The concept has been suggested, but with a new fillip to rural infrastructure, can integration of various infra projects under an umbrella, which can be viability’s “go†signal, take off this year? Arvind Mahajan examines.
Rural infrastructure related to post-harvest actiÂvities is receiving a special fillip through policy and fiscal incentives. Governments are finally acÂcoÂrding the due attention to cold chains, food parks and, more recently, silos. There is investment and expenÂdiÂture on extension services to ensure timely and high quaÂlity knowledge and agri-inputs to the farmers. Finally, the media has been bringing rural consumers to the atteÂnÂtion of companies, while helping increase the aspiraÂtions of rural populations. These are indicators of increÂaÂsing trade and commerce in rural India that will reÂqÂuÂiÂre logistics, technology and financial services to be deployed.
Bundle of joy?
Integrating all these elements on a single platform can potentially drive faster deployment through PPP. A concept in practice is the establishment of Micro LogiÂstics Networks (MLNs), whereby a micro logistics hub comprising silos, cold chains or processing units are serÂved by the catchment area. In return, the hub acts as a comÂÂmeÂrcial centre for the farmer. The opportunity also lies in distributing agri-inputs and sale of goods and serÂvices to the local population and delivery of welfare schemes of the government. Each hub is also connected to other such micro-hubs or a larger hub that is on the mainstream corridors.
Bundling value-added activities in hubs with the rural roads feeding into them can enable funding of both asset classes. Further, the high degree of synergies can facilitate an integrated development. The hub develoÂper requires good roads and high reach to villages for the produce to flow into the hub for its effective use; the presence of a hub in turn promotes the usage of rural roads for commercial activities and supports a higher and more effective usage of the road. Also, since the roads are ultimately connected to the hub as a central node, the monitoring of implementation, planning the network and managing the geographical spread makes the entire package more amenable for a developer while increasing the project size to attract a certain segment of the organised infrastructure community.
The cold storage industry is expected to grow from approximately Rs 15,000 crore in 2010 at a CAGR of 22 per cent to reach Rs 40,000 crore in 2015. The govÂernment is aiding the growth through various infrastÂructure development initiatives such as 30 mega food parks, partnering with Indian Railways to establish cold storage infrastructure, etc. The public sector plans to invest Rs 2,400 crore in the overall supply chain sector by 2016. Thus, the opportunity to create such bundles is real and can be explored on a pilot basis.
Concerns in rural networks
The government launched the Pradhan Mantri Gram Sadak Yojna (PMGSY) in 2000 to provide all-weather access to rural areas. In value terms, there has been a 53 per cent compounded annual growth rate (CAGR), while in volume terms it has been 30 per cent. The funding for the PMGSY has been entirely through funds from the Central Government and by allocation of funds from the CRF. Fifty per cent of the cess on high-speed diesel (HSD) is earmarked for rural roads.
The scheme suffers from the following drawbacks:
Limited project scale: In 2009-10, there were 12,389 km of cumulative length of rural roads sanctioned in 12 states through a total of 1,413 packages. The total number of rural roads development sanctioned were 2,462 in the year 2009-10. The average length of road per package works out to roughly 9 km. The average cost of a package is about Rs 3 crore.
This is an indication that under the present system of allocation of projects to private players, the scale of the projects is not only small in value but also in the volume terms. These projects are limited in terms of the scale because the geographies that they are built in are remote and dispersed.
Revenue and funding limitations: Since revenue canÂnot be generated through tolls or user charges, capiÂÂtal subsidy or annuities become the natural trigÂgers for incentivising private sector participation in concession structures with long-term operÂations and maintenance obligations. The staÂte government at present relies largely on the cenÂtral funds for the implementation of these projects. In 2009-10, state governments contributed a mere Rs 1.33 crore out of a total cost of Rs 4,011 crore for the sanction of road projects in rural areas under PMGSY. The World Bank and Asian Development Bank together contributed only Rs 530 crore. The remainder of the funds was sourced from the Central Road Fund.
Extensive geographies: Rural road development is not focused on connecting financial and industrial areas; they are instead targeted to be the catalyst for development in the far flung villages of India by proÂviding them proper access through roads. As indiÂcated by the figures on the length of the road per package, there is a limitation in increasing the size of those packages at it would span out on wide areas which would make the execution of such proÂjects a cumbersome task. Availability of raw material or access to local infrastructure is an additional challenge. Monitoring road sections in disparate geoÂgraphies is difficult.
Solutions
The concept of bundling rural roads with other assets in the vicinity to make them PPP-friendly is a welcome concept. To an extent, it borrows upon the PPP models of bundling real estate alongside transport projects (roads, metro rail, etc) to make them viable for the private sector. The concept is reasonable as well, since transport projects create a multiplier impact on the economy that is visible in appreciation of land values in the immediate vicinity of the project.
However, while such concepts may apply in an urban scenario or dense corridors with high industrial/commÂercial activity, they may not be uniformly applicable to rural networks. One of the key benefits of rural roads is that they directly connect farmers with the marketplace, enabling them to compare prices and obtain the best value and price. This may not entirely be true.
Firstly, certain crops are MSP-driven, with the govÂernment as the key buyer. The concept of comparing prices across markets does not arise for mainstream farmers, as they are comfortable and dependent on the government. On the other hand, horticulture crops offer greater opportunity for arbitrage that farmers need to be aware of—especially the margins of middlemen that are well documented and create the case of their elimination to benefit both consumer and producer. The reality is that the middlemen will continue to proliferate as they would not only be the buyers/intermediaries at the micro hubs but also be the largest financier for farmers. By providing working capital against collateral of land/ future produce through informal and unorganised means, the village middleman plays an important role in keeping rural economies running. Unless banking and formal finance channels take a deep root in mindset and workÂplace of the rural workforce, the middleman’s role as extended financier will stay.
