One of the key challenges in infrastructure is facilitating the flow of projected but large amounts of capital into infrastructure. Current trends indicate that there might be a funding shortfall of over $300 billion, predominantly in debt, posing a serious supply side financing constraint to India's infrastructure story over the next five-year period Focus in the next year will shift to discoms, ULBs and other micro-level attention-grabbers, says Arvind Mahajan.
On the supply side, so far, infrastructure debt financing in India has been led primarily by the banking sector. The relative large sizes of these loans, the fast growth in infrastructure asset creation, and the fact that there are select large developers in India has meant that banks have approached prudential sectoral and borrower-group limits faster. This is leading to a situation where they would have to pare the growth of their infrastructure loan book in the medium term and other financing sources would need to step in and fill the resultant gap. In addition, the recent uncertainty over policy and fuel linkages in the power sector has led to banks becoming extremely cautious on fresh sanctions and there may be some financing pressure in the short term as well due to this factor.
On the demand side, the key issues faced right now by developers are lack of borrowing options (predoÂmiÂnantly the banking sector), high interest rates due to the overall macroeconomic environment and limited proÂducts available: for example, lack of fixed rate, low cost funding for longer durations since banks are not able to provide this kind of product as their liability profile does not match this requirement.
Over the medium term, there is a need to bring in domestic and international long term investors (life insurance companies and pension funds) to meet these gaps. The government has been taking steps in this reÂgard: the recently announced Infrastructure Debt Funds (IDFs) are a step in this direction. IDF needs to be pursued in conjunction with opening up the domestic corporate bond market and other measures to improve liquidity and attract long term investment into infraÂstructure, i.e., development of credit/interest derivative market and long term currency hedging.
A key message from projects and sectors has been the need for seamless integration of efforts across governÂment agencies to deliver on the physical targets. These agencies span role (planning to execution and moniÂtoring), scope (regulation, development etc), sectors and geography. While overarching institutions can imÂpede progress and hence may not be desirable to create, an empowered implementation framework that fosters timely collaboration along with retaining the flexibility and independence of an agency could be considered for de-bottlenecking and fast-tracking projects.
Meanwhile, the focus next year may shift to states needing to reform electricity distribution companies (disÂcoms) and urban local bodies (ULBs), prepare transport projects at a state level, and deliver social and agriculture infrastructure. As the Draft National Policy on PPP manÂdates, this would mean capacity building for state ageÂnÂcies, and improving their financial management to proÂvide, manage and monitor funds for development and prepare a shelf of projects with a clear policy roadmap for implementation to attractive private sector investors.
Power
The scenario of coal supply is worrisome enough to endanger the growth of power sector and with it the infrastructure sector as a whole. The major area of concern this year has been coal supply. The sector has failed to keep pace with the previous growth in power generation capaÂcity and seems to be even less prepared for future growth.
A natural corollary of this is strong demand of therÂmal coal in India. It is estimated that the coal deÂmÂand from the power sector will be approximately 954 MT by 2017. Compared to this, the domestic coal supply to the power sector is estimated to reach only 670 MT, leaving a gap of almost 30 per cent of the power sector's demand. Of this, almost 190 MT (import coal has been tied up against the balance) is on account of potential deficit in supplies from Coal India (CIL) from its committed LoAs. The initial signs of the problem are already visible; total coal import volumes are estimated to touch close to 142 MT in 2012, an increase of almost 70 per cent from 2011 volume of 84 MT.
Fallouts of coal deficit: A coal deficit of 190 MT translates into stranded capacity of 37 GW or a potential investment of approx Rs 185,000 crore (at Rs 5 crore per MW).
The fallouts would be multi-fold:
- Stranded and/or underutilised capacity: The plants will not be able to operate at their design capacities. The maximum impact would be on hinterland-based power stations, for which imported coal is not feasible due to distance and logistics bottlenecks.
- Increasing generation cost: In the absence of adequate domestic supply, plants will procure more imported coal at a much higher delivered cost, coupled with the risk of greater price volatility and insufficient port and inland infrastructure. (Most of the imported coal is not consumed in coastal locations.)
