The rural infra opportunity: Go against the grain!
This year starts the Plan for a huge boost from the government to rural infrastructure. Private investors should not look at the immediate size of attractiveness of projects alone, but consider the multiplier effects. Infrastructure crunch in rural areas is a major reason for Indiaâ€™s high logistics costs, and private participation from the logistics companies in rural infrastructure will indirectly help lower those costs and ease the flow of perishables to the market in time, reducing the 30 per cent rotting that exists today. Janaki Krishnamoorthy writes.
A recent World Bank Study says that the Indian logistics cost is one of the highest in the world. While the figure is between 6 and 8 per cent of the total value of goods in developed countries, that cost in China is estimated at 10 per cent of total value of goods, while in India, the cost of logistics is 14 per cent of the total value of goods. Inadequate infrastructureâ€”storage and transport facilitiesâ€”are the major factors behind escalation of logistics costs.
Rural logistics contÂributes substantially to this increase. Rural infrastructure has been receiving govÂernmentâ€™s special attention in the past few years with focus on development of cold chain, warehousing facilities and rural connectivity. But not enough has been attained yet as borne out by following facts and figures: Every year between 2.5 lakh and 5 lakh tonne of grains rot in warehouses across the country. India is the second highest fruit and vegetable producer in the world, yet more than half decays even before it reaches the markets. Poor post-harvest methods of wareÂhousing, storage and unsafe transportation from point of proÂduction to point of sale are the major reasons behind this wastage.
Apart from boosting development and opening up backward regions to trade and investment, connectivity is the key in inter-modal transport development, estaÂblishing links with airports, railway station and ports. Interventions that improve logistics infrastructure and services within rural areas and between rural regions and urban cities like motorised and non-motorised transport, storage facilities, markets, marketing and farm-to-market logistics increases rural productivity, enhances rural populationâ€™s access to education, health care, markets, information and other services. All of this can have a substantial impact on improving rural economy and reducing poverty. From the perspective of the cities, improved rural-urban transport and logistics linkages can bring in quality agricultural produce at lower prices to urban consumers.
BUILDING A STRONG CHAIN
The inadequate support infrastructure which is the biggest bottleneck in expanding the food processing sector includes long and fragmented supply chain, inadÂequate cold storage and warehousing facilities, road, rail and port infrastructure, lack of modern logistics infraÂstructure such as logistics parks, integrated cold chain solutions, and last mile connectivity. The Indian govÂernments, both at the Centre and State levels, are aware of the situation. They have taken some steps to improve the rural logistics, but much of the initiative has come from the central government.
â€œThe Planning Commission has identified storage gap of 1.5 crore tonne from the food grain storage point of view,â€ reveals BE Prasad, General Managerâ€”Commercial, Central Warehousing Corporation (CWC). â€œUnder Private Entrepreneurs Guarantee Scheme (PEG-2008), the Government of India is creÂating 1.5 crore tonne warehouse capacity through FCI to fill the storage gap. National Horticulture Board under National Horticulture Mission Scheme is working for bridging the gap in cold chain.â€
CWC has a total storage capacity of 1.03 crore tonne, operating mostly from district head quarters or state capitals and at some locations at Taluk level. The 17 State Warehousing Corporations (SWCs), which operate at Taluk and Mandal levels, have a total capacity of about 2.1 crore tonne. FCI as of now holding more than three crore tonne storage capacity of its own. The total warehouse capacity available in the country in the government, corporate and cooperative sectors is about 10.6 crore tonne.
Cold chains form an integral part of the supply chain for storage and distribution of perishable goods and temperature sensitive pharmaceuticals and biological preparations. The government has accorded high priÂority to the establishment of cold chains and has introÂduced major initiatives like allowing foreign equity parÂticipation, allowing import of cold storage equipment with no restriction, other tax incentives etc.
But the most effective implementation in rural logiÂstics has been in the road sector, with several governÂment schemes in successful operation. Pradhan Mantri Gram Sadak Yojana (PMGSY), Provision of Urban Amenities in Rural Areas (PURA) and Bharat Nirman are some of the major ones introduced over the last decade, and have bolstered rural connectivity to some extent. Nevertheless, a large quantum of work under these schemes still needs to be implemented across the country.
