RBI policy rates by itself may not improve viability of projects

Tata Strategic Management Group provides management consultancy solutions to clients across multiple industry sectors in order to create competitive advantage and sustain superior performance. The group has been a major player in this industry for the last over twenty years and it operates in SAARC and West Asian countries. As an India based consulting firm, it helps clients gain a perspective on India entry strategy, rural markets and other India insights.

Susnato Sen, Practice Head – Infrastructure, Tata Strategic Management Group feels that the reduction in policy rates by Reserve Bank of India (RBI) on January 29 may not impact or improve viability of large infrastructure projects significantly as there are serious issues of long delays in implementation of infrastructure projects because of complex clearance processes. Such delays and uncertainty of returns have seriously affected viability of projects. As a result there are few bankable projects in infrastructure sector today, he said in response to queries raised by Raja Iyer, Research Analyst, ASAPP Media.

"Significant investments are planned in the urban infrastructure sector across affordable housing, urban transport, water and waste water, solid waste management etc. Development of urban infrastructure would need a well-developed regulatory framework and risk-sharing agreement to ensure success of PPP projects."

Industry players view that the proposed land acquisition bill of the central government may raise cost of projects. Do you agree with the compensation formulae and other clauses in the bill?
The proposed Land Acquisition Bill provides compensation to land owners in both urban and rural area with the stipulation that makes it mandatory for developers to gain consent of 80 percent of people when land is acquired for private projects and 70 percent of people when land is taken for public-private partnership (PPP) projects.

While the stated aim is to reduce disputes and uncertainty of execution, there is a scope for bargaining and driving up the land prices thereby seriously affecting financial viability of projects. Hence, putting almost the entire responsibility of land acquisition on the private sector may not work as it is only the government which can acquire land from their owners in an efficient manner since in lot of cases the ownership of the land is not clear and well documented with proper titles. In this context, an independent regulatory body or Land Bank could be set up, which would identify and acquire large tracts of mostly non-cultivable land, develop the trunk infrastructure and hand it over to the private sector at a commensurate price that addresses the concerns of livelihood of the landowners. There should be transparency in this whole process.

The outcome of the recent meeting of the Cabinet Committee of Investment did not live up to the expectation of industry players. How do you expect the committee to tackle the issue of delay in statutory clearances for key infra projects?
The Cabinet Committee of Investment (which is another form of the earlier proposed National Investment Board), is expected to become a critical element in the quick and speedy approval of large infrastructure projects stuck due to issues of environment clearance and inefficient coordination in projects where interface between multiple ministries is involved. The first meeting of CCI focused largely on oil and gas projects that have been delayed due to concerns raised by the Defence Ministry about location of some of projects in areas close to defence establishments. While CCI is working with the two ministries to resolve this issue what would be critical going forward, would be the ‘time taken’ for resolution of the same. A fast track time bound resolution of issues or clearance would help in instilling confidence of the investors.

Execution of several port projects – especially container terminal projects in JNPT, Ennore Port – are facing delay. What according to you are causing delays for these projects and how can they be addressed?
India’s port infrastructure is over stretched, with berthing delays well below the international benchmarks of major ports. In fact, infrastructure at Indian ports has not grown in tandem with India’s growth rate. Capacity addition has been very minimal over the past few years, with ports sector facing the largest shortfall in planned as against actual investments (In 11th Five Year Plan). The ports are unable to handle the current traffic and the delay is affecting international trade. Port projects have largely been delayed by environment and security related clearances. These certainly need to be expedited. Another issue that has come up in recent times across infrastructure sectors is aggressive and unrealistic bids for projects. Such bids can render projects unviable thereby leading to termination of projects. The bid evaluation process needs to be strengthened in this regard. Also the multi-modal connectivity and infrastructure for ports would need to be in place. For the overall development of port infrastructure and to ensure private investment, it will be important to create a robust and transparent PPP framework.

