Development of infrastructure is vital for the progress of Indian economy. However, a collective support of other sectors is required to achieve its goal. The year just gone was shaded with the dark patches of issues like slowdown and lack of policy initiatives. However, a realistic approach in policy frame work and the revival of the global economy can uplift the sentiments of the industry in the coming years. Arvind Mahajan writes on the performance and outlook of India's infrastructure sector.
Infrastructure constitutes the foundations of speedy economic growth. Thus, infrastructural development will be the key to attaining the 12th Five Year Plan's objective of faster, sustainable and inclusive growth. Gauging the potential of this sector, the Government of India (GoI) has put the thrust on accelerating the pace of investment in infrastructure sector. For the 12th Five Year Plan, the GoI has doubled the investment target to $1 trillion. To fund this investment target, it has envisaged increased private-sector participation (around 50 per cent), primarily through public-private partnership (PPP)-based development.
In most sectors, growth in the calendar year 2012 (CY12) has been muted in comparison to that in CY11.
The following are major highlights for the sector:
Power: Sector growth has witnessed a decline as a result of fuel shortages in coal and gas. The government has intervened by issuing directives to Coal India Limited (CIL) for a minimum guaranteed quantity of coal. Sector performance is expected to remain moderate until issues related to fuel supply are resolved.
The silver lining has been the renewable energy segment with the success of National Solar Mission Phase-I. Going forward with National Solar Mission Phase-II and favourable state solar policies, the solar sector is likely to see accelerated growth. On the power transmission, integration of grid with southern region would result in efficiency in short term markets. In CY13, we may see increased participation of private players in power distribution sector through the franchisee model.
Oil and gas:The decline in domestic gas production has negatively affected infrastructure development in the sector. However, it has also presented a new investment opportunity with respect to the development of LNG terminals. The year 2013 is likely to present opportunities to bid for shale gas, deepwater blocks in upstream and the CGD sector in downstream.
Urban infrastructure: The pace of investments in the flagship Jawaharlal Nehru National Urban Renewal Mission (JNNURM) program received criticism from the Comptroller and Auditor General (CAG) of India. However, given the rapid urbanization, increased focus on urban infrastructure in the areas of water supply, sew¡e¡¡rage and urban transportation projects can be expected.
Roads: Due to the economic slowdown and the challenges associated with achieving financial closure, private participation in the sector has declined. In 2013, the GoI plans to award around 4,000 km to the sector through the engineering, procurement and construction (EPC) route. Once the financial closure of recently awarded projects is achieved, PPP activities in the road sector are expected to see action again.
Further, significant opportunities exist in expressway projects, as the GoI intends to build around 1,000 km of road through the PPP route.
Ports: Policies and regulation governing the ports sector saw little progress in the year. Issues related to security clearances and land transfers have resulted in less number of projects being awarded through PPP route. Further, the export ban imposed on iron ore from Karnataka has affected the profitability of ports. The year 2013 could witness some regulatory changes (such as a relaxation in cabotage and the implementation of the Port Regulatory Authority Bill), which could significantly alter the sector's structure over the next two to three years.
Civil aviation: India continues to be one of the fastest growing aviation markets despite a slowdown in 2011-12, and is expected to become one of the top three aviation markets in the world by 2020. The government took significant initiatives in the current year to support the industry including allowing foreign direct investment (FDI) by foreign airlines in Indian airline companies, direct import of aviation turbine fuel (ATF), opening up of fresh bilateral arrangements to allow more seat capacity and better access to private operators on hitherto restricted international routes. There are many regulatory, financial and project development challenges to be addressed in order to realize the growth potential and make investments sustainable and attractive to private investors. The growth of second-tier cities and increasing potential for global trade from the Indian sub-continent are expected to drive the growth of air traffic in the future. Air cargo has shown good promise for growth and will become an integral part of airport development strategy of airport operators, as it contributes significantly to the overall revenues of the airport. This is likely to be the decade of aviation in India. Thus on an overall basis, 2012 has been a challenging year for the infrastructure sector. The global slowdown, funding constraints, the slow pace of project execution, capex deferrals by private players, high interest rates, the currency depreciation, fuel shortages, resistance to land acquisition, and lengthy and cumbersome processes for statutory clearances, among other roadblocks have hampered the growth of the industry. Currently, several legislations and bills related to land acquisition and pension reforms, for instance, are awaiting government approval; if these approvals come through, the sector will likely receive a significant boost to the sector.
