By fiscal year 2023, India will be looking at a whopping investment requirement of Rs 38.6 trillion in the infrastructure sector. Over a period of time, the government spending has completely overshadowed private sector investment which was 37 per cent in 2008, and a gradual downward curve between 2013 and 2017 was witnessed. Although, revival and sustainable acceleration of PPPs in infrastructure has become sine qua non. This will require redrawing of the PPP framework in double-quick time and paving the path for private investments.
India's infrastructure spending will have to accelerate to at least Rs 50 trillion between fiscals 2018 and 2022 to make a visible impact on service delivery and provide a foundation for rapid and inclusive economic growth. This projection factors an average annual GDP growth of 7 per cent, infrastructure investments equal to approximately 5.5 per cent of GDP, and a pick-up in private sector investments after fiscal 2019.
Experts see the power, ports, railways, urban transport (metro rail) and urban sectors accounting for 78 per cent of the overall infrastructure spending.
That said, according to a recently published report, CRISIL Infrastructure Yearbook, a material ramp-up in government spending in the past few years has meant the share of private investments in infrastructure has fallen to a decadal low of around 25 per cent in fiscal 2018. The share, which averaged 37 per cent between fiscals 2008 and 2013, fell 600 basis points (bps) between fiscals 2013 and 2017 as a plethora of stalled projects and stressed assets dampened investor interest and risk appetite. While the highways sector has seen a revival in public-private partnerships (PPPs), and the renewables sector some buoyancy, the private investments in other infrastructure segments has remained stagnant or weak.
The downfall of private investment suggests policy paradox has actually paralysed the private players investments interests in India's infrastructure sector, barring a few. However, the government is leaving no stone unturned, and keeping the investment cycle up and running with some major policy overhaul along with huge impetus to capacity building.
Between fiscals 2008 and 2017, private investments in infrastructure was estimated to be Rs 20 trillion, or nearly a third of all infrastructure spending during the period. This had transformational impact in several sectors. And by 2012, India's PPP programme also acquired a significant scale. So much so, the World Bank's Private Participation in Infrastructure (PPI) database ranked India on top among the developing nations between fiscals 2008 and 2012. However, since then, a raft of risks manifested, exposing lacunae in the PPP architecture, leading to a spike in stalled projects and stressed debt, which muted risk appetite in the private sector.
To wit, a step-up in public spending has hastened the construction of highways, while proactive policies have unclogged stalled projects. Recalibrated PPP models, including the hybrid annuity and toll-operate-transfer have helped draw some private investments. Similarly, in renewables, largely favourable policies and market conditions have led to 18 GW capacity being added in fiscal 2018 alone. Today, the private sector also has a dominant share of airport and port traffic management. Metro rail sector has seen strong traction in the last couple of years and is expected to provide sizeable opportunities for construction companies over the next three to five years. The overall cost of expansion of the operational and approved metro projects under implementation is over Rs 2.5 trillion and another Rs 2 trillion worth projects are in various stages of approval and are likely to come up for bidding in the next five years. This is expected to boost the order book of construction companies from Rs 750 to 900 billion over the next three to five years. In total, about 440 km of new metro network development has been approved and another 800 km is in the proposal stage. Given the large size of metro projects, sizeable opportunities exist for both, infrastructure developers and construction companies over the next five years.
In case of roads, earlier, a mere target of 5,000 km took years to complete. However, things have changed drastically in the last four years. The government is now fast tracking its road development programme. In FY18 alone, NHAI awarded 150 road projects of 7,397 km, a record high. HAM projects formed the bulk of the total value of awards last year at 63 per cent, followed by pure EPC contracts at 35 per cent and BOT projects the remaining. In addition, the government's Bharatmala project is creating a lot of optimism by constructing logistic parks worth Rs 2 trillion in 24 villages and is heavily investing in 44 economic corridors. Bharatmala is a project worth Rs 10 trillion; within a year, the Centre will start projects worth Rs 3 trillion under Phase-I.