RBI started reducing policy rates to accommodate economic growth concerns? Given that infrastructure companies are facing cost overruns owing to lack of statutory clearances, will reduction of interest rates improve the viability of projects?
After a sustained period of high interest rates, driven by macro-economic concerns of high inflation, RBI has started reducing interest rates. However, this may not impact or improve viability of large infrastructure projects significantly as there are serious issues of long delays in implementation of infrastructure projects resulting out of delay in land acquisition and environment clearances and in certain cases unavailability of key natural resources. Such delays and uncertainty of returns have seriously affected viability of projects. As a result there are few bankable projects in infrastructure sector today.

Some financial institutions have launched infrastructure debt funds (IDFs). How far do you think the fund would help in addressing the financial constraints of projects?
In the recent times, financial institutions like IL&FS, IIFCL and Srei are exploring the opportunity of setting up an Infrastructure Debt Fund. This is certainly a step in the right direction as a key challenge facing the infrastructure sector is the unavailability of long-term fund, particularly given the long gestation of infrastructure projects and under-developed bond markets. IDFs are designed to address some of these issues by facilitating the flow of low-cost, long-term funds to capital-intensive infrastructure projects that are of viable nature, but are awaiting financial closures.

Take-out financing has not gained traction in the country even though it was introduced around 2 years ago. What are the other measures you suggest to boost funding for the sector?
Take-out financing is one of the many ways for boosting funding in the infrastructure sector. There have been discussions around several ways of mobilizing funds for the infrastructure sector such as development of domestic debt market, tapping insurance sector, facilitating equity flows, attracting foreign investment, creating dedicated infrastructure funds, utilizing the country’s forex reserves etc. However, the sense is that funding would not be such a critical issue as long as it is possible to create a shelf of bankable infrastructure projects, particularly those under the PPP format. It would be important to showcase such projects and implement them in a time bound manner which in turn will generate investor confidence and attract capital into this sector.

The proposed price pooling mechanism for coal may reduce cost for power producers who depend on imported coal. But it may not address the coal shortage in the country. How can we boost coal output in the country?
Most of the mines are located in ecologically sensitive areas. Hence, mining in these areas require clearances from forestry and environmental agencies. Delays in obtaining such clearances hinder increase in coal production from new mines. Coal India, the largest producer has not achieved commensurate additions to its coal capacity and hence the overall domestic demand is not being adequately met. In addition, the regulations blocking mining of coal blocks in environment sensitive areas, is also leading to under production. Land acquisition is another area that causes significant delays in operating new mines. Bottlenecks in domestic coal transportation cause delays (and hence losses) in coal output reaching the end customer. Some of these issues need to be taken care of to ensure boost in coal output.

The government announced a mega debt restructuring package for SEBs. Even in early 2000s the government introduced such a package combined with certain reform conditions. How far will the current restructuring package help the power sector?
Most of the DISCOMs are facing severe debt issues. In response, the government has announced a debt restructuring package. This is a necessary response to ensure continuity of the distribution network. While this is similar to the restructuring done in the early part of last decade, a crucial element is the "mandatory condition of tariff increase every year to reduce the gap between average cost per unit and average realization per unit". The utilities have also been mandated to follow a restructuring and loss reduction path. This current package would help the utilities in maintaining fiscal discipline and focus on reforms to help enable the utilities function as viable entities. This package would also provide the required thrust to DISCOMs to invest in measures to curb distribution losses and improve collection efficiency.

Urban infrastructure sector faces many challenges like lack of capacity building at urban local bodies, lack of user-pay practices for civic amenities. How can we promote the sector amid these odds?
Significant investments are planned in the urban infrastructure sector across affordable housing, urban transport, water and waste water, solid waste management etc. Development of urban infrastructure would need a well-developed regulatory framework and risk-sharing agreement to ensure success of PPP projects. A suitable regulatory environment that levies the right tariff based on ‘willingness to pay’ rather than ‘political compulsions’ will invigorate consumers to demand better quality of services from the providers and also enhance viability of urban infrastructure projects. Schemes like JNNURM needs to be put in place, especially in supporting the viability of projects through central and state grants. Also it is important that ULBs be equipped to develop and manage PPP projects and engage more with the private sector, who with their financial, technical and managerial expertise can ensure greater success of urban infrastructure projects.