Seeking for a revival

With the Union Budget 2013 announcement is approaching, industry stakeholders are seeking government support for a possible revival of their respective industry segment. Ami Mistry, Dhruba Purkayastha, Mohit Sinha and Prithweesh Ghosh present an insight into the current status of critical infrastructure segments and recommend some urgent steps needed in the coming Budget.   
 
The Union Budget 2013-14 will be tabled at a time when growth has slowed down drastically, at the same time the industry believes that this is an opportunity for country like India to take some reform measures towards a sustainable growth. In most infrastructure sectors, growth in 2012 has been muted in comparison to that in 2011.  
 
Ports  
Maritime industry forms the backbone of India's foreign trade as 90 per cent (by volume) and 70 per cent (by value) of India's exim trade is seaborne. While a capacity utilisation of between 75-80 per cent is considered ideal for ports across the globe, many critical port terminals in India are operating at utilisation levels of close to 100 per cent, indicating the urgent need for developing port capacity in the country.

According to the Ministry of Shipping projections, total traffic handled by Indian ports is estimated to reach 2,500 million tonne by 2019-20, requiring capacity at Indian Ports to be trebled in the next eight years to 3,200 million tonne, up from the current capacity of ~1,000 million tonne. 

While Indian policy makers have attempted to improve port capacities and efficiencies through programmes like the National Maritime Development Programme and more recently, the Maritime Agenda 2010-2020, the following are some critical issues in development of PPP in the ports sector:

Policy and governance issues: The policy paralysis in the sector continues though we have seen some posi­tive indications in FY13. Recently, the Shipping Ministry decided to not pursue the Port Regulatory Authority Bill given the concerns regarding reduction in autonomy of maritime states and non-major ports therein. The Shipping Ministry has also announced that they would be eliminating tariff regulation by Tariff Authority for Major Ports (TAMP) at the major ports leading to a new price regime where operators would be free to set their own tariffs determined by market forces.

Capacity additions: In FY12, two of the larger PPP projects awarded in the maritime sector in India had to return to the drawing board. Jawaharlal Nehru Port Trust (JNPT) was forced to terminate the concession awarded to PSA consortium for the Rs 6,700 crore fourth con­tainer terminal as the bidder refused to sign the conc­ession agreement even after a year. Grup Maritime TCB also pulled out of the Rs 1,400 crore Ennore Port container terminal citing financial stress and inability to raise funding for the project. Of the 29 planned Public-Private Partnership (PPP) projects for 2012-13, 17 had been added till December 2012 and the re­maining are expected to be awarded in the present quarter. While the performance has been better in terms of number of projects when compared to FY12, we still have a long way to go in achieving the required capacity additions year-on-year to achieve our final target. 

Evacuation Concerns: Evacuation constraints have been a critical concern at both major and minor ports. Constraints are primarily linked to rail line and, to a lesser extent, road connectivity and related urban congestion. In India, the ministries of rail, roads and ports often do not coordinate their timelines – which is critical for development of port infrastructure. Private players who are invited to bid for concessions often deal with tremendous uncertainty on the modalities (when, by whom, at what cost etc) through which the connectivity infrastructure would be built.
 
Coastal shipping and inland waterways
It is recognised that coastal shipping and inland waterways can bring our logistics costs down dramatically and are environment friendly. However our fiscal policies penalise 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 institution of an ombudsman or appellate authority to address concerns of investors which currently lead to endless delays in project awards and conflict resolution  

• Indian ports need more balanced project structuring and a simplified tariff regime, to allow better private participation. The decision to abolish tariff re­gu­lation by TAMP is the right step in this direction.

• PMO level overseeing and accountability for delays in projects including projects for hinterland co­nnectivity of ports (which do not fall under the purview of Ministry of Shipping

• Fiscal incentives to promote coastal shipping  

• An Empowered Inland Waterways Authority with a demarcated fund on the lines of NHAI.