The GoI has taken decision on several key reforms that were pending for a while. FDI in civil aviation and power exchanges, as well as the overhaul of state electricity boards are expected to directly benefit the infrastructure sector. The impact of FDI in multi-brand retail would be indirect, as it requires at least 50 per cent of investment in 'back-end infrastructure' such as supply chain and logistics.
In light of the reform measures adopted in 2012, coupled with expected policy changes in the coming year, could revive the India Infrastructure growth story.
Power India's power sector has witnessed challenges in recent times, with the country's power deficit currently at around 8.5 per cent . The demand for electricity is continuously growing, driven by high economic growth and increased rural electrification.
At present, more than 50 per cent of India's installed generation capacity is coal-based. Over the past five years, the demand for coal has been growing at an average rate of 8û9 per cent annually as compared to a 5û6 per cent increase in domestic production . This has widened the demand-supply gap, leading to a growing dependence on imported coal. In 2011û12, the country imported around 100 million tons of coal (including thermal and coking coal).
The coal shortage is not only affecting operational plants; it is also raising concerns around the viability of future power projects. The lack of coal linkages is making it incrementally difficult for power-generation companies to raise capital for their proposed thermal plants. Against this backdrop, the Planning Commission has lowered the country's power capacity addition target for the Twelfth Five Year Plan from 1,00,000 MW to 88,000 MW . Further, to improve fuel security for coal-based power producers, the GoI issued a presidential directive to CIL in April 2012, asking the organization to sign fuel supply agreements (FSAs) with power companies.
Other initiatives the GoI has taken to give impetus to the power sector include the following:
• CIL and the Ministry of Power have suggested a price-pooling mechanism to distribute the cost of import coal across a large section of the power-generation sector.
• The integration of the North-East-West grid with the southern grid is likely to bring efficiency in the short term power markets.
• Various state governments have promoted private participation in power distribution through the franchisee route.
• Ministry of Power, Government of India, has come up with a Scheme for Financial Restructuring of Distribution Companies. As a part of the scheme, State Governments should take over 50 per cent of outstanding short-term liabilities which will be converted into bonds duly backed by State Government guarantee and balance 50 per cent of short term liabilities would be rescheduled by lenders.
Further, private investment in the power sector has been promoted through initiatives such as the following:
• Up to 100 per cent FDI has been permitted in the power sector through the automatic route for generation, transmission and distribution. • The GoI has allowed the issue of tax-free bonds worth Rs 60,000 crore to finance infrastructure projects.
• In order to provide low-cost funds to certain infrastructure sectors, including power, it has been proposed that the rate of withholding tax on interest payments on external commercial borrowings (ECBs) be reduced from 20 per cent to 5 per cent for three years.
• Foreign investment of up to 49 per cent is allowed in power-trading exchanges. Key imperatives for policy makers
The following are some of the immediate measures that policy makers could adopt to resolve India's Power sector problems:
• Build CIL's coal import capability
• Increase power tariffs to make imported coal affordable
• Allow the partial pass-through of fuel costs for projects dependent on imported costs
• Enhance domestic coal production
• Encourage gas-based peaking plants
• Prepare model documents for Distribution Franchisee bidding.
India's ever-increasing power requirements, together with growing concerns over energy security and climate change, are compelling the GoI to consider the adoption of alternative sources of energy. This - coupled with India's vast supply of renewable energy sources such as solar radiation and falling costs - make renewable energy more relevant than ever.
Key factors that could drive this market include the following:
• High power deficit
• Rising dependence on imports
• Favorable economics
• Grid-demand synergy
• Benefits of distributed generation
Currently, renewable energy accounts for about 12 per cent of total installed capacity in India, registering six-fold growth over the last 10 years.
** CWET had initially estimated 48 GW; recently with new Class-II machines the potential is increased to 100 GW; recent study by Lawrence Berkeley National Laboratory (LBNL - US DoE) reassessed wind potential in India at 3,000 GW.
The National Solar Mission has triggered the development of solar capacity in India in the last two years. India's solar capacity has grown from less than 20 MW to more than 1,000 MW in the last two years.
The following table summarizes potential estimates for solar PV across key market segments.
India is the world's third-largest annual wind power market in the world. In FY12, around 3,200 MW of new wind capacity was added to reach a total of around 17,350 MW. Among all of India's states, Tamil Nadu led, with a share of around 30 per cent in total capacity addition. During the Eleventh Five Year Plan, wind energy has exceeded the target with actual installations of 10,260 MW against a target of 9,000 MW. For the 12th Plan, the working sub-group report has proposed a reference target of 15,000 MW in new capacity additions.