Greenfield industrial cities like the Delhi-Mumbai Industrial Corridor, a USD 100 billion project was aimed at creating a trade corridor between Delhi and Mumbai, running through Delhi, Uttar Pradesh, Haryana, Rajasthan, Gujarat and Maharashtra. The DMICDC has planned eight smart cities for the Phase I of the project. Out of the eight smart cities, four of them- Dholera in Gujarat, AURIC in Maharashtra, Vikram-Udyogpuri in Madhya Pradesh and IITGNL in Uttar Pradesh- are in the implementation stage, with laying of roads and utilities still in progress.
Under the Sagarmala programme, the government has already awarded more than Rs 1.80 trillion in the port sector. Also, it has commenced railway works and road connectivity projects. Of the Rs 4 trillion, projects worth Rs 300-400 billion are in the tendering process. For Sagarmala, 70 per cent of detailed project reports (DPRs) are ready and by March-end, Rs 3.5 trillion projects will be up for bidding. In case of logistics, the government is developing a national logistics plan for the country, which is a long-term plan for the integrated development of logistics. Under the Smart City Mission, around 1,333 projects worth Rs 506.26 billion have been completed or are under implementation or at the tendering stage. Overall projects worth Rs 2.03 trillion have been identified for all 100 smart cities across the country.
Since 2014, the federal government has launched several big-ticket infrastructure projects and the above mentioned numbers depict how India has leapfrog from small-scale projects to mega-scale wonders. This will certainly lead leading engineering and construction companies to engage well-trained and experienced project managers to deliver projects within the stipulated budget and timelines.
Roads and Highways
The length of India's highways network has increased significantly to 115,435 km in fiscal 2018. It has improved hinterland connectivity across the country and brought unprecedented level of connectivity to various parts of the country. The PPP mode of development has contributed considerably to this development. Demand for private sector funding in the highways sector led to the introduction of PPP in the 1990s. However, given the challenges that developers have faced in the past because of various risks associated with the sector, new initiatives are needed to revive PPP in the sector.
Sector performance and trends:
Planned versus achieved targets
Budgetary allocation for the roads sector was increased to Rs 710 billion for fiscal 2019 from Rs 650 billion in fiscal 2018.
Mega projects such as Bharatmala, Setu Bharatam, Char Dham connectivity, economic corridors and toll-operate-transfer (TOT) will be the biggest investment drivers in the sector. Over the next 5-6 years, Rs 7 trillion is envisaged to be invested under these programmes.
The Ministry of Road Transport and Highways (MoRTH) constructed a record 9,829 km of highways in fiscal 2018 with a per day construction rate of 27 km. The rate of construction is increasing steadily, bringing it close to the target of 45 km per day.
MoRTH achieved the highest-ever award of 51,073 km of national highway projects and the highest-ever construction length of 28,531 km over a four-year period from fiscals 2015 to 2018.
Trends in private sector participation
As part of the Bharatmala Pariyojana initiative, MoRTH aims to implement projects that will improve connectivity of key production and consumption centres across the country. These involve:
The Indian Railways has addressed the issue of chronic absence of investments, by announcing a plan to pump in Rs 8.56 trillion in the sector between fiscals 2016 and 2020. Of this investment, 15 per cent is envisaged to be funded through the PPP mode. Earlier, the private sector participation was limited to wagon manufacturing, civil construction, raw material supplies and catering. However, the latest reforms and policy changes have cast the net of private sector participation in the railway sector much wider. In addition, there are various projects such as DFC, station redevelopment and private freight terminals, which have increased the opportunity for private players to enter the sector.
Sector performance and trends
The gross revenue receipt of the Indian Railways was Rs 1.65 trillion in fiscal 2017. It grew at a CAGR of 15 per cent between fiscals 2012 and 2015 but slumped to 1.5 per cent between fiscals 2015 and 2017.
The operating ratio of the railways, a consistent weak-spot, reached alarming levels of 111 per cent for April-July of fiscal 2019, from 96.50 per cent in fiscal 2017. The huge jump in operating ratio will pose difficulties for the railways to carry out its operations and certainly restrict any investments in capacity augmentation or modernisation through internal accrual.