- Discoms' health: Higher coal prices will also result in opening of many Case I Power Purchase Agreements (PPAs) and renegotiation of prices to a much higher level. With constraints on the part of discoms to pass on the cost increase to consumers, their losses will increase proportionately with incÂrease in power prices.
- Potential impact on lenders: The stranded capacity has the potential to put huge pressure on the projects ability to serve the debt repayment requirements. This may result in defaults in the power sector and restructuring for the banking system.
Recommendations to policy makers: Some of the immediate steps that could be taken by policy makers to alleviate the situation arising out of coal deficit are:
- Linkage rationalisation: This move is required to ensure optimal coal flows in the country and miniÂmise superfluous transportation of both domestic and imported coal. As per KPMG's initial estimate, optimisation of coal flows can bring about signifiÂcant saving.
- Resolution of “Go-No Go”: Clear and objective, even if stringent, measures need to be formulated to help allotted coal blocks to develop and balance deveÂlopment needs with management of forest lands.
- Competitive bidding for coal blocks: Out of 218 coal blocks awarded under captive mining to public and private companies, only 28 coal blocks have started production. The government could re-evaluate the award of coal blocks through competitive bidding to optimise national resources. In order to enable rational bidding, government could identify a large pool of blocks and ensure that minimum exploration data is available so that bidders submit an informed and reasonable bid.
Renewable Energy
Currently Renewable Energy (RE) accounts for just over 11 per cent of the total installed capacity in India, registering a six-fold growth over the last 10 years. The current installed capacity exceeds 21,000 MW.
Wind: We project that next phase of accelerated growth in wind installation will be driven by IPP-style investments. The Government of India provides Generation Based Incentive (GBI) in the form of 50 paise per unit of power that is helping attract IPPs to the sector.
Solar: A continuous and substantial fall in the cost of solar power over the last few years has brought us closer to grid parity, which is expected to arrive sooner than later. As per KPMG analysis, grid parity is expected to happen anytime between 2017 and 2019.
Based on grid parity projections, we believe the market for solar energy is much larger than envisaged. As shown in the diagram below, we expect that solar installations will see an accelerated growth path after grid parity is attained, throwing up more opportunities than ever. A large part of the opportunities will come from off-grid applications of solar such as in agricultural pumps, telecom towers and roof-top solar installations.
Recommendations for policymakers: Utility losses have increased from Rs 131 billion in FY07 to Rs 680 billion in FY11, so it is important to enforce the solar purchase obligations to ensure growth of solar markets.
Other concerns that need to be addressed are:
- Financial facilitation: Some initiatives that should be considered include priority sector lending to solar, increasing sectoral caps and developing a dediÂcated fund.
- Enforcement of Renewable Purchase Obligations (RPO) strictly by the regulators is another major area of concern.
- Localisation: The government can consider supporÂting solar solution development that caters to local needs through a loan guarantee scheme to support R&D projects focusing on development of localised solar solutions.
- Continued market support programme can help build the eco-system that is required to support solar post grid-parity.
Outlook: Next year will be a critical time for the solar sector as the deadline for first phase of Jawaharlal Nehru National Solar Mission (JNNSM) projects and Gujarat projects approaches. Substantial capacity creÂated will lead to further maturing of the sector. We expect that another 1,000 MW of solar plants will start construction in 2012.
Oil and Gas
The oil and gas (O&G) sector witnÂessed significant changes during the last financial year, owing to many national and internaÂtional events that had a notable impact on the sector:
Upstream: The declining production from KG D-6 hit the headlines. The curÂrent production is about 42 mmscmd in contrast to the planned output of 80 mmscmd. This has resulted in curtailed natural gas supplies to several power producers, refineries, CGDs, etc. Many power projects find themselves stranded. This means lenders will exercise caution in lending to gas based assets. Another key transaction was BP's purchase of 30 per cent stake in Reliance's 23 blocks, including India's largest gas field KG-D6. Further, Cairn energy sold its 40 per cent stake in Cairn India to Vedanta.
The government flip-flops and delays in approval of these deals did bring out lack of clarity in the set-up. The interest by large international players to take stake in existing blocks is notable (BP in particular), since it could bring into India international best practices in field development.
Going forward, MoPNG intends to offer blocks on open licensing basis. This will assist in increasing the area under exploration. Currently, DGH is working on Shale Gas Development Policy which is expected to be ready by March 2012. The government intends to offer shale gas blocks under International Competitive Bidding (ICB) process in September 2012.