 
Railways  
The Railways play an important role in the transport of raw materials for the manufacturing industry, finished products to distribution centres as well as transportation of general public. It provides rapid, reliable and cost-effective bulk transportation to the energy sector, to move coal from the coal fields to power plants and petroleum products from refineries to consumption centres. The recent policy paralysis has adversely impacted all the sectors of infrastructure including Railways. Indian Railways has been facing a massive deficit of more than Rs 20,000 crore in the passenger segment. To counter this, the Railway Ministry has recently increased the passenger fares marginally to generate revenues to the tune of Rs 4,000 crore. The step of increasing passenger fares has been taken by the ministry just before the upcoming railway budget in February. Though the Railway Minister was non-committal on revision in freight tariff, we may expect the same to be dealt during the budget.

If we go by the government's current efforts in improving the investor's sentiment and trying to get the economy back to its growth path, the role of Railways can't be ignored.  
 
Recommendations:

• Implementation of recommendations of committees such as “Expert Group on Modernisation of Rail­ways” which are essential to change the overall face and manner of Indian Railways

• Proper outlay for maintenance and upkeep of its current assets which impacts the safety of people as well as materials

• Reduction in capital expenditure through well placed private sector participation in its project. This can happen only upon the railway board coming up with clear and implementable policies with proper risk sharing mechanism and impartial handling of the issues of the private sector.

• The proposed Rail Tariff Authority (RTA) should be finalised as soon as possible and should be completely de-politicised. The RTA should keep in view the current market condition and should be allowed to control both the passenger as well as freight tariff. The ultimate aim of such an authority should be to allow Indian Railways to generate resources for its capital expenditure in coming years.

• The long due “modernisation of stations” has not taken off till date. However, the government has taken the right step through setting up of Railway Station Development Corporation. However, the long drawn process of attracting private sector capital should be curtailed through proper policy and improving the investor sentiments.

Roads
The roads sector saw strong activity last year – with awards close to 8,000 km in FY12. FY13 however has been a different story. The year started out with the NHAI planning to award over 9,000 km of highways – with about 3,000 km funded publicly through the EPC route and 6,000 km being funded through the PPP route. The activity in the roads sector has since seen a minor paradigm shift.

Cash strapped developers: Paucity of available funds for further bidding for projects has become a near perennial constraint for developers vying for projects. As a result, several majors are presently consolidating their portfolios and are looking at private financing and equity dilutions to garner cash for equity commitments to projects. With most of the developers running out of steam, in the short term, a focus on EPC contract based bidding can bring much needed stability to the cash flows of developers.

Equity financing issues plaguing developers: Trad­itional sources of equity financing are facing differing issues – Volatility in the equity markets, coupled with current market values of firms facing discounts in the public markets make it difficult to raise public equity; Private Institutional Equity investors however, are not able to meet return expectations for investment in road projects and holdcos. Taxation issues and exit constraints create transaction costs for investors which do not allow private equity and institutional investors to generate requisite returns – impacting the ability of developers to raise funds for funding future projects.

Debt financing is also becoming constrained: Financial closure is at present becoming a problem with several projects not being able to raise finances due to the constrained debt capital market conditions in the country. This problem is exacerbated by the already high operational leverage on the project – brought about through fixed escalating premiums for developers under the current bidding regime. FY13 saw the NHAI cancelling projects due to concessionaires not being able to arrange debt finance for projects. Debt financing faces constraints in the way traditional bank financing operates – with deposits coming in from short term deposits and lending to longer term infrastructure projects. Longer term investors such as Pension and Insurance funds, with sovereign guarantees along concessions have far more appetite to handle longer term debt finance. The Infrastructure Debt Fund concept had been developed to provide just such a framework. However, the regulatory mechanism for implementing the same is nascent with multiple regulators working across funding agencies, each with different benchmarks and frameworks for investment.

Regulatory delays and sluggishness: With two majors withdrawing from mega-highway projects citing environmental clearances and other issues, the industry is bringing to the fore critical issues in regulatory barriers impeding implementation of already bid out projects. Almost all NHAI projects face some kind of delays due to land acquisition and handover. While the Concession Agreements place the onus of providing land squarely with the government, in practice, most concessionaires have to liaise with local authorities for completing projects, with NHAI in most cases not having the framework in place to achieