Extend ´plug-and-play´ model beyond power sector

Moses Harding, Group Chief Executive Officer and Chief Economist, Srei Infrastructure Finance Ltd, talks on the impact of amended Land Acquisition Bill on expenditure of projects, and the solutions for overcoming land acquisition problems in infrastructure projects.

What are the pros and cons of amended Land Acquisition Bill?
The intent as stated in the Bill is the right to fair compensation and transparency in land acquisition and to ensure rehabilitation and resettlement for smooth execution, which is seen to be at fair value for both the parties. The take-away from the past is not good, indefinite delay in land acquisition is the major factor that has caused delay in project execution, leading to inefficient ROI and cost overrun killing the viability of the projects. The agenda, therefore, is to remove all kind of irritants and bottlenecks that come in the way.

The coverage in the Bill focuses on critical sectors such as defence, security, rural and social infrastructure and industrial corridors, addressing hurdles around consent from affected people, social impact assessment (SIA) and multi-crop land. The ordinance provides for easy facilitation through removal of mandatory consent and compulsory SIA for every acquisition with no special treatment for multi-crop land. The simplification of procedures (and acquisition process) has been done relating to return of land if unused for five years, consideration of food security and role of panchayat. The coverage of beneficiaries is now extended beyond public and private sector companies to other private entities including partnership, proprietorship and NGOs.

The long-term beneficial impact on the Indian economy is from bringing major reforms for significant scaling up of infrastructure, manufacturing and agriculture sectors and to help the Government in execution of its marquee projects of 100 smart cities, dedicated freight corridors and Delhi-Mumbai Industrial Corridor amongst others. It would facilitate fast track process for defence production, rural infrastructure including electrification, affordable housing, industrial corridors and infrastructure projects taken up under PPP mode where the ownership of the land continues to be vested with the Government. The amendment Bill includes all those exempted for the purpose of compensation, rehabilitation and resettlement, thus benefiting the farmers and affected families. The provision of adequate notice period and acquisition of multi-crop irrigated land for core sectors for the benefit of the economic expansion are seen to be in the interest of the nation. The cons of the Bill largely revolve around making the acquisition process fair and just to the landowners to offer better livelihood than what is being enjoyed before acquisition.

How will the Bill affect the sector development projects in terms of cost and expenditure?
The cost escalation will be from higher compensation, rehabilitation and resettlement package that would now apply to the 13 exempted legislations leading to higher cost of land acquisition and direct costs related to rehabilitation and resettlement. Considering this as incurred for fair-value acquisition, it is in order to cost this as capital expenditure for project implementation. The benefit, however, will be from costs related to social impact study involving public hearings and time overrun on prolonged procedures. The indirect cost savings from time factor through faster land acquisition. Both combined, cost escalation can be considered as the business premium to cut cost and interest overrun, thus improving the project viability. This is very positive from the investor and lender points of view.

FM has proposed setting up five UMPPs with ´plug-and-play´ mode, but the experts are sceptical about its implementation. What are the hurdles faced in implementing this model?
The proposed five UMPPs, coal-based thermal power installations with generation capacity of 4,000 MW each in the plug-and-play mode, and with all clearances and linkages in ready to execute mode at the time of auction will not only mean an outlay of over Rs 1 trillion investments ($16 billion), but will also lead to adequate availability of power to realize the ´Make-in-India´ ambition. Under this mode, coal linkages and related green clearances, which are major irritants, are expected to be removed for speedy execution of projects to put monies to efficient work cutting time overrun costs.

The hurdles may emerge from investment appetite from private sector players now engaged in the power sector, given the past experience and related low ROI. It is not clear at this stage on lender´s credit appetite for this sector. So, it would need entry of new players, domestic and foreign, and funding support from domestic development financial institutions and external long-term lenders. The poor financial health of power distribution companies may also be a major concern for domestic and international investors. The meeting of 2015-16 timeline is seen ambitious and daunting task, and the time-lag between completion of the bidding process and reaching financial closure may be an extended one, causing delay in project execution. The past experience from Odisha and Tamil Nadu UMPPs from lacklustre industry response leading to cancellation of bidding process is not encouraging. Considering the quantum of time consumed in getting environmental clearances, settling administrative and technical issues related to pricing of power and sourcing of coal, and on top of it, the hurdles around acquisition of land, the plan of starting five UMPPs in one year looks ambitious.

Please tell us about the viability of this model in roads, ports, airports, highways, etc. Most, if not all infrastructure projects are under viability stress from policy paralysis, regulatory irritants and administrative bottlenecks causing delay and time and cost overrun due to delay in project execution. The investments that have gone into creation of assets concerning roads, ports, airports and highways are stuck in most cases, and that are in operations are under severe financial pressure from cost burden relating to interest and fixed operating expenses. The near-zero appetite for investment and finance to these sectors says it all on the viability of the project leading to negative return on investments and credit turning to NPAs in lender´s balance sheet. The ´plug-and-play´ model should be extended beyond the power sector to across economic and social infrastructure, not limiting to power, defence, rural and social infrastructure and industrial corridors. Given the fact that these sectors contribute to building linkages for movement of raw materials, finished and goods and people in cost efficient manner, extended coverage is very essential.

What do you think are the solutions for overcoming land acquisition problems?
Need to have fair play in acquisition: Any acquisition is based on fair value is acceptable both to the giver and acquirer. And, anything is available for a price based on the need (and urgency) of the buyer or seller. In the current context, India (not the Government) is the buyer with urgent need and the seller (who owns the land) gets double benefit, from sale value and direct benefits from India´s well-being. Many countries (developed and emerging) have demonstrated this for the ultimate benefits for the people. The belief now is that land is acquired for the benefit of corporate business houses, and not for India. The Government has the duty to kill this myth in the bud to bring all political parties in loop for this common objective.

Land reforms is only a beginning: India plans to build 30 kms of road per day across 2/4/6/8 lanes to build connectivity across India for smooth movement of goods, services and people. It is long-term cost (and time) efficient. This vision cannot be realized without availability of land, not held by the Government. If adequate compensation is put on the table ensuring that livelihood is not put at risk, landowners will be more than willing to support the Government. Extend this to other economic and social infrastructure, the need is huge and so is the opportunity for monetisation of land which may not be remunerative for the holder. Compensation can also be in the form of cash and structured equity to provide monthly or yearly dividend. Land acquisition process can be smooth with this combination, and will be win-win for both.