crisis, his team was able to keep all workers united. “Not for a day did we stop their salaries. That kept them motivated,” he says. “I learnt so many things from this exercise,” admits Sen, saying two lessons stand out: “There is no substitute for timely action. Nor is there any substitute for effective communication and taking people into confidence. Because we followed these principles, we were not only able to turn the fortunes of the company around, but generated enormous goodwill.”

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Negotiating a deal in Asia is not just about a smart presentation. Understanding and following the local culture and its peculiarities can make or break a deal. DAVID LIM

ABOUT THE AUTHOR David Lim, Founder, Everest Motivation Team, is a leadership and negotiation coach, best-selling author and two-time Mt Everest expedition leader. He can be reached at his blog http:// theasiannegotiator. wordpress.com, or david@everestmotivation.com

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WE DO BUSINESS WITH people we like. It does not mean we do not do business with people we dislike, but all things being equal, we award contracts to and work with people we like. In Asia, a common mistake is assuming that we, away from the Big Lakes or far from Anglo-centric powers, are just one big group of people who think and behave alike. But I can tell you that a Chinese business person from Malaysia, Singapore, China or Hong Kong will have enough cultural and national biases to make even dealing with ONE Asian race – say Han Chinese – pretty tricky at times. Let us focus on one aspect, doing better in negotiations, for example. One of the first things we normally do is build rapport. This is a complex mix of reaching out through language, gestures, actions, words and protocols designed to bring ourselves closer to another person – even if it is someone we have some misgivings about. In Asian cultures where the Chinese race dominates, certain threads and cultural issues are key in understanding how rapport works. However, in this article, I want to move away from the more conventional information which are based on obvious customs and business etiquette. Instead, let us go deeper into the Asian psyche.

!"#$"%&'(01%!$ HIGH/LOW CONTEXT: Small things such as signs and gestures mean a lot in societies which have a lot of respect for rank. First time meetings where you bring a small token or gift that represents your nation or company are welcomed and seen as a sign of courtesy. FACE: You create rapport by giving appropriate face to all staff present. Going over the head of someone in a negotiation process may lead to loss of face and you will not win that person’s support in future. Here is an example when it can go wrong. An acquaintance of mine was once assigned to close a multi-million-dollar deal in China. For three days, he had to wine, dine and entertain the buyers. When he fell ill on the fourth day, he excused himself from the evening sessions. Upon his return to Paris, his boss told him that the Chinese feedback included a retort that the harried executive had not shown them enough ‘face’ when in China. They lost the deal.

“In ‘high power distance countries,’ there are likely to be many more gatekeepers who you need to win over before you actually get to negotiating with the economic buyer.”

POWER-DISTANCE: Geert Hoftstede’s studies in the concept of ‘power distance’ in culture continues to fascinate me. For many years he measured and studied employee value across cultures. The term ‘low’ and ‘high’ power distance refers to the relative inequality of distribution of power within a society or organisation. Many Scandinavian countries, for example, have a ‘low’ power distance culture, with fewer layers between the boss and the shop-floor worker. Culturally speaking, Scandinavian countries are also egalitarian in terms of wages and standard of living. The scores of these countries hover around 30 on Hofstede’s scale. India has one of the highest Power Distance (PDI) scores for culture, with a ranking of 77 compared to a world average of 56.5. This Power Distance score indicates a high level of inequality in power and wealth within the society. This condition is, to some extent, accepted by the population as a cultural norm. China scores even higher at 80, while Singapore is not very far behind. In this context, in an everyday negotiation, understand that in ‘high power distance countries,’ there are likely to be many more gatekeepers who you may need to win over before you actually get to negotiating with the economic buyer. In a lowpower distance context, far less rapport-building energy may be required. The greater hierarchy in Indian and many East Asian cultures also suggests that approaches to negotiation may require the unpeeling of the proverbial onion – discerning just who is the economic buyer and who are the influencers involved in the process.