Midstream: Owing to the declining production a significant LNG regasification, capacities have been plaÂnned on both eastern and western parts of India.
However, as some of the planned terminals don't have a significant long term LNG tie-up, it may be diffÂicult for them to secure funding and their commissionÂing may get delayed. Further the ability of Indian markÂets to afford the crude linked LNG is to be tested given that significant primary energy is consumed in the power and fertilizer sectors that are sensitive to fuel prices.
The trunk pipelines have seen a substantial devÂelopment by recent bids, wherein aggressive bids of four trunk pipelines were received by the PNGRB. These pipelines total more than 4,000 km and connect Mallavaram to Bhilwara, Mehsana to Jammu and Kashmir, and Surat to Paradip.
Downstream: The Section 16 of the PNGRB was finally notified by the Government of India and the Supreme Court granted a go-ahead to PNGRB for authoÂrising new CGD licences. PNGRB went ahead with third round bidding and received very aggressive bids for the same.
However, the fourth round of bidding was postponed several times before finally getting cancelled. The unrÂealistic stance taken by bidders and issues on regulatory front has become a hassle in rapid development of network. With new team at PNGRB and a rethink on regulations, we expect that the bids would be more realistic and decisions on pending authorisation shall be taken quickly.
Outlook: Expectations around bidding on shale gas blocks in September 2012, offer investment opportunities. The sector is awaiting policy announcements on open licensing of upstream blocks and revised policy on city gas distribution in 2012.
Urban Infrastructure
The High Powered Expert Committee (HPEC) set up by the Ministry of Urban Development has pegged the total investÂment requirement in urban infrastructure over the next 20 years at Rs 39 lakh crore, nearly Rs 2 lakh crore annually.
Within the sector, water supply (WS) attracts a third (Rs 19,000 crore) of the outlay, the highest among all sectors, followed by sanitation (28 per cent), urban transport (23 per cent) and drainage (14 per cent). Given that there is an urgent need to ramp up urban infrastructure in the country, it is surprising to note that utilisation of project funds has not been very high. For example, under JNNURM, water supply has witnessed the highest utilisation, but even that is estimated to be around 54 per cent of the sectoral allocation. Such low utiÂlisation may be attributed to the inability of ULBs to raise their share of funds for the projects in a timely manner. Moreover, under the project structure, any proÂject cost escalation on account of delays in execution has to be covered by the ULBs, who are unable to do so.
The recent announcement by the Ministry of Urban Development to consider metro systems for cities with population of 2 million or more is a welcome step.
Outlook: Water supply, sewerage and urban traÂnspoÂrtation projects will continue to remain the areas of focus in 2012 and will attract significant amount of investments. Based on an analysis of the portfolio of DPRs that are under active consideration, most projects in WS and sewerage may aim at augmentation and repÂlenishing current networks.
Some of the key projects whose DPRs are under appraisal by JNNURM include trans-municipal WS project in West Bengal (Rs 600 crore), WS projects for Panaji, Mysore and Jaipur, sewerage system in Ujjain (Rs 342 crore), and WS distribution project in Hyderabad (Rs 3,000 crore). Several sewerage and WS projects are expected to be taken up for Surat and Porbander (Rs 2,700 crore).
Transportation projects will continue to remain an area of focus in 2012. Some of the major projects that are likely to be taken up in include Phase III, Delhi Metro (Rs 35,000 crore), Mumbai Trans-Harbour Link (Rs 8,000 crore), suburban rail, bus network in Mumbai (Rs 4,000 crore), BRTS in Kolkata (Rs 250 crore), Rajkot (Rs 110 crore), Surat (Rs 500 crore), Bhopal (Rs 121 crore), Vijayawada (Rs 150 crore) and Visakhapatnam (Rs 450 crore).
Phase 1 of JNNURM is set to conclude in March 2012. Some of the key features that are likely to be incorporated in Phase 2 are:
- Likely to cover all cities and towns; the duration of the programme to be 15-20 years
- One-time incentive to each area that is urbanised
- Separate window for weaker ULBs and PPP window for medium to strong ULBs
- Focus on small and medium towns with different reform agenda for them
- Regional Development authorities to be made accÂountable to respective ULBs, although they are to continue as the implementing agency
Key imperatives for public and private sector
- Service Level Benchmarks and time bound progÂrammes are likely to be laid down to signal a changing and increasing focus on outcomes than outlays.
