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With a stable, reform-friendly government in place, the Indian infrastructure growth story is looking for the right implementation strategy and on-ground action. Here are the key current infrastructure trends and the outlook for 2015.
The infrastructure sector in any country holds special significance because of its impact on other sectors and economic activity. In India too, this sector has been attracting substantial attention and activity. For the infrastructure sector, with a new and stable government coming in, varied expectations are already there. This article takes a look at some of the key trends which have been witnessed in India in the last few years and throws some light on what the future might look like for the infrastructure sector in India.
Roads & Highways
The roads and highways sector has been at the forefront of infrastructure development in India. National highways, which carry approximately 40 per cent of the road traffic, have been considered as India´s success story due to the large number of projects awarded on PPP basis (more than 245 projects as on October 2014), substantial interest in market, standardisation of contracts, etc. Over time, learnings from PPPs in the roads and highways sector have been used to guide PPPs in other infrastructure sectors.
However in the last two years, there has been a downward trend in the sector. Road and highway projects on PPP basis have been getting low response from bidders. A large number of projects awarded by NHAI have not been able to achieve financial closure, there has been a slump in project award, there are capacity constraints in the construction industry and extensive delays in land acquisition and environmental/forest clearance have been experienced in project execution. Banks are reluctant to lend to road projects due to a variety of reasons such as sector limits, issues in debt servicing due to delays and reduced traffic and delays in project commencement because of delay in land acquisition and receipt of environmental and forest clearances.
Given the challenges faced and importance of roads & highways infrastructure for social and economic development of the country, the Central government has felt a need to provide impetus to the sector. As an immediate measure, keeping bidding capacity and response to PPP projects in view, NHAI is focusing more on Engineering, Procurement and Construction (EPC) as a mode of project execution and not on PPP. For example, 15 out of 17 projects awarded in 2013-14 were on EPC basis.
Furthermore, the limit for investment approval by the Ministry of Road Transport and Highways (MoRTH) has been raised from Rs 500 crore to Rs 1000 crore which is envisaged to fast-track project approval. Greater focus is being placed on project preparation so as to avoid post-bid delays and litigation. Environment and forest clearances which have long been highlighted as reasons for delay have been eased and made online so as to bring in greater transparency, efficiency and accountability. These two sets of clearances have also been independent of each other. MoRTH has also signed an MoU with the Ministry of Railways which is envisaged to facilitate speedy clearance of ROBs/RUBs along national highway corridors.
To overcome the financial distress of developers, some steps have been undertaken by the Central government. MoRTH has come out with policy intervention to allow substitution on request of the concessionaire also, in order to release more equity in the market, as well as providing case-to-case revenue shortfall loans for premium-based projects. Also, commercial banks have been permitted to raise long term funds for the infrastructure sector with a minimum maturity period of seven years. The amount raised will also be exempted from regulatory requirements like cash reserve ratio, statutory liquidity ratio and priority sector lending.
Further initiatives are likely to be seen soon. There are thoughts and debates on modification on Model Concession Agreement, developing a renegotiation framework and also to allow early exit of developers from the project. Substantial focus is also coming on institutional improvements and contract management practices. MoRTH is also considering the idea of developing roads using concrete. While the construction cost of concrete roads is higher than bitumen roads, the operations and maintenance costs and overall lifecycle cost are lower. MoRTH had invited bids from cement companies to arrive at cheap prices for procuring the raw material which in turn is expected to benefit contractors and developers. With respect to safety, MoRTH has recently come up with a draft of the Road Transport and Safety Bill, 2014, which is expected to improve the safety of road users. These initiatives would take a few years to show their impact and it is estimated that for such initiatives to be successful, the financial conditionof industry players needs to improve. Thus, some interventions from the government in the domain of reviving troubled projects may also been seen. As per an earlier budget announcement, a Regulatory Authority was also proposed for the highways sector. As of now, this doesn´t seem to emerge as a key priority area for the next few years. With some glimpses of recovery in the sector, international developers & funds might again show their interest and deals can be seen in the sector over the next few years.