A top official of the Union Ministry of Rural Development, (MoRD), who wished to remain unnaÂmed, said: â€œSeveral studies have shown that the road development under PMGSY has had positive impacts including those on transportation of agricultural produce. Notably, after the advent of this programme, farmers in remote areas are also able to raise crops that have limited shelf life, especially fruits and vegetables. Under PMGSY, we have already completed 60 per cent of the projects and now focus is on roads remote areas.â€
As Mahendra Gupta, Engineer-in-Chief, Madhya Pradesh Rural Road Development Authority (MPRRDA), points out, direct connectivity can elimiÂnate costly intervention: â€œThe newly constructed roads under PMGSY have had a great impact on transportation of agriculture products, vegetables and milk from villÂages to market directlyâ€”without any mediator. Health and education facilities have also improved and villagers are happy.â€
Will PURA finally take off? As the Ministry of Rural Development is planning to kick start its first PPP project in rural infrastructure under its scheme Provision of Urban Amenities in Rural Areas (PURA), the resÂponse from the leading private players has been enthusiastic. The government is aiming at 500 clusters for impleÂmentation in the 12th Five Year Plan which will, according to the ministry will require about Rs 60,000 crore, out of which Rs 20,000 crore would come in as grant money from PURA, Rs 20,000 crore from non-PURA government grants and Rs 20,000 crore from private player. â€œDevelopment of roads is just one part of the rural development process, and it cannot succeed in isolation,â€ says Digvijay Kudtarkar, Chief Technology Officer, Hindustan Construction Co (HCC). â€œThe government needs to adopt a holistic approach in the form of a blue print for balanced development in key areas such as agriculture, irrigation, marketing and cotÂtage industries. Such a balanced development programme will create a robust social scenario, which is a must for attracting PPP developers towards rural projects.â€
BOOSTING PRIVATE INTEREST
A universally voiced solution in this context has been the bundling of projects – clubbing of various road projects or linking them with district roads and State Highways or with allied activities like building wareÂhouses, cold chains, power etc to increase the project values and make them attractive to big private players. In other words looking at the entire infrastructure which goes with roads which is logistics infrastructure.
â€œThe very segment of logistics is connected with the various aspects of human progress, and viability of their higher standards of living. So, every activity should take shape for growth,â€ opines Ignatius Michael, Regional Director, Avian Logistics. Some industry proÂfessionals even suggest a more holistic approach which will not only attract private participation but also lead to integrated development.
A key issue here in PPP model of course is the funding model. Since BOT/BOOT (toll) module may not attract the private companies for obvious reasons the government is proposing the annuity model.
â€œClubbing of roads has been done in the past by our Public Works Department (PWD),â€ says Sudhir Thakre, Secretary, Ministry of Rural Development and Panchayati Raj, Government of Maharashtra. â€œThey combine a road with good earning along with other roads which are not good revenue earners and award it to contractors. But whether this can be done under PPP is yet to be seen. Under PMGSY we have sent proposals for PPP based on annuity model.â€
The annuity issue: The best mode of contract in the current situation is the annuity-based model wherein a developer is responsible for providing infrastructure facilities for rural development on a long-term basis without risk of returns. This can be achieved as the devÂeloper is compensated on a long-term basis. Abhijit Maheshwari, Deputy General Managerâ€”Real Estate & Logistics Business Development, Tata Realty & Infrastructure Ltd, reflects a typical problem: â€œFrom a business perspective, we need to look at the viability of a project. The government can promote participation in roads, cold chains, warehousing or State Highways by giving the first few projects on an annuity basis with some incentives to make it feasible for private players to participate and post that the next set of projects can be done on PPP basis.â€
Apart from bundling contracts private sector players feel that tax incentives, single-window clearances, land usage rights along the project corridor can be included as part of the concession agreement, to make the projects more attractive.
WHERE PMGSY CAN FAIL
Unavailability of contractors or inadequate contrÂacting capacity has been cited as one of the major reasons for the delay in completing projects under PMGSY. Agencies like MPRRDA have been working under sevÂeral constraints like lack of permanent staff, and empÂloyees are deputed from other departments and non-availability of local contractors.