- Emphasis on Rajiv Gandhi Awas Yojana (perhaps by including it under JNNURM Phase 2) would help in addressing unchecked growth of slums.
- ULBs are expected to push forward with reforms that will improve their credit and market worthiÂness and enable them with easier access to private finances.
Roads & Highways
The road sector has witnessed a healthy revival of private sector interest in BOT projects since the slowdown in 2008-09. The procurement process has now been speeded up with annual prequalification of bidders, who would now be eligible to bid for all projects within a threshold project cost based on a single preÂqualification application. Many big-ticket projects were awarded. More than 10,000 km of highways are in various stages of implementation with another 27,000 km yet to be awarded to meet the original NHDP target of 55,000 km.
In recognition of the need for continual capacity addition in transport and logistics infrastructure is becÂoming inevitable, the government is planning expansion of 55,000 km of existing two- and four-lane highways and construction of select expressways at an estimated investment of $120 billion over the next five years. This is nearly twice the original estimate of the government for completing the seven phases of the National Highways Development Project (NHDP).
While national highway projects have received good attention from both government and private sector, state and city road infrastructure projects have not been pursued by governments with equal zeal, barring a few states like Rajasthan, Andhra Pradesh, Bihar, Madhya Pradesh and Maharashtra. There has also been limited private sector interest in these projects because of various reasons including poor traffic, comÂpetition from national highways, poor financial strength of state and local governments, land acquisition and tolling challenges. Some states like Karnataka, Andhra Pradesh and Gujarat have secured funding from World Bank to support state highway development. The Indian government has also signed a $1.5 billion loan agreement with the World Bank earlier this year to supplement funding for Pradhan Mantri Grameen Sadak Yojana (PMGSY), which has achieved significant progress since the launch of the programme in 2000.
Outlook: NHAI plans to award 7,500 km of roads in FY2012, which is 50 per cent more than the awards in FY2011, but we await to see whether this translates into faster progress of project construction on ground. Various estimates peg the current rate of construction between six and 10 km per day, though there is little to substantiate these numbers. NHAI would need to award approximately 9,000 km of road per year to achieve the NHDP target in the next three years.
NHAI's financing plan involves a combination of grants, revenue share from project concessions, budgetary provisions, contributions from the central road fund, bond issues and commercial borrowings from domestic and multilateral institutions. Assuming 50 per cent of the projected investment is met by the private sector, an additional $60 billion would need to be raised through alternative means by NHAI over the next five years.
Persistent inflation and tightening liquidity in domestic and global markets will compel NHAI to look at innovative mechanisms to raise debt without seeking recourse to sovereign guarantees. These mechanisms could be as follows:
- Securitisation of cess and toll revenues from projects.
- Raising capital through tax-free bonds, with a miniÂmum lock-in period for investors. NHAI has preÂviously been allowed to raise Rs 10,000 crore (~$2 billion). However, this limit may need to be increased subject to availability and cost of credit in the next 2-3 years.
Ports
As per the National Maritime Agenda (NMA), which covers a development period of 10 years, planned investments in ports in Phase1, period 2010-12, were $13 billion of which $10 billion was expected from the private sector.
The past few months have seen a slowdown in major port terminal projects being awarded with projects getting delayed at various stages of the bidding process. The silver lining has been the setting of precedents and clarity on regulatory and policy issues in the bidding process. These could enable subsequent unique situations being handled in a faster and more proactive manner resulting in lesser delays. Some of the recent projects have seen single bids that indicate that investor senÂtiment has been cautious.
Gujarat, Karnataka and Andhra Pradesh have taken initial steps this year towards developing non-major/regional ports. However, long durations for awarding projects have been witnessed.
Outlook: Policy/regulatory decisions in end user indÂustries could be a positive driver of traffic. For example, lifting of regulatory ban on export of iron ore from Karnataka or clarity on importing coal for power projÂects will directly determine the amount of coal to be imported and hence traffic at ports. State governments should support non-major ports by providing better connectivity and road/rail accessibility through policy or direct intervention.