After witnessing a slump in FY 2012-13, the aviation industry has picked up in 2013-14 and continued with this growth in the current year. The passenger traffic grew at healthy rate of 10.1 per cent to 91.21 million passengers in the period of April-Oct 2014 versus 82.87 million in the same period last year. The industry in the last two years has recovered from the gap left by the exit of Kingfisher, with the other airlines capturing the demand.
The positive outlook of growth of the Indian aviation sector, and its potential in the long term has encouraged large international operators to show interest in the Indian market. After the conclusion of the Jet-Etihad deal last year, the current year saw the entry of AirAsia and Tata-SIA JV Vistara. AirAsia commenced operations in June 2014, while operations of Vistara are expected to commence soon. The Ministry of Civil Aviation has recently issued no-objection certificates to six more airlines to commence scheduled operations in the country. This provides for substantial capacity being added in the country to respond to the increased demand. Existing operators are also expanding their fleet, with IndiGo signing a $2.6 billion agreement with the Industrial and Commercial Bank of China to acquire 30 new aircraft and Air Costa planning to acquire aircraft worth $98 million.
One critical issue which continues to hamper the aviation industry is the financial performance and profitability of the scheduled operators. Currently all airlines except IndiGo and Go Air are reeling under financial losses. While Jet Airways and SpiceJet have recently been able to reduce their losses, in case of Spicejet, the extent of negative net worth hasn´t improved much, with its financial auditors continuing to highlight doubts of it being a going concern in the near future. SpiceJet has also been recently cancelling several flights and reducing capacity, with aircraft being returned to lessors to optimise operations and reduce losses.
Though airlines are working towards improving their operations by adopting international industry practices, one area where the government may need to step in is to reduce the taxes on ATF and promote standardising the taxes across the States. This will help in providing the much-needed stimulus to the airlines. While the number of airline operators and capacity deployed is on an increase, to sustain the growth in the industry would require modernisation of existing airport infrastructure and development of new airports in the country. The government failed to successfully implement the initiative of privatising six more airports, with the new government recently cancelling the qualification document by its predecessor. Also no significant progress has happened on the development of the much required second airport in Mumbai and Goa. A strong push from the government on this aspect may be expected.
Regulations such as the ´5/20´ rule and the route disbursal guidelines, which have resulted in inhibiting growth and also forced airlines to operate loss-making routes have been existing for decades. To ensure India is able to achieve its potential, the government may push for reforms. The Ministry has recently pushed for certain reforms and is revisiting the route disbursal guidelines, which are currently going through stakeholder consultations. Similar reforms are the need of the hour for regulations around the ´5/20 rule´ and minimum capital requirements, which no longer serve any purpose as the dynamics of business have changed over the last couple of decades.
Other expectations from the government in the next fiscal are to promote developing low-cost/no-frills airports. More transparency in processes and requirements for licensing and final approvals by various authorities is needed. Finally easing the tax levels on ATF continues to be an area which should be on the government´s watch to provide the necessary impetus to the sector.
The Indian Railways (IR) is considered as the lifeline of the Indian economy and is also not looked positively when it comes to efficiency, bold initiatives and innovation. The primary reason for this is that it has always been considered as a populist tool by the government. The key issues/challenges being faced by the Indian Railways include consistent decline in freight transport share, not being able to generate sufficient internal funds and lack of focus in implementing initiatives. Freight traffic share for IR has decreased consistently over the last few decades despite it contributing to ~65 per cent share of the total revenue. Lack of appropriate augmentation in railway capacity has impacted the quality of freight transportation services, thereby resulting in an intermodal freight traffic shift from railways to roads & highways. IR has also not been able to generate sufficient internal funds over the years to implement/finance its development initiatives.
Lack of funds is one of the key factors that has impacted its capacity to implementing some infrastructure development projects. The PMG has indicated that of 674 projects worth Rs 1,57,883 crore sanctioned by IR in the last 30 years, only 317 could be completed. Completing the balance requires Rs 1,82,000 crore. IR has been particularly slow in implementing initiatives/projects it has sanctioned and many factors such as lack of adequate funds, enabling policies, institutional structure etc., have part contributed to this.