CONFUCIAN PRINCIPLES: Though not explicit, many East Asian companies still believe in the philosophy of the ancient Chinese philosopher who outlined how we should live, run governments and lead a household. These include principles that championed respect for elders, filial piety, a strong work ethic and effective governance of the state. You cannot effectively negotiate any Chinese who has some Confucian exposure, and not realise its influence. So, in the context of a negotiation – respect your elders, though you may diplomatically disagree with their position. When it comes to filial piety, it is a phrase that is almost never used in Anglo-centric societies. When you get a culture which focuses on individual freedom over collective interests, when you call your father by his first name – you get a society far divergent from Chinese cultures where filial piety reigns. It extends to taking care of your parents even if you do not get along with them. In a family-run business (and many large Asian businesses are still family-owned), understand the power dynamics of the matriarch or patriarch and find out if the Harvard-educated eldest son will really ride roughshod over his father. If you wish to be on the winning side, think about these when building rapport with Asian decision-makers – show some respect, be open, listen when the oldest/eldest at the table speaks and understand the context of the familial situation. You will be respected and liked. It will create a good impression! APRIL 2011

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VOLKSWAGEN PASSAT

IMMACULATE!

Bolder, greener, and packed tight with tech, VW’s new Passat makes a strong statement to those dressed in power suits. Amit Chhangani VOLKSWAGEN IS EASILY one of the most sophisticated and evolved automobile companies in the world. Unfortunately for VW, its Passat didn’t quite achieve in India what the German brand wanted it to. A slightly dated exterior along with strong competition from the Skoda Superb and Honda Accord didn’t let the Passat garner good numbers with its previous version.

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THE LOOK All that, however, may change soon with the introduction of the latest iteration of the premium sedan unveiled by VW a few days ago. In its new avatar, the Passat comes across as a totally revamped car. There are similarities with the older version, but the differences are substantial enough to deem the ‘new’ tag justified. Not only has VW lent the Passat its new

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Following Volkswagen Group’s acquisition of Audi in 1964, Volkswagen used new engineering expertise to develop a modern front-wheel drive car with a watercooled engine, and thus the Passat and Golf were the first of a new generation of Volkswagen cars. The first Passat was developed in 1973.

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#"0$6??=: signature family grille and design, but has loaded it to the gills with features and plonked in a better engine to make it better than its predecessor. Visually too a lot has changed. Apart from the trademark VW grille, the new Passat gets stronger, more muscular lines around the bumper for a solid visual appeal. The headlamps get a row of daytime running LED lamps with the rear portion having been refreshed too with more compact taillights replacing the earlier set. The interior too feature a host of improvements. The signature ribbed seats which have always lent an aura of class to the car have been retained but made more comfortable. VW has cleverly used chrome inserts in several places within the cabin to make the car’s interior look refreshing without having to overhaul it.

THE USP The USP of the new Passat though is on the tech front. VW has packed it tight with features so that when comparisons are drawn with the Superb, it comes out a clear winner. Two of the most impressive new additions include Park Assist and Attention Assist. Park Assist helps park the car in both parallel and perpendicular fashion by taking complete control of the steering wheel with the driver only having to control the accelerator and brake pedals. Attention Assist on the other hand can detect a drowsy or inattentive driver and uses an audio alarm to wake him up. Apart from this tech wizardry, the Passat gets a new 2.0-lter TDI common rail diesel engine which is much better than the earlier unit, both in terms of power output and driveability. It is mated with the fantastic sixspeed DSG dual clutch auto box with the Tiptronic manual shift function. For those not interested in spending on the technology, there is the goodold manual transmission version available too.

LOADED WITH NEW TECHNOLOGY SUCH AS PARK ASSIST, THE NEW PASSAT IS ALSO SPACIOUS WITH THE SEATS ALLOWING YOU TO STRETCH YOUR LEGS WITH EASE.

&#=!:$3>?"0 13::3@ Engine:

1968cc, 4 cylinder, common rail diesel

Power: 170 PS @ 4200 rpm Torque:

350Nm @ 1750 – 2500rpm

Price: (Ex Showroom Delhi) Trendline: 20,80,000 Comfortline: 23,80,000 Highline: 25,65,000 POSITIVES Fuel efficient, improved power, boasts of Park Assist and Attention Assist technologies NEGATIVES More expensive that most competitors in its class VERDICT A clear winner because of its fuel efficiency, eco friendly facilities and technological superiority.

REASON TO BUY VW is marketing the new Passat as a fuel efficient and environmentally friendly car. Taking centre stage at Passat’s marketing campaign is the Think Blue mantra which highlights the car’s BlueMotion technologies – a combination of various systems to maximise energy efficiency, boost mileage and reduce emissions to a bare minimum. The BlueMotion tech utilises ideas like a clever stop/start system to reduce energy wastage on traffic lights, a brake energy recuperation system to conserve energy lost during harsh braking, low rolling resistance tyres and taller gear ratios for minimal fuel consumption at cruising speeds. All in all, the new Passat is a substantial improvement over the model it replaces. Honda Accord and Skoda Superb’s prospective buyers now have a seriously good third option to check out. AMIT CHHANGANI, A FORMER EDITOR AT CAR INDIA, IS CURRENTLY EDITOR – MOTOROIDS, AND EDITOR-AT -LARGE AT CARSALESINDIA.COM. APRIL 2011

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Laidback In Adelaide Anil Mulchandani goes Down Under for a taste of great food and wine. ADELAIDE, THE CAPITAL of South Australia lies between the 727m high Mount Lofty and an incredible coastline of white beaches and rocky cliffs. Underestimated as a holiday destination, Adelaide has much to offer – an impressive collection of Victorian buildings, churches and heritage houses, museums, sprawling parks, gardens and recreational centres apart from the Glenelg beach and some of Australia’s finest vineyards in the Barossa Valley. Our stay at Adelaide began at the Hilton Adelaide where we joined the gastronomic tour organised by Mark Gleeson at the historic Central Market. Gleeson is a well-known name at Adelaide and he took us through a cross-section of shops where we tried Greek-style yoghurt, sampled cheese at Smelly Cheese and Say Cheese, and tried the dumplings called Piroshki at TaldyKurgan, run by immigrants from Kazakhstan. Walking past shops with stacks of bread, fresh veggies and fine meat whetted our appetite for lunch, for which Gleeson recommended the Lucia’s Pizzeria and Spaghetti Bar, started in the 1950s by the late Lucia Rosella. Here we enjoyed delicious pastas and pizza. Back at the Hilton, we met Christopher Smyth (Chris) from Tourabout Adelaide through whom we had booked a tour of the city. He showed us around the city’s Victorian buildings, the green belt along the Torrens River, the Festival Centre and Art Gallery of South Australia that have earned the city fame as a contemporary art hub of Australia. We spent some time at two excellent examples of 19th century domestic architecture and workmanship – Edmund Wright House and Ayers 58

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House. For cricket enthusiasts, Adelaide is something of a pilgrimage – the city has the Bradman Museum, the house where Don Bradman lived and the elegant Adelaide Oval. Chris also accompanied us to Haig’s Chocolate Factory, where we visited the factory and tasted the sinfully delicious chocolates and shopped for chocolates as well.

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LEFT: A GROWING METROPOLIS, ADELAIDE CONTINUES TO BE VERY GREEN AND IS PLEASANTLY COOL IN MAY. BELOW: DO GO ON A WINE TRAIL WHEN IN ADELAIDE

EAT AND BE MERRY: ADELAIDE IS A FOODIE’S PARADISE. WHETHER YOU LOVE SEAFOOD (SEE PICTURE ON THE LEFT) OR JUST A GREAT VEGETARIAN MEAL. ABOVE: A HAIGH’S CHOCOLATE SHOP, ONE OF THE ‘MUST VISIT’ PLACES IN ADELAIDE

In the evening, we went to Glenelg beach and took a cruise in an unsuccessful attempt to spot dolphins. Here we met Kent Rossiter, who organises sports events and tours. He took us for a walk along the landscaped foreshore and the cafe strip. Being seafood buffs, we selected Sammy’s On The Marina, which had simply delightful fish, prawn and other seafood dishes. The next morning, we drove up into the Adelaide Hills, a wildlife paradise. We visited Cleveland Wildlife Park which houses Great grey and big red kangaroos, wallabies, emus,

dingos, waterfowl, Tasmanian devils, koala and the deadly Aussie snakes. We also saw wild marsupials and Australia’s wild parrots in the native trees. On the way back to town, we stopped for lunch at The Lane, a vineyard restaurant with a view of the vineyard along the rolling countryside. After wine tasting, we lunched on duck breast in orange marmalade with a glass of Pinot Gris. For dessert, we stopped at Hahndorf, a Prussian settlement with Lutheran churches, which has a huge range of restaurants, cafés and confectionery shops run by immigrant families from Europe. We bought cheeses at a shop called Udder’s Delight and had hot chocolate at a shop called Chocolate@no5. On our third day we set out for the Barossa Valley. This is true wine country – the land of internationally-reputed producers. We visited Pensfold to try their wines and then Saltram, where we had a superb lunch and rich red wines (oh...the shiraz!!) at their 1859 AD winery on the Barossa hills. The weather was nice and chilly all along and we wished we could have spent some more days in this beautiful city. WHEN TO GO: May is a good month to visit Adelaide when the

city isn’t too busy with tourists. Autumn is extremely pleasant here. During the winter months (June - August), the temperature drops to about 5°C, with chilly nights. APRIL 2011

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iPad 2

The much awaited iPad 2 is now shipping in more than 20 countries. Much thinner than the original one, iPad 2 boasts of enhanced battery life and hosts cool nascent apps like Garageband and Photobooth. Featuring a rear one megapixel and front VGA cameras it shoots videos in HD.

For the Serious Headphone-Audiophile Michael Browne checks out the rather expensive new HD 800 headphone. THE HD 800 has a brand new design – compared to the HD 650 – new earcups, a much improved OFC cable, new ring radiator drivers especially designed to do away with the congested soundstage that headphones are known for. They look space age too – and very well built, with a lot of metal in the design. They’re a comfortable, secure fit, and while the padding on the earcup looks thin, it’s adequate. These headphones need serious amping. We used a Woo Audio 6SE to power it. If you listen to the HD 800 straight out of your soundcard, you’ll wonder what the fuss is about. When amped, the mid-range clears up, and there is more space between each performer. While not as good as speakers at imaging, the soundstage is expansive – in fact, this would be one of the standout features. Bass is tight, impactful and pleasant, not boomy. 60

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The mid-range is wide and open, clear, and rather neutral. The highs are equally well represented – no hint of sibilance, but the HD 800 extends all the way to the top. If anything, the HD 800 has a bit more energy in the upper frequency range, but for all practical purposes, the HD 800 is far more neutral than the HD 650 was. The price tag of Rs 74,995 will make most people faint, but these aren’t regular cans. However, considering that you’ll need to double this amount for a good amplifier and a DAC... they’re overpriced – as any headphone over Rs 40,000 is; but if you seek sonic bliss, this will get you close. SPECIFICATIONS: Frequency response:

14-44000 Hz; impedance: 300 ohms; max sound pressure level: 102 dB; weight (without cable): 330 grams

Motorola Atrix 4G We couldn’t help but cover the Motorola Atrix 4G which is due next month. Touted to be the most powerful smartphone when it releases. The Atrix will run Android 2.2, it’ll be the first phone to have a 1 GHz NVIDIA Tegra 2 dual core processor.

Dell XPS 15

As the name suggests, Dell XPS 15 has a quad core Sandy Bridge processor. It features a NVIDIA GeForce GT 540M for that extra boost in graphics power, LED display, HDMI and back-lit keyboard. This laptop is pretty much jam-packed with features. POWERED BY

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