Oil and gas
Upstream: The Indian oil and gas industry continues to face the mammoth challenge of meeting domestic gas demand (primarily from power and fertilizers) amid concerns around declining domestic gas production at flagship basins such as KG-D6. In the first week of December 2012, production declined to 22.8 mmscmd from a peak production level of 60 mmscmd.
Declining gas production has left many gas-based power plants stranded. The Ministry of Power has issued advisory to power producers to refrain from setting up new gas-based plants at least by 2015û16. The year 2013 is expected to remain challenging from the perspective of gas availability.
With a view to develop domestic shale gas reserves, the GoI has announced a draft policy on shale and also plans to launch the first licensing round by the end of 2013. The draft has proposed to offer exploration areas on royalty and production-linked payments, similar to that adopted during the CBM regime.
Midstream: Due to declining production, significant LNG regasification capacities (onshore and FSRU) have been planned (including the expansion of existing terminals) on both the eastern and western regions of India.
The LNG regasificaton capacity is expected to increase to 48û50 mtpa by 2017 from the current capacity of 13.5 mtpa. To foster transparency and equal opportunities, the Ministry of Petroleum & Natural Gas (MoPNG) has announced rules on eligibility conditions for LNG terminal registration. In addition, to secure long-term supplies, Indian gas companies continue to collaborate with key gas-producing nations. While some companies are signing gas supply contracts, many upcoming RLNG terminals are still mired by the long-term gas supply concern.
Downstream: The GoI has taken certain bold steps to help contain the oil subsidy burden for oil marketing companies (OMCs). The government has decontrolled petrol, increased diesel prices and introduced a cap on subsidized LPG cylinders. Further, the fact that international crude oil prices have dipped has a positive effect on the profitability of these companies. Given the positive impact on financials, many of the companies would consider an expansion of existing business and venture into new business areas such as acquiring stakes in upstream assets.
With respect to CGD, little progress had been made in 2012. After cancelling the fourth round of bidding in November 2011, the PNGRB has prepared draft bidding guidelines. It is envisaged that new guidelines could revive the interest of players in this sector.
According to numbers presented in the 2011 Census, for the first time since independence, the absolute increase in population has been more in urban areas than in rural areas. The proportion of the rural population has declined from 72.2 per cent to 68.8 per cent. The trend of rapid urbanization in the country is recognised, and the sustained growth trajectory of the Indian economy has also mirrored the country's pace of urbanisation.
Recently, the CAG tabled a report in Parliament on the JNNURM, stating that the objective of bringing about reforms in the governance of ULBs could not be achieved through the scheme. The report added that against an allocation of about Rs 660 billion by the Planning Commission, the GoI had only allocated about Rs 370 billion. Of this, only Rs 330 billion was released by 31 March 2011. The CAG report highlighted the following key issues:
a) Project preparation
d) Implementation capacity
Based on the report and the current status of urban infrastructure, the following are some of the key areas that need to be addressed:
i. Integrated planning: In many instances, the lack of integrated planning - especially for meeting transportation needs - is clearly evident, and there is an urgent need for ULBs to work on implementing long-term integrated plans.
ii. Addressing the financial capacity of ULBs: Innovatively tapping aspects such as property tax and land to augment ULBs' financial capacity is the need of the hour.
iii. Developing the capacity of personnel: Developing personnel capacity of ULBs to implement and monitor projects is required. There is also a need to generate capacity at all levels to engage the private sector on a PPP basis.
FY13 considerations and outlook: It has been reported that the official launch of the second phase of the JNNURM is likely to occur after the next parliamentary election. However, the Centre has decided to provide about Rs 15,000 crore for the scheme till 2014 as an interim arrangement. It is understood that the States will infuse another Rs 10,000 crore for fresh projects to be covered under the scheme.
Water supply, sewerage and urban transportation projects will continue to remain focus areas in 2013 and will attract significant investment.
The following are some of the key agendas that are likely to driven in future:
• ULB capacity building
• Financial reforms at ULBs
• Large Projects implementation
Roads and highways
India is home to the second-largest network of roads in the world, with a length of around 4.7 million km . The country's roads account for 80 per cent of passenger traffic and 65 per cent of freight traffic in India. To improve the country's highways in, the GoI had embarked upon a massive National Highways Development Project (NHDP).