A key decision expected from the government is the relaxation of cabotage laws that would enable foreign vessels to ply in coastal waters and support a greater role and movement of coastal cargoes. However, shipping is only half the picture as the land logistic linkages and port infrastructure that is more aligned to coastal vessels and the cargoes (in terms of variety, parcel sizes and volumes) also needs to be developed. Select routes where both ends on the land side are developed may witness growth but the full potential would be seen only after 2-3 years.
The Draft Ports Regulatory Bill is likely to see further speeding up towards it enactment, provided the concerns of states are taken into account. The full scale impact of port regulators will however be seen only after 2-3 years, once the regulators are formed and their guidelines etc. are framed.
Overall, major port terminal projects would be the key focus for the coming year. The recent announcement by the government to expedite clearances for Rs 5,000 cr worth of projects is a welcome move that is likely to witness quite a few terminals be brought up for bidding to meet the FY12 targets of the 11th Plan. It is expected that projects stalled in the current economic plan period till now will be the first to see traction.
In the non major sector, projects that can secure rail connectivity and environmental clearances are likely to get developed-a key role would be played by govÂernments in ensuring support for these decisions and we can expect select states taking an active role in promoting investments.
Airports
India is the fastest growing aviation market in the world: Passenger traffic has been growing at 16 per cent per annum since 2009.
India's growing aviation market is expected to be worth $120 billion in the next decade with $80 billion expected to be invested in new aircraft. Aircraft fleet is expected to triple from 460 planes currently. Most of the major airports have witnessed a consistent growth in international air traffic over the last decade indicaÂting India's growing importance as a business and tourist destination.
Challenges: While the prospects of growth look attractive, there are several issues and challenges that the industry is facing today that could potentially stifle growth. A key issue is the cost of modernising and rebuilding new airports and its impact on increase in airport tariffs. In a price-sensitive market like India, affordability is a key consideration for passengers. Low-cost offers met with increasing fuel costs, which conÂstitute between 40-50 per cent of operating costs for an airline, state taxes and other levies on aviation turbine fuel (ATF), forcing airlines to increase average ticket fares in order to preserve their margins. The airline companies are also highly leveraged and are struggling to sustain competition from low-fare carriers which are threatening the viability of some of the convenÂtional carriers.
At the same time, airport investors who seek a reasonable return on their investments have proposed an increase in tariffs, which are likely to increase further. Whether growth will continue to sustain at higher fares is uncertain, especially when such growth is contingent on providing access to new flyers who seek affordable fares.
The principles of tariff regulation have become another bone of contention between airport operators, government and the Airports Economic Regulatory Authority (AERA). This year, AERA proposed a single-till framework for determination of tariffs at airports other than those in Delhi and Mumbai, which implies that all revenues from commercial services at airports will be used to subsidise airport tariffs so as to yield a fair rate of return on the operator's investment in airport infrastructure. Private operators have contested this approach claiming that investors returns cannot be capped and that operators should be allowed to retain part of the upsides in commercial revenues in order to incentivise continued investment in airport infrastructure.
The dichotomy in tariff regulation is also expected to create uncertainties with regard to commercial viaÂbility of competing airports such as in Mumbai, where a second airport is being planned. Some industry analysts have suggested that the government should consider traffic allocation for the Navi Mumbai airport to create a level playing field.
Providing low-cost airport infrastructure in Tier-2 and Tier 3 cities (population of 2-5 million) with 24×7 services is essential to drive future growth in air travel. There are many airports which do not have night-landing facilities which restrict services only to the daytime. Incremental investments to provide night-landing facilities would provide better connectivity and fuel growth. Government is also progressively moderÂnising several non-metro airports to improve the level of service and adding capacity to meet future demand. Some of these non-metro locations include Madurai, Coimbatore, Ahmedabad, Chandigarh, Jaipur and Thiruvanathapuram.
Sustained growth of 15-18 per cent per annum is expected to generate demand for ancillary services such as aircraft maintenance, repair and overhaul (MRO), ground handling and training infrastructure for air navigation services, pilots and cabin crew. The industry is already confronting an acute and growing shortage in trained manpower across these disciplines. As per KPMG analysis, total manpower requirement of airlines is estimated to rise from 62,000 in FY2011 to 117,000 by FY2017. This includes pilots, cabin crew, aircrafts engÂineers and technicians (MRO), ground handling staff, cargo handling staff, administrative and sales staff.