IR has planned some of the largest initiatives, which, if implemented, have the potential to change the face of not only railways in India but that of the whole country. Dedicated Freight Corridors (DFC), a greenfield high axle load freight corridor namely, Eastern Corridor (from Ludhiana to Punjab to Dankuni near Kolkata (1839 km) and Western Corridor (from Jawaharlal Nehru Port (JNPT) in Mumbai to Tughlakabad and Dadri near Delhi, 1499 km) is being implemented and planned for operations in 2018. There is an ambitious plan for construction of Diamond Quadrilateral Network of High Speed Rail, connecting major metros (Delhi, Mumbai, Kolkata and Chennai) and growth centres of the country modelled on the completed Golden Quadrilateral mega-highway project. There are also plans for Semi High Speed Trains through upgradation of the present network (to increase the speed of trains to 160-200 km/h) in select sectors so as to significantly reduce travel time between major cities. Proposed as an advisory body, the Rail Tariff Regulatory Authority is envisaged to help delink railway operations from political considerations, while enabling the public transporter to rationalise freight and passenger tariffs. The Indian Railway Station Development Corporation is an SPV focused on modernising railway stations and monetising land/air space at station premises.
At present, five railway stations have been identified for re-development involving modernisation and upgrada¡tion of passenger amenities and some movement in this aspect can be expected in the near future.
Recently, the government has announced for allowance of FDI in railways. According to the new policy, FDI up to 100 per cent may be allowed except in railway operations. This would help attract foreign capital and advanced foreign technology in initiatives such as Freight Corridor and High Speed Railways, etc. Rail Budget 2014-15 announced that the PPP route should be explored for provision of infrastructure augmentation and modernisation of stations, inducting new technology, IT revamp, harnessing solar energy by utilising rooftop spaces of stations, railway buildings and land, etc. An appropriate PPP policy framework will help IR attract private capital in implementing its major development initiatives going forward and the same may be developed in the near future.
Furthermore, some interventions relating to accounting reforms, to understand the systemic costs and develop frameworks for effectively pricing various product and services offered, as well as relating to leveraging land assets may be expected. Based on the inclination shown by the government till now, a lot of activities might be centered around high speed trains also. Also, leveraging the æSwachh Bharat´ campaign to provide better service, clean premises and hygienic toilets at railway stations and in trains is also likely to emerge as a key focus area.
Port projects in major ports have been continuously grappling with issues relating to security clearances, environmental clearances and tariff regulation. Earlier norms for port tariffs were governed by a complicated formula based on return on capital. These rules were widely seen as restrictive, hampering growth and therefore putting off investors. TAMP has now modified the tariff regulation guidelines, however, the same has also not seen excitement from the market. Global port operators with substantial investments in India such as PSA International, APM Terminals and DP World have repeatedly expressed their grievances at what they see as a crippling tariff structure.
In addition, to ensure that existing infra projects that have been stalled get the requisite clearances soon, the government needs to take suitable initiatives in a focused manner. In the Union Budget FY14, it was announced that two new major ports will be established at Sagar, West Bengal and in Andhra Pradesh to add 100 million tonnes of capacity and a new outer harbour will be developed in the VOC port of Thoothukkudi, Tamil Nadu, through PPP at an estimated cost of Rs 7,500 crore. These initiatives are in the preparation stage and may come out for bidding in the near future.
Non-major ports, which are governed by State governments, have shown higher growth compared to major ports in India. This trend is likely to continue because of some long-term initiatives taken by State governments and non-major ports. Coastal shipping and inland waterways are focus areas which are attracting government attention. While coastal shipping has huge potential for the complete logistics chain, it has issues and constraints with respect to cabotage law and taxation issues in the Indian shipping industry. The Indian government has recently announced some initiatives and others like financial incentives are being debated at Central as well as State government level.