â€œRoad construction contractors were not available in required numbers so MPRRDA had to arrange for contractors from other states to implement the project in time with quality,â€ laments a concerned Gupta. â€œContractorsâ€™ meets were organised at different places outside the state to build capacities, nor were contracÂtors available for maintenance works as PWD B&R is maintaining its roads through its permanent gang.â€ The problem is magnified as states, including Madhya Pradesh, launch their own rural road schemes, typically called the Chief Minister Gramin Sadak Yojna (CMGSY), to connect villages of population less than 500 in general area and less than 250 population in tribal/Schedule V areas that are not covered under PMGSY.
Resistance from separatist or extremist groups has been another major hurdle in some areas. For instance, in Maharashtra the projects have been disrupted in certain areas by Naxalites. â€œDespite projects being appÂroved under PMGSY, we were not able to implement them in Naxalite districts like Gadchiroli, Gondia, etc,â€ says Thakre. â€œWhen we tried to construct roads here two contractors were killed by the Naxalites and the proÂgramme had to be halted. As connectivity will be a hindrance to their activities Naxals are opposing road developments in these areas. Around 39 districts in seven to eight states are facing a similar situation.â€
Even otherwise, Maharashtra and some other states like Karnataka are not benefitting much from PMGSY where new connectivity can be undertaken only for habitations with population of 500 and above (250 and above in hill/desert/tribal areas). These states have already constructed roads to most areas with population over 500, albeit not of very good quality; they need funds for repairing these old roads.
â€œWe have therefore suggested that there should be two windows under PMGSY,â€ Thakre says. â€œFor instance if Rs 20,000 crore is the budget for PMGSY, Rs 15,000 crore should go for new connectivity and Rs 5,000 crore be allocated to states for upgradation of connectivity estaÂblished in the past. Many state governments are not in a position to fund such road projects and upgradation. While our annual requirement is around Rs 6,000 crore, budget allocation is only around Rs 2,000 crore and we get around Rs 500 crore from Rural Infrastructure Development Fund (RIDF).â€
The government is also considering a special scheme for providing connectivity to habitations not covered unÂder PMGSY (less than 500 population/250 in tribal areÂas) for which an estimated Rs 8,000 crore is envisaged.
LOCAL VS NATIONAL CONTRACTORS
The limited capacity and ability of local contractors in building quality roads in time and maintaining them is another issue. For instance, in Orissa 269 projects were delayed by as much as four years because of incapability of the contractors. Big national contractors are in a better position to implement aggressive targets of rural infra, but most of them find the scale of the projects not big enough to catch their fancyâ€”and their allocations. Packages awarded under NRRDA however are not very large and for the 60 Integrated Action Plan districts, the package size has been further reduced to Rs 50 lakh to facilitate local contractors to participate.
â€œCurrently, we are not executing any rural infraÂstructure development projects because such assignments are taken up in small packages, whereas HCC maintains a steady focus on projects with a value of over Rs 500 crore,â€ says HCCâ€™s Kudtarkar.
While conceding that as of now the projects are not attractive for big players, MoRD official however mainÂtains that quality is not suffering as they have a three-tier quality monitoring system with defined parameters. â€œWe do not compromise on these parameters and every project with photographs is uploaded on public domain so that anyone having issues on the project can approach us,â€ he told us. â€œWe have also asked the state governments to train the contractors and their men along with their depÂartmental training. While some may question why a private guy should be trained at the cost of exchequer we had to take this bold decision because eventually he is going to handle public money.â€
A report prepared by United Nationsâ€™ Economic and Social Commission for Asia and the Pacific identifies the complexities of rural logistics: â€œRural logistics and supply chains are affected by a number of complex and interrelated factors and issues that include: land tenure, farm size, market structure (including the market power of various actors in the chain) information flows, avaiÂlability and cost of finance banking facilities, available logistics infrastructure and services, government policies (legislative, regulatory and fiscal environment), and levels of public and private participation. Many of these factors lie outside of the scope of issues normally dealt with by transport ministries. They do, however, illustrate the need for a multi-sectoral approach to rural logistics and supply chains.â€
With a 4 per cent growth aimed in agriculture, the government is planning to focus on rural logistics even in the 12th Plan (2012-17) with a multi-sectoral apprÂoach and with the involvement of private developers. Hence, private players should aggressively look forward to lucrative opportunities and recommend to the governÂment specific activities that can come under PPP.