Indian MRO industry is expected to triple in size from Rs 2,250 crore in 2010 to Rs 7,000 crore by 2020. This is small compared to the size of MRO industries in UAE (Rs 8,000 crore) and China (Rs 10,000 crore). As the fastest growing aviation market, there is enough potential for capacity creation and opportunities for domestic and foreign investment. However, the current taxation structure is skewed against domestic third-party MRO service providers and needs to be reviewed to create a level playing field.
Outlook: The bidding process for the greenfield Goa and Navi Mumbai airports is expected to commence in early 2012. The proposed Rs 10,000 crore (estimated cost of development) new airport at Navi Mumbai is one of the largest greenfield airport projects in the world, and many international developers and airport operators are expected to participate in the bid process. AAI is also expanding and modernising the terminal facilities at Chennai and Kolkata airports. The refÂurbished terminals are expected to be commissioned by March 2012.
With the AAI looking to expand and modernise 35 non-major airports across the country opportunities for private participation in turnkey EPC contracts will emerge.
Current growth trends will mount pressure on govÂernment to invest and attract private capital in supÂporting infrastructure such as MROs, ground handling and training. By 2017, ground handling market is expected to double from present Rs 2,000 crore to Rs 3,900 crore. Leading ground-handling players have aggressive expansion plans in India. It is estimated that about Rs 3,000 crore of investment will be made by domestic and international companies in augmenting ground handling infrastructure in the next two years.
The success of CAE academies at Rae Bareli and Gondia is expected to encourage private investments in new facilities. It is also expected that government would consider liberalising procedures to allow trained techÂnicians from other countries to offer services in India as an interim arrangement to meet supply shortages, subject to clearance by local regulators. There is an immediate need to increase the number of pilot training academies and capacities of existing training institutions and encÂourage foreign investment in pilot training academies and technical training institutes.
One of the long standing demands of the airline industry is to have a uniform tax on ATF, which has now assumed greater significance with the major airlines struggling to generate profits and a weakening economic environment. Private investments in new infrastructure, particularly in non-metro locations will also be conÂtingent on availability of adequate state support on land acquisition and essential services, commercial utilisation of land, bank credit and viability gap support from central and state government.
Create a fund: The government could consider setting up a dedicated Airport Infrastructure DeveloÂpment Fund (AIDF) on the lines of the Central Road Fund for highways or the JNNURM funds for urban infrastructure. The AIDF could be funded through nominal levies on international and domestic airport passengers with budgetary support from the central and state governments. Even a fee of Rs 10 per domestic passenger and $1 per international passenger at all major airports would help generate a corpus of Rs 1,500 crore over the next five years. The Fund could provide much needed capital support for attracting private investment in non-metro airport infrastructure and hastening the growth of the industry.
FDI in airlines is also an imminent possibility and may help support financing requirements of the domestic airline industry besides giving them access to technical and operational know-how and strategic alliances. Some of the policy initiatives on these issues are expected to be seen as part of the much awaited new civil aviation policy. It is also expected that Budget 2012 will provide relief to the industry on some of the fiscal impediments to growth.
Agriculture Cold Chain
The cold chains market in India is in a nascent stage. Despite being the second largest producer of fresh fruits and vegetables, the lack of post-harvest management facilities has led to wastages as high as 30-35 per cent for fresh produce. In 2010, India had a capacity of storing 23.6 MT in cold storages and fresh produce of 180 MT. Nearly 80 per cent of the facilities are accounted for by potato. Further, these facilities have a utilisation of only around 50 per cent. The cold storage facilities for meat in India are almost negligible.
Key trends: With the government's inclusion of cold storage under infrastructure this year, the cold storage industry is expected to grow from approximately Rs 150 billion in 2010 at a CAGR of 22 per cent to reach Rs 400 billion in 2015. The government is aiding the growth by various infrastructure development initiatives like setting up of 30 mega food parks, partnering with Indian Railways to establish cold storage infrastructure etc. Ot
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