The increase in GDP growth has led to greater increase in urban population as well and with continuous growth in GDP, the urban population is bound to increase further. This trend has resulted in increase in share of urban population vis-a-vis rural population, with the urbanisation level having almost doubled in the past sixty years from 17 per cent in 1951 to 31 per cent in 2011, as per Census of India 2011. Urbanisation is estimated to have increased to 32 per cent in 2014 (as per World Population Prospects, 2014 by the Department of Economic and Social Affairs, United Nations). As per the Registrar General & Census Commissioner of India, the urban population is estimated to increase to 38 per cent by 2026. This has led to major emphasis being put on the urban sector.
Two of the centralised and large initiatives in the domain of urban infrastructure are JNNURM and UIDSSMT. In 2013 and 2014, under JNNURM and UIDSSMT, 284 projects worth Rs 15,000 crore were approved and are currently ongoing in various sectors. In 2014, the number of projects drastically reduced because both the programmes are towards their fag end and the Central elections were scheduled during the year. Apart from the ongoing programmes (JNNURM, UIDSSMT and RAY), this year the government launched two big ticket initiativesùfirst, provision of sanitation facilities to all households by 2019 (Swachh Bharat Abhiyan), and second, affordable housing to all by 2022. In addition, the government also announced its intent to develop 100 smart cities and improve basic amenities in the urban space. In addition to these, minimum built-up area and capital restrictions for FDI in affordable housing have been relaxed and slum development has been included in the CSR activities list to encourage private sector investment. It is being planned that pooled Municipal Debt Obligation facility available to ULBs would be increased to Rs 50,000 crore by 2019.
However, substantial interventions are required to improve urban infrastructure in Indian cities. These interventions can be centralised to a limited extent only and majority of initiatives are to be led by ULBs and State governments. There is need of enhancement of the capacity of ULBs to implement projects and improved service delivery through e-governance.
It is required and expected that solutions are developed to address the issue of poorly developed capital market for ULBs in India. Total bond market size in India is Rs 2 lakh crore, but borrowings by ULBs from capital market is less than Rs 200 crores per year. With the increase in economic activities, migration to urban areas from rural areas has led to clustering of slums. Low cost housing supply is not keeping pace with demand. Further, the cost of housing finance is higher (from HFCs) for the affordable segment and banks have largely been catering to the segment having formal and regular income sources till recently. A strong policy push from State governments and the Central government may be expected in the domain of affordable housing.
Governance is the weakest and most crucial link to bring about transformation. Many States have partially implemented the 74th Constitution Amendment Act, and hence the ULBs are not able to fully discharge their responsibilities. These constraints are likely to continue in the near future. This, coupled with daunting shortfall in available funds for improving and maintaining basic urban infrastructure, would pose increasing challenges for urban infrastructure.
There are also significant issues with respect to lack of convergence between various planning documents such as CDPs, Comprehensive Mobility Plan, Master Plan, City Sanitation Plan and Slum Free City Plan leads to poor planning and lack of coordination. The interventions and initiatives required for urban infrastructure need to focus on the long-term, starting from the basic aspects of institutions, funding and policies.
Other Major Trends
In the latest budget speech, an institute to provide support to mainstreaming PPPs called 3P India has been announced. Progress on this initiative needs to be closely monitored as successful implementation of the same can have a long-term impact. The government is also keen on various smart cities and industrial corridors. A Central Industrial Corridor Authority is being planned apart from DMIC. As many as five industrial corridors are in various stages of planning, covering over 6,500 km across the country. As part of these industrial corridors, over 15 greenfield smart cities are also being planned. These projects are likely to have much longer gestation period and with focus and support to these projects, these can generate long term growth and sustained development.
Each sub-sector comes with its unique challenges and constraints and the way ahead for the government is not easy. Even if the government takes various positive steps and more, as discussed here, it may be expected that results would take a few years to be visible. If handled well, there might be improvement in market sentiment within one year. During this time, it can be noticed that various projects would be in the preparation stage. A culmination of policy reforms, improvement in financial scenario and a ready pipeline of good projects can show their impact in the next two-three years in the infrastructure sector.
This article has been authored by Amrit Pandurangi & Vishwas Udgirkar, Senior Directors, Deloitte Touche Tohmatsu India Private Limited.
Very good & informative article.