The roads and highways sector is considered to be one of the most successful sectors in terms of project implementation through the PPP route. For instance, in FY12, the Ministry of Road Transport & Highways awarded 62 projects measuring 7,957 km in length. Of these, 49 projects measuring 6,491 km in length were awarded by the National Highways Authority of India (NHAI), while the other 13 projects accounting for 1,466 km were awarded through state agencies. For the Twelfth Five Year Plan, the GoI has set a target to increase the length of India's highways to about 85,000 km by 2016û17; the projected expenditure on roads and highways is around INR 4-5 trillion ($80û 100 billion).
Encouraged by the success of FY12, the GoI set an ambitious target of awarding 8,800 km of projects in FY13. However, the progress made in the first nine months of FY13 has been slow. To date, the GoI has managed to award 11.5 per cent (1,010 km) of the targeted projects.
Delays in land acquisition, timely clearances and dispute resolution constitute another challenge associated with road projects. Financial institutions demand 100 per cent land availability and all regulatory clearances to be in place before considering any project for financing. These factors have prolonged construction time, thus adversely affecting project profitability. Several road sector companies have outstanding order books and have indicated they would like to selectively participate in bidding for BOT projects for a while.
The GoI has swiftly responded to market conditions and introduced engineering procurement contracts (EPCs) to address some of the aforementioned issues. In the current financial year, the GoI is likely to award projects for 4,000 km of highways under the EPC mechanism, entailing an investment of Rs12,000 crore.
Additionally, under Phase VI of the NHDP, the GoI plans to offer around 1,000 km of expressway. To facilitate the development of expressways, it plans to establish a new organization - National Expressways and Connectivity Corporation (NEXCOR) ù under the Ministry of Road Transport & Highways (MoRTH). NEXCOR will be responsible for the planning, building, operation and management of India's expressways.
Maritime transport con¡tributes about 90 per cent (by volume) and 70 per cent (by value) to India's external trade. This highlights the significance of the ports sector in India's overall economic growth. Major commodities traded at major ports between April and November 2012 are petroleum, oil and lubricants (POLs), containers and coal, contributing about 34 per cent; 22 per cent and 16 per cent to total traffic, respectively.
During 2012û13, the GoI aims to award 29 PPP and 13 non-PPP projects at a total estimated investment of INR145 billion, which will add total capacity of about 246 MMTPA at major ports. However, due to issues related to security clearances, land transfer and policy delays only 4 new projects were awarded under PPP against an initial target to award 14 projects till 1H12.
Traffic handled at major ports: As compared to the same period a year ago, cargo traffic at major ports declined by 3 per cent in the first eight months of FY13. This was primarily due to the ban on mining and iron-ore export imposed in Karnataka (which impacted cargo traffic at ports on the East Coast) and Goa. The highest decline in cargo traffic was observed in Mormugao Port, with cargo traffic decreasing by 40 per cent, followed by ports at Visakhapatnam, Kolkata and Chennai.
In the past year, policies and regulations pertaining to the ports sector have seen little progress. A cabotage law, which allows foreign vessels to ply on coastal waters and supports the greater role in movement of coastal cargoes, is still under discussion. No decision has been taken to implement the Port Regulatory Authority Bill proposed in 2011. From an end-user perspective, there is no clarity on the relaxation of the export ban imposed on iron ore from Karnataka.
There is growing need to focus on enhancing technological capabilities at ports. Some initiatives in this direction include the integration of the Port Community System with all stakeholders (ports, shipping lines, agents, and government regulatory authorities), the introduction of modern security systems, and the implementation of vessel traffic management systems for the smooth flow of vessels.
Another key focus area could be to enhance port connectivity to accelerate the evacuation of cargo from ports and enhance capacity utilisation.
Aviation is a sunrise sector in India. Industry analysts predict India to be one of the top three aviation markets in the world by 2020. More than Rs 30,000 crore has been invested in development of airport infrastructure at Delhi, Mumbai, Chennai, Kolkata, Bengaluru and Hyderabad since 2004. The best years of growth were seen in the period 2005-08 (CAGR of 40 per cent). The global financial crisis in 2008 and the resulting double-dip recession has continued to impact air traffic growth. In 2012, economic slowdown, weak business sentiment and high ticket prices further contributed to a significant drop in air traffic. Despite the slowdown, passenger and cargo traffic grew at a CAGR of 11.2 per cent and 8 per cent respectively between FY2007 and FY 2012, much higher than the global average.