Secondly, information on markets being available online, the producer need not be physically connected to the marketplace but can negotiate with the local buyer on similar pricing terms to be revenue neutral. However, this can be irrelevant if goods cannot physiÂcally connect to the market. To that extent rural roads create trading opportunities and reduce exploitation by the middleman.
MLN as change agent: This creates the need to define project models for MLNs that go beyond the obvious benefits and become change agents. One of the key ills in the Indian food system is wastage and losses in post-harvest condition, as also the marketing infrastructure. Other than improper storage, improper handling of produce in incorrect containers, carrying produce in non-bulk format, multiple handling by diffÂerent intermediary agencies leads to visibly higher and even higher hidden logistics costs. The presence of such micro-logistics hub should be to inculcate better mateÂrial handling practices in the value chain at the point of production and avoid multiple handlings. Hence, such an MLN is preferred to connect to a larger storage/ distribution/processing hub. Alternatively, if such an MLN can itself become a processing hub, and in certain cases, such as milk or horticulture, primary processing centres (to preserve the freshness and quality of harvest), it would be highly beneficial.
For example, the provision of cold chains and assoÂciated facilities can enable farmers to arrive quickly at the hub and use the chilling centres to capture or ‘lock’ the freshness of the produce. Indeed, the critical enabler to ensure longevity of perishables is to use chilling cenÂtres for extracting heat from the crop and preventing deterioration processes to set in. While a single centre may be too expensive and underutilised by a single farÂmer, a common infrastructure system accessible to the region can address the challenge. Similarly, silos can proÂmote the usage of bulk transport for grains leaving bagÂging to the last mile distribution. Losses in silos are estimated to be 1-2 per cent and the usage of such micro hubs can introduce modern methods to farmers.
Such a hub can also be leveraged by the corporate sector in that can reach out directly to the primary proÂduÂcer such as organised retailers for procurement—thereÂby bypassing the mandis (and the built-up middlÂemen marÂgins). The e-Choupal initiative was a pioÂneeÂring effÂort in this direction and is a prototype that can be developed on.
Feasible modes of delivery
Therefore, what project delivery models are possible in a rural scenario? Given the diversity of the Indian rural landscape, there are different challenges necessiÂtating a range of approaches. Some of the key deterÂminants of the models are discussed briefly below:
1. Nature of produce: The rural primary sector of India can be classified into five main categories of produce: agriculture (cereals and pulses); horticulture (fruits and vegetables); others (spices, cash crops, oil seeds, flowers, etc); dairy products; and animal produce (poultry, meat, eggs, etc).
Each of these categories is unique in its production characteristics, ie, cropping pattern, timing, seasonality, volume/parcel size, and storage needs, thereby helping define the design of the hub. Cereal crops have once-in-a-season, high-volume movement, while horticulture is steady, daily or periodic volumes in smaller scale which could have a milk-run type of network design.
2. Density of population: The larger the density of population, the greater is concentration of economic activity. Thus, a certain minimum economic size of a hub becomes effective over a smaller catchment area. A smaller catchment area requires lesser roads to be built and higher usage per km of road. This creates a concern for less dense areas, where a larger catchment area and longer roads (with potentially lesser usage) are required. Conversely, denser areas could support larger hubs, and therefore the option is between larger hubs in denser areas and smaller hubs but dispersed in the sparse areas.
3. Disposable income and customer needs: Areas with higher per capita incomes have a greater propensity to consume and can support a vibrant services and goods trade. This promotes two-way movement of goods, leading to higher usage of the roads and genÂeral economic activity.
4. Present connectivity: The physical design of the rural road network or MLN could ensure that dupÂlication or competition with existing infrastructure does not occur.
These considerations flow from the guiding prinÂciples for development of MLNs:
1. Ensuring that the micro logistic hub has good proÂximity or access to the main hub for logistics moveÂment/processing
2. Ensuring high utilisation of the rural road through traffic generation activities
3. Enabling alternate activities at micro hub for faciÂlitating year round utilisation
The overarching objectives being to:
1. Create a business model that incentivises the micro hub developer to develop and maintain rural roads
2. Minimise re-handling losses.
Being an infrastructure asset, the ability to utilise it aroÂund the year is a near necessity. Hence, bundling alterÂnate activities in the hub or granting permission for alterÂnate uses is important to make MLNs financially viable especially for PPP. It also enables a higher degree of usage of the road and makes the road project more viable (if it has to be tolled, for example). Examples of round-the-year activities could include adding a vocational training centre, school, sports and cultural centre etc, that ensure the rural population patronises the MLN on a more regular basis than merely as an extended mandi.
To conclude, no one size-fits all solution exists. HowÂever, based on a framework covering the above points, major models, and policy initiatives can be developed. The plethora of initiatives related to rural development, could be integrated and delivered through MLNs. DeveÂlopment of food parks, silos and cold chains can be the anchors and catalysts for promoting commercial activities in the vicinity and supporting road development in place of creating standalone assets that do not talk to each other.
The author is Head—Infrastructure Practice, KPMG. With inputs from S Vasudevan, Priyank Garg, Vishnu Khandelwal and Sameer Bhatnagar at KPMG.
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