The freight segment contributed a major share of 64 per cent to the railways' earnings, vis-a-vis, 26 per cent share of passenger earnings in fiscal 2017. The remaining came from non-fare revenue and indirect earnings (wharfage, demurrage).
Private investment is invited in projects of greater economic significance, such as the elevated rail corridor in Mumbai, sections of the dedicated freight corridors (DFCs), freight terminals, station redevelopment and other rail modernising projects. With an aim to increase rail freight share, to create additional freight capacity and to reduce transportation cost, DFCs have been planned as eastern and western corridors. The completed physical progress as of January 2018 was 40.3 per cent. Private investment is expected in corridor development and structuring other logistical amenities. Sections of Western DFC (432 km) and Eastern DFC (343 km) will be operational soon.
Multi-modal logistics parks
Private players can invest in developing multimodal logistics parks and integrated logistic parks along the eastern and western corridors passing through various states. The Container Corporation of India (Concor) and the Ministry of Railways are spearheading this initiative together. Access charges at rail terminals constructed will be levied on logistics providers and users of terminal facilities. To build terminal capacity, Concor and the Ministry of Railways had planned to set up 100 private sidings or freight terminals between fiscals 2016 and 2018, to provide end-to-end logistics services, by developing common user facilities with handling and value-added services at select rail terminals. Currently, 90 projects have been commissioned against the target of 100. Private investors have shown significant interest.
Station redevelopment projects
The Indian Railways has identified 400 stations across 100 cities, covering 2,700 acres of land. Mode of development has been deliberated and the ministry is now redeveloping stations through the Indian Railway Station Development Corporation, under engineering, procurement and construction mode. The Habibganj station, allotted to the Bansal Group, is expected to commission by December 2018. 10 stations have been allotted to NBCC India.
Last-mile connectivity projects
Partnerships with logistics service providers and container train operators are envisaged to transform the logistics landscape. The aim is to provide integrated transport solutions for select commodities. For example, Indian Port Rail Corporation, a joint venture between the Ministry of Railways and Indian Ports Association, will build the Indore-Manmad rail corridor for container movement from Indore to the Jawaharlal Nehru Port Trust.
Network augmentation: In high density areas, route congestion is a major issue faced by passengers and freight trains, leading to detention and low average speed. Projects for doubling of existing tracks in high density corridors, development of DFCs and port or coastal connectivity projects are expected to create additional capacities, and reduce delays and associated costs.
Higher non-fare based revenue targets: This initiative is imperative to reduce dependence on traditional fare-based revenue. Initiatives such as train branding, railway display network and on-board entertainment are expected to fetch additional revenue. The target for fiscal 2019 from these sources is Rs 12 billion.
Greater share of high-capacity wagons: The augmenting carrying capacity of existing lines and improving railway freight revenue are aims of the Mission 25 Tonne.
However, the realisation of this initiative will require upgrading of the existing rail tracks to bear 25 tonne axle-load wagons.
100 per cent rail electrification plan: Railways is pushing for complete electrification, which is likely to save at least Rs 110 billion annually on fuel expenses. This will help in improving railways' operating ratio and enable electric locomotives to run in any part of the country. In fiscal 2018, the railways electrified 4,000 km of route and in this fiscal, it targets to electrify 6,000 km.
The Indian Railways appears to have realised the challenges in the way of private sector participation and has taken steps to mitigate them by proposing reforms and policy change. However, there is a sluggish implementation of these reforms. This has subsequently discouraged private sector funding. The railways has also been slow to respond to the market changes. It needs to reduce unnecessary costs to the freight business and focus on increasing its freight market share. To achieve this, the sector will need to revive the PPP track for executing more focussed projects such as DFC.
With airports- private and public- reaching saturation levels, there is an urgent need to augment capacity at existing airports or develop new airports near existing ones. It is important that there exists a strong enabling environment for private investment to flow into the sector. CRISIL estimates that by 2026, 90 per cent of the investment requirement will need to be met by the private sector.
