Putting infra ducks back in a row

Budget Wish 2012-13: Putting infra ducks back in a row

Much has been said about the now popularly termed policy paralysis over the past two years that has led to uncertainty in implementation of and financing to infrastructure sectors. With the single exception of the roads sector, none of the major sectors have met expected growth levels this year. Some obvious solutions can put the industries back in the fast lane, as Parvesh Minocha and Neeta Ramnath suggest. Analysing some of the critical infra sectors, they recommend what the Budget should ideally emphasise this year, and some urgent steps that are needed to augment the graph.

The Indian infrastructure story has suffered as much implementation paralysis over the past couple of years as it has policy paralysis. Even while NHAI will bid out its highest road kilometres in this year, it has not had a chairman for the entire year. The roads ministry did not have a full time Director General (DG) for an even longer period. The Railways have not increased passenger fares for the general public for over eight years, and have created less than 20 per cent new rail lines since independence than what was created by the British. While world class airports got created in the major metros, the story of minor airports and hinterland connectivity remains dismal. Most of the airlines have been bleeding. Less than 10 per cent of the capacity licensed to minor ports is getting implemented, container terminals remain choked, connectivity rem­ains dismal, and many of the projects “successfully bid out” have not moved at all in the last two years. The confusion over rail connectivity projects is so serious that some ports are known to be operating rail lines for nearly a year, without knowing how much and when they will get their fair share of the revenue from the railways.

India could be one of the most disadvantaged countries whether it is the modal mix—with roads carrying more than 1.5 times the rail freight traffic and coastal shipping being minuscule—or on account of road fatalities.

Ports: Regulator needed

Consider this: India will not achieve even 50 per cent of our planned capacity addition as per 11th Five year plan. Against a plan of bidding out 24 PPP projects in FY12, we are unlikely to reach even 10.

While our container ports are hitting capacity ceilings—JNPT handled 100 per cent in FY11; Chennai cannot evacuate containers, leading to congestion surcharge of $100 per TEU—India has bid out three key container terminals (at Ennore, JNPT and Chennai) in the last two years but has been unable to get them off the ground. All the bid-out terminals were not structured well, leading to single bids only. Even after the bidding, the terminals are delayed. Ennore, whose agreement was signed in August 2010, has not achieved financial closure. JNPT IV has not been able to sign the concession agreement due to lack of clarity on stamp duty! And the decision on the Chennai mega terminal award is yet to be taken.

It is not as though the national policymakers are unaware of the obvious advantages that coastal shipping and inland waterways transportation bring: environ­ment-friendly, and can bring our logistics costs down dramatically. However, our fiscal policies have penalised coastal shipping (24 committees and study groups since independence haven't been able to lift coastal shipping in India), and practically no investments have come in inland waterways.

Recommendations: The following urgent action steps are needed to jumpstart reforms in the sector:

• Indian ports need more balanced project structuring and a simplified tariff regime, to allow better private participation.
• PMO level oversight and accountability for delays
• in projects, including projects for hinterland conn­ectivity of ports. Cross-ministry coordination is vital for this purpose and must be encouraged.
• Independent regulator to handle PPP projects—esp­ecially tariff-related disputes which continue to dog the sector.
• Fiscal incentives to promote coastal shipping.
• Empowered Inland Waterways Authority with a demarcated fund on the lines of NHAI.

Roads

This is perhaps the only infrastructure sector which has witnessed tremendous investments despite various irritants that persist. The National Highways Authority of India (NHAI) is aiming to finalise over 7,000 km in the current fiscal—and it is on track to meet the target. Hence, on the asset creation front, NHAI seems to be on track to meet its internal target of 20 km per day. However, there are a few irritants that need to be addressed as follows:

