In July 2010, IDFC got the Infrastructure Finance Company (IFC) status
 within the NBFC category from the Reserve Bank of India (RBI).  We
 leveraged this status to raise debt capital through the issue of
 infrastructure bonds. As a measure of our efforts to widen our reach
 among ordinary households, we raised Rs. 1,451 crore from over 7.3 lakh
 retail investors. In addition, the IFC status, by allowing us to raise
 capital through External Commercial Borrowing (ECB), has also opened
 access to a new class of international debt finance agencies. Going
 forward, we would use our new relationship with these foreign financial
 institutions to leverage capital in forms other than ECBs, including
 rupee bonds.
 
 This year IDFC entered the list of top 50 Indian companies in the
 Standard & Poors Environmental, Social and Corporate Governance (ESG)
 India Index. Our presence on this Index is an indicator to our
 investors that their portfolio is consciously balancing the interests
 of all stakeholders, thereby creating a platform for strong long-term
 performance.
 
 Complementing our core activities in financing infrastructure
 development in the country, we have carved out our development agenda
 under the rubric of the IDFC
 
 Foundation. The Foundation has now been registered as a company under
 Section 25 of the Companies Act, 1956, which deals with not-for-profit
 companies. IDFC will support the Foundation through a certain
 percentage of its profits every year. The Foundation will also be able
 to raise more third-party non- commercial development funds for
 activities such as training government employees and advising the
 government in policy matters, one of the prime objectives behind the
 setting up of IDFC. Moreover, I am happy to inform you that IDFC
 actively continues to contribute to the policy formulation and
 development strategies of several sectors. IDFC has been nominated on
 several committees set up by the Union Government including in the
 transport sector, on electricity distribution, urban water and
 sanitation, and several financial sector reform committees.
 
 Notwithstanding a good financial year, there are serious challenges
 mounting in the infrastructure sector. Lack of effective governance and
 policy/regulatory uncertainty is perhaps the biggest challenge facing
 not just the infrastructure sectors, but the country at large.
 Corruption issues that came to the fore in the past year have had a
 serious negative fall-out. Besides eroding investor confidence, the
 working environment has become more difficult due to extreme risk
 aversion in decision-making and consequent delays.
 
 In the power sector, the impact of poor governance by states, lack of
 political will for reforms, and stalled regulatory processes is leading
 to a critical situation. This is clearly a matter of concern since this
 is a priority sector accounting for nearly one-third of the projected
 investments in infrastructure during the Eleventh Five Year Plan. The
 private sectors role has been growing in power generation capacity, as
 evidenced by the increase in its share in capacity addition from 13% in
 the Tenth Five Year Plan to 30% in the first four years of the Eleventh
 Five Year Plan.  While an additional 40,000 MW is expected to be
 commissioned in the next four years, effectively doubling existing
 private sector installed generation capacity, there could well be a
 slowing down of this new capacity coming on-stream. Essentially, this
 is due to two key risks that the sector is facing – fuel risk and
 off-taker risk. As a result, many thermal plants are operating below
 capacity and the commissioning of some new ones is being delayed.
 
 On the fuel risk, shortfalls in domestic coal supply have emerged as a
 major speed-breaker to electricity production. Despite having the
 fourth largest coal reserves in the world, our power sector cannot get
 the coal it needs. Coal Indias production has been unable to keep pace
 with the increase in domestic coal-based power capacity. A firm
 commitment for the supply of domestic coal in the form of a Fuel Supply
 Agreement is difficult for power developers to obtain and the agreement
 is skewed in favour of the fuel supplier, leaving the developer with
 great uncertainty and limited recourse. Given the recent increased pace
 of power generation capacity addition and the substantial project
 pipeline, the coal demand-supply gap is only likely to worsen. To meet
 the incremental coal demand from the power sector alone, we estimate
 that domestic coal production has to increase annually by 11% as
 against a historical average growth rate of 6%. Failure to keep up with
 rising demand will increase our dependence on imported coal to achieve
 desired capacity utilisation levels (plant load factors) which, in
 turn, would imply an increase in the cost of generation and
 vulnerability to global fluctuations in coal prices and freight
 charges. I must add here that the reliance on imported coal to improve
 capacity utilisation of existing domestic coal-based power plants is,
 of course, limited by the technology already locked into, as well as
 the available infrastructure capacity, mainly ports and road and rail
 connectivity. It is therefore urgent to solve the fuel problem so as
 not to have stranded assets.
 
 The expected increase in the cost of power generation brings to the
 fore another key challenge facing the power sector – the stalling of
 tariff reforms. Tariff revisions have not kept pace with the rising
 fuel prices. Some State governments, on their part, have been reluctant
 to levy even nominal user charges for large consumer categories such as
 agriculture, while resisting attempts to rationalise electricity
 tariffs for other categories such as domestic consumers. The total
 amount due to State governments decision to subsidise such consumer
 categories more than doubled in 3 years from Rs. 12,233 crore in 2005-06
 to Rs. 29,665 crore in 2008-09, and has increased even further over the
 two subsequent years.  This clearly has an impact on the fiscal
 position of State governments. In fact, because of the constrained
 fiscal situation, the subsidy payments by State governments have not
 matched their commitments, with consequent cash losses having to be
 incurred by the discoms (distribution companies). All three factors –
 delays in tariff revisions, increasing subsidy burden, and shortfalls
 in subsidy payments from State governments – have contributed to the
 poor financial health of the discoms as characterised by their
 increasing cash losses, which have risen to an estimated Rs. 70,000 crore
 or 0.9% of GDP in 2010-11, up from 0.4% of GDP in 2004-05. This is
 despite several discoms bringing about operational improvements and
 reducing their Aggregate Technical & Commercial (AT&C) losses. As a
 result, some discoms have resorted to load- shedding rather than
 purchasing power. This has led to the investor community arguing
 strongly in favour of urgent corrective action to deal with such
 off-taker risks. After all, it reflects a serious crisis of governance
 that consumers have to face blackouts when power generators have
 surplus power that is not purchased because the State-owned discoms are
 bleeding financially. It is thus critical that effective regulatory
 action keep pace with the changing market and economic conditions to
 ensure the long-term viability of the sector.
 
 These challenges in the power sector underscore the need to escalate
 our efforts in harnessing renewable energy sources and reducing our
 dependence on increasingly expensive fossil fuel based power
 generation.  An increased share of clean and renewable energy sources
 in the nations energy portfolio would have a double dividend –
 mitigating a critical constraint to our continued growth and
 development, as well as lowering greenhouse gas emissions (GHG) and
 local pollution.  Electricity sources such as wind and solar energy,
 which do not have the fuel supply risks associated with coal-based
 power plants, also benefit from a favourable regulatory and policy
 regime. Here initiatives such as feed-in tariffs for renewable energy
 and capital subsidies for construction of the renewable power plants go
 a long way in mitigating the risks associated with thermal power
 plants. As electricity generation constitutes the bulk of our GHG
 inventory (38%), even the co-benefits from such a strategy are
 significant. The recently released Kirit Parikh Committee Report on Low
 Carbon Strategies for Inclusive Growth estimates that nearly 145
 million tonnes of CO2, over 9% of the baseline emissions in 2020, could
 be reduced in electricity supply with aggressive efforts to increase
 the share of clean coal, nuclear, wind and solar energy in our
 electricity generation mix.
 
 Besides the larger governance issues afflicting the infrastructure
 sector, project execution risks have grown, especially difficulties in
 land acquisition, and unaddressed environmental and social impacts.
 Environmental and social impacts of power, mining and other major
 infrastructure projects continue to be significant. Several large
 projects have been held up for both these reasons, including some of
 the proposed Ultra Mega Power Plants (UMPPs). Delays in land
 acquisition, environmental clearances, and declaration of several
 resource-rich but ecologically sensitive areas as No-go areas have
 also contributed to the tardiness in developing coal mines.
 
 The strict application of the Go – No Go Area policy by the Ministry
 of Environment and Forests points to how critical the environmental
 challenge is. Much of the untapped resources lie in areas that are more
 sensitive, both ecologically and socially. It is crucial that a clear,
 sustainable development policy emerge to address this apparent deadlock
 between environmental conservation and social inclusion on one hand and
 infrastructure development on the other.  Further, the processes of
 environmental clearances need to allow for greater engagement with
 local civil society right from the inception and planning stages to
 ensure some ownership and effective participation of local populations.
 Moreover, schemes and projects need to be designed whereby local
 populations also share in the benefits from infrastructure development.
 Unless the execution risks associated with environmental and land
 acquisition issues are resolved urgently, it will be difficult to
 sustain even the current pace of infrastructure development.
 
 While the challenges at hand are clearly significant and require urgent
 action, there is no doubt that the targeted GDP growth of 9-9.5%
 envisaged in the Twelfth Five Year Plan would depend crucially on
 increased investments in the infrastructure sectors.  This is also
 recognised in the issues for approach to the Twelfth Plan, which argues
 for a reprioritisation in the allocation of resources in favour of
 social and economic infrastructure sectors, and a greater role for
 public private partnerships in infrastructure development alongwith
 urgent attention to policy and institutional bottlenecks.  Thus, the
 medium to long-term outlook does present significant growth
 opportunities. IDFC, being a key player in bringing together private
 financing of infrastructure projects, would continue to play an
 important role.
 
 My colleagues at IDFC recognise that we have to enhance and expand our
 efforts in the coming years and meet the high performance expectations
 that the nation has come to expect from IDFC. Here I would like to
 thank my colleagues for the efforts put in this year.
 
 DEEPAK S. PAREKH
 
 Chairman