Sector performance and growth trend
Capacity utilisation trends
Capacity utilisation across the six key airports increased significantly. Nearly all had above 100 per cent capacity utilisation in fiscal 2018, signalling the dire need to augment capacity at these airports.
Private sector participation
With the Indian government's thrust on PPPs in the infrastructure sector, multiple models have been formulated to channel private sector investments into various projects. These models, with suitable legal and regulatory frameworks, have been used in actual infrastructure projects across sectors with varying degrees of success. Given that infrastructure projects are inherently capital-intensive and susceptible to cost overruns, the positioning of private sector players as stakeholders through PPPs has incentivised robust project management practices.
Learnings from operational PPP models led to the development of newer models, which addressed challenges and evolved with time. While past PPP initiatives in the airports sector have been successful in attracting private investment, both government regulators and private investors faced a number of challenges. Given the pace of traffic growth across several airports in India, capacity augmentation of existing airports and development of newer airports have become increasingly important. Against this backdrop, it is essential to have a rigorous PPP framework for the airport sector be put in place to enable the development of required infrastructure for both greenfield and brownfield airports.
Ports and Shipping
Attracting private investments in the ports sector has become paramount for the government, considering its focus on port-led development, and implementation of ambitious projects like Sagarmala. However, reported cases of PPP terminal operators at major ports going into litigation with port authorities have increased over the years. Apart from this, failure of the current PPP model to remain flexible with respect to changes in the regulatory environment and international market dynamics has reduced the number of investors in the sector. Thus, there is a need for reconsideration of the PPP scenario in the ports sector in India.
Implementation of Sagarmala Programme
The Sagarmala programme is based on the four key pillars for port-led development and comprises 577 projects across 19 states. Out of the 577 projects, more than 70 per cent of the projects are in various stages of implementation.
According to CRISIL report, more than 50 per cent of rail connectivity projects under Sagarmala are under implementation through various agencies such as Indian Port Rail Corporation, which is a joint venture between major ports and Rail Vikas Nigam.
Coastal community development
26 fishing harbour projects totalling Rs 40 billion have been identified, out of which only seven are under implementation.
Over the last few years, the government has taken a number of initiatives to attract private investments into the ports sector- permitting 100 per cent FDI under the automatic route, allowing income tax incentives under the Income Tax Act, 1961, formation of joint ventures between major ports and foreign ports, non-major ports and private companies, and standardisation of bidding documents such as request for qualification, request for proposal and concession agreement. Apart from that, some of the recent developments include proposed revisions by the government in terms of the model concession agreement and the replacement of the Major Port Trusts Act, 1963, with the Major Port Authorities Bill, 2016.
Major Port Authorities Bill, 2016
In order to increase the autonomy of major port boards, the Union Cabinet has approved the Major Port Authorities Bill, 2016 which allows ports to fix tariff based on the market conditions, winding down TAMP. The bill is more compact compared with the Major Ports Trusts Act, 1963, as the number of sections has been reduced from 134 to 65.
PPP operators will be free to fix tariff based on the market conditions. The board of the port authority has been delegated the power to fix the scale of rates for other port services and assets.
An independent review board is proposed to be created to carry out the residual functions of the erstwhile TAMP for major ports and to look into disputes between ports and PPP concessionaires.
The board of each major port shall be entitled to create specific master plan of any infrastructure proposed to be established within the port limits and such master plan shall be independent of any local or state government regulations of any authority whatsoever. This will expedite the approval process which is a big positive for PPP.
Reform measures taken by the government for PPP projects in the ports sector have a significant impact in the context of making Indian ports more attractive to private investors. Without further delay, the government needs to implement the Major Port Authorities Bill, 2016, replacing the existing Major Port Trusts Act, 1963 and abolish the TAMP regime. Also, the government would have to ensure that the existing PPP projects in operation get absorbed in the reform process and derive maximum benefits in the renewed ecosystem.