The GoI approved the Greenfield Airport Policy in April 2008 for the expeditious growth of aviation infrastructure in the country. It took a liberalized approach to establishing of greenfield airports with a view to bridging the growing deficit in airport infra¡structure. So far, the GoI has accorded 'in-principle' approval for the establishment of 12 greenfield airports in the country.
According to the estimates of the working group for the Twelfth Five Year Plan , Indian airports would require an investment of about Rs 67,500 crore during 2012û17. Of this, around Rs 50,000 crore is likely to be contributed by the private sector.
Government has also approved direct import of ATF by airlines. This could lead to potential savings for airlines due to difference in taxes (between sales tax and import duty). Meanwhile, The Ministry of Civil Aviation (MoCA) also announced introduction of new international sectors and the progressive increase in the number of international services offered by Indian carriers.
We have witnessed Kingfisher Airlines going through troubled times, but other private airlines are busy augmenting capacities on trunk routes and deploying new fleet on new domestic and international routes trying to address the latent regional demand for air travel and providing seamless connectivity through hub-and spoke operations through better fleet utilization and strategic alliances with global airline partners.
India continues to offer the largest bouquet of opportunities for airport investors with several key Greenfield airport projects underway in Navi Mumbai, Goa, Agra and Kannur. With the opening up of FDI for foreign airlines, Indian airlines now have the opportunity to tap foreign capital and enter into strategic alliances with foreign airlines for investing in new value-adding assets, competing with regional players and addressing a wider aviation market. In the short term, this step would likely to provide liquidity to cash crunched airlines and in medium to long term it will bring best practices to the India civil aviation sector. In 2013, we may see some foreign major airlines players entering into the Indian space through FDI route.
While there have been concerns expressed by airlines and passengers on increasing airport charges, fuel costs and depressed demand continue to be the biggest challenges facing the industry today. Airport charges, though increasing commensurate with better infrastructure provided at the major airports, constitute only a small percentage of the average ticket price for users.
With the commissioning of new terminal at Chennai, and on-going development of the new domestic and international passenger and cargo terminals at Mumbai, all six Indian metros will have world class airport infrastructure in the coming years.
Challenges and Way Forward
While the long-term prospects of the aviation industry remain strong, the industry has several challenges to overcome in the short to medium term. Air travel has still not percolated to the masses, so growth has not been inclusive. Several tier-II and tier-III cities are still under-served by domestic airlines. Urgent policy and regulatory measures are required to address this anomaly. Most Indian air carriers are running into cash losses due to volatile oil prices, high fuel taxes, the rupee devaluation and high interest rates.
While the AAI and the private sector have developed top-notch airports, significant challenges related to fixing airport tariffs, acquiring land and obtaining various government approvals for greenfield airport development remain. These challenges have led to delays in the development of greenfield airports at Navi Mumbai and Goa.
Growth of other key areas such as air cargo, maintenance, repair and over¡haul (MRO), general aviation (GA), and human resource development (HRD) have been cons¡trained due to infra¡structural limitations and lack of supportive policies.
India needs to be promoted as a trade and tourism hub to derive synergistic benefits for the aviation industry. Close collaboration between the MoCA and various government departments (finance, defence, environment, and others), is important for the speedy implementation of projects. The GoI should strive for clarity on economic regulations and airport tariffs to attract the interest of developers for upcoming airports at Navi Mumbai, Goa and other locations. Additionally, there is a need to reduce sales tax on ATF and establish an Essential Air Services Fund (EASF) to broaden the base of domestic flyers In the sum, key action measures for the GoI with respect to the civil aviation industry in India include the following:
a) ATF to be notified as a 'declared good'
b) Stable, transparent, investor friendly regulatory policies to encourage greater private sector investments in airports
c) Government facilitation for swift clearances for new airports
d) Innovative funding solutions such as AIDF and EASF to support air connectivity at tier-III and tier-IV locations
e) Revision of the 5/20 rule to allow international operations for Indian carriers
f) Air cargo reforms by way of growth of AFS, 24x7 Customs operations and facilitation of transshipment cargo
g)Ten-year tax holiday and deemed export status for the domestic MRO industry
h) Establishment of world-class aviation training facilities
In India, civil aviation has the potential to create a revolution similar to the one seen in mobile telephony. With long-term vision, an effective road¡map, a favorable regulatory framework and relentless focus on quality and cost are likely to rocket the industry to new heights.