• “Start date” for many concessions and formal declaration of “Commercial Operations Date” (COD) are getting seriously delayed in several cases, seriously affecting the viability of many projects.
• Rs 10,000 crore is currently stuck in litigation between NHAI and private players. There is an urgent need to set up an independent regulator. However, progress has been tardy on this front.
• While asset creation has been on the roll in highways, asset maintenance and delivery of desired service levels has seen very little progress. India remains at the top when it comes to road accidents and fatalities. Not only do the concession agreements need to be tighter in defining the minimum standards for main­tenance, patrolling and highway safety, but the deli­very on these fronts also needs to be monitored strictly lest the “willingness to pay” evaporates.
• Recent policy changes by NHAI/roads ministry are beyond comprehension: Such as qualifying only the top seven EPC companies for contracts as small as Rs 300-400 crore; selecting consultants on “least cost basis”; not deciding on bids for months and then threatening to black-list companies which can't deploy those exact resources.
• Appointing “Lenders' Engineers” with the consent of borrowers (funnily enough, even their fees are paid by the borrowers) is creating a huge systemic risk. No wonder there is huge difference between the Total Project Cost (TPC) of NHAI and the concessionaires.
• Indian road concessions are going through tumultuous times. The bids have been very aggressive and fina­ncial closure is increasingly becoming difficult and more expensive. Significant reforms are needed in the taxation and debt market regulations governing infrastructure SPVs before access to funds is eased. We hope to see some action on the Deepak Parekh Committee, which had submitted its report in 2007.

Logistics

It is an oft-repeated fact that Indian logistics costs are among the highest in the world. The biggest con­tributor to the high logistics costs is our freight modal mix. Today this mix is roughly 60:40 (road:rail). With the current growth trend for road transport (higher investments, higher reliability, lower congestion, better last-mile connectivity), road share is only going to increase.

In comparison, the modal mix in China includes water transport with 30 per cent share and rail with 47 per cent share.

India has had 24 committees and taskforces to give impetus to coastal shipping. Yet coastal shipping acc­ounts for a negligible share (~5 per cent) of our freight. Typically, the logistics costs of transporting a bulk com­modity such as thermal coal through coastal shipping or inland waterways are roughly 40 per cent lower as compared to rail and 60 per cent lower than road. Apart from being cheaper, water transport involves less than 25 per cent of carbon emissions as compared to road transport.

Some of the key interventions required to improve the share of water transport in our modal mix are:

• Duty exemptions for bunker fuel used in coastal shipping to make it commercially viable.
• Change in income tax laws for seafarers – current income tax laws make it more attractive for seafarers to work with foreign vessels rather than coastal vessels.
• Reduction in custom duties for spare parts used in coastal vessel.
• Inland Waterways Authority of India (IWAI) needs to be cast along the lines of NHAI and given an independent fund and a strong leadership.
• Inland waterway projects can be implemented on PPP basis and a policy needs to be outlined for the same.

Airports

In the past decade, passenger footfall has seen double-digit annual growth, but airport infrastructure has failed to keep up. Due to inherent characteristics, airports have struggled to stay profitable purely on avi­ation revenue. This has resulted in relatively low level of interest among private investors in airport projects. Non-aviation revenue remains the key to turning around airport projects.

In India, the airports run on PPP model have proven more successful in tapping non-aviation revenue than AAI operated airports. On an average, AAI airports derive 90 per cent of their revenues from aeronautical sources, whereas international average is 60 per cent (implying 40 per cent of the revenue is from non-aviation sources). Privatisation of airports through PPP route has given AAI funds to carry out modernisation and redevelopment of its existing small airports.

Despite the advantages of private sector, further privatisation has not taken place. Most airports remain with AAI, and several expansion/modernisation plans have faced severe delays. Consider the case of Amritsar airport which first came for bidding in 2008, but the project is yet to take off. Projects like Navi Mumbai and Pune airports have witnessed severe delays due to land acquisition, environment and viability related concerns.

Judicious selection of airports for privatisation, faci­litating means to enhance the financial viability of projects, and maintaining clarity and consistency in policies would go a long way in reviving investor sen­timents in the sector.

Rail

The share of private investment in total investment envisaged for rail (including MRTS) as per the original estimates of 11th Five Year Plan was targeted to be 19.23 per cent which was substantially lowered to just 4.14 per cent during the mid-term appraisal in 2009-10.

Private participation was envisaged in projects like DFC, modernisation of stations, rolling stock manu­facturing (coaches, locomotives), telecommunication towers and OFC, and parcel services. None of the schemes have seen the light of the day till now. Dedicated Freight Corridor scheduled to be completed by 2005 was extended to 2012 and now only one phase is expected to be operational by 2016. Sixty railway stations were identified for upgradation and modernisation to world class stations on PPP but no progress is seen till date.

Rail Ministry has the intent and appetite for large scale innovative projects but somewhere down the line none of the projects actually progress on ground. Policies exist (even though some of these need immediate overhaul) but implementation is the main hurdle. Industry is waiting eagerly for Railways, a closed domain till now with huge potential, to open up. The Ministry should leverage the fact. Projects should be cleared and awarded for development under PPP and under the R3I policy. Long pending approvals should be expedited to restore confidence in the Railways intentions. And it can't stay with “no fare increase policy”.

Urban Transport

Studies show that it costs more to keep expanding infrastructure than to pay owners to keep their personal transport vehicles home and use public transport instead. To make this switch happen, an efficient and reliable public transport is a precondition. Thankfully, Urban Transport is the most dynamic sector currently: the MRTS sector alone is in line to see contracts of almost Rs 75,000 crore being decided in two years, with the government also realising the beneficial effect of mobility on urban economic growth. Corrective measures are being taken to reduce the imbalances, ie, inadequate transport infrastructure and its sub-optimal use and getting integration between land use and transport planning. National Urban Transport Policy was a step towards improving and providing good quality trans­portation services at affordable prices. JNNURM addr­esses the issues to some extent. Recent Sustainable Urban Transport Project which aims at capacity building, training and skill development for the implementation of transport projects is a step further by the government to strengthen the sector.

In spite of the policies and support for urban trans­port projects, most of the projects are delayed. The delay in most cases is because of lack of approvals from the various government agencies – this is applicable across BRTS, MRTS, City Bus Services, LRTS, etc.

• Government needs to put in place a mechanism for speedier approvals, improve coordination in inter-ministerial projects, remove indecisiveness from the system and let go of political interference if the objective of the well intentioned policies has to be achieved.
• Lack of political resolve and accountability at the state level can't be allowed to come in the way of derailing some mega urban transportation projects.

Rural infrastructure

Bharat Nirman went slow and had a spill over of targets in 2009 to be achieved by 2012. List of unfinished tasks is long and arduous. Main targets of connectivity for all villages with population of more than 1,000 with all weather roads, providing rural housing of 120 lakh houses, improving water supply quality and power connection for all villages with effective power supply are all running behind schedule. They may well be shifted to 12th Plan. The twin issues of corruption and inflation have diverted the government's focus from expediting reforms and implementing planned projects.

As far as PMGSY is concerned and as per the 11th Five year Plan, the number of habitations to be covered under the rural roads programme (which also included projects under Bharat Nirman) was 60,638 and the number of kilometres to be constructed/upgraded were targeted to be 307,433 km. Till December 2010 (FY11), 80 per cent target for habitation and 70 per cent target in terms of length was achieved. Year wise analysis of target versus achievement shows that targets are being missed since 2007-08. It is only in the first year of the eleventh five year plan that the targets were surpassed.

The project that was moving at full speed was PURA but since its restructuring and pilot implementation on PPP, it has also slowed down. Government was on track till November 2010 when the stage of shortlisting of six private players for preparation of DPRs for works under PURA in 11 districts was completed.

Permitting FDI in retail can bring in investments of several billion dollars and millions of jobs apart from development of storage, logistics, cold chain etc.

To summarise:

• Infrastructure story is still alive and if nurtured well, will continue to be the game changer;
• Political resolve and accountability or lack of it, can make or mar progress;
• To ensure consistency and transparency, regulators must be appointed for each of the sectors;
• Decisions regarding indirect boosters of infrastruc­ture, such as FDI in retail and oil & gas exploration policy must be taken up urgently;
• Rural roads and PURA projects can be bundled together to make it attractive at least for medium-sized companies. Annuity model should work well by leveraging the limited resources for quicker gains.
• Technology funds must be created to “invent & commercialise” appropriate technologies for the rural sector;
• All major procurements must be put on e-platform; the outcomes of 3G bidding in telecom should serve as a lesson;
• Railways system must be made more accountable;
• Incoming leadership of all key Nodal Agencies must be put in place at least three months before the last occupant of the top slot is to retire;
• PMO must create and manage an office to monitor and guide the progress of “100 Infrastructure Projects of National Importance”;
• State governments must publish the plan against actual reports annually, for the “100 Infrastructure Projects of Importance for the State”;
• Service delivery levels of all public assets must be displayed prominently and audited results of actual performance must be published.

Minocha is Managing Director and Ramnath is Senior Vice President in the Transportation Advisory & Engineering Division of Feedback Infrastructure. With input from Monika Pal Bharti and Nishant Raman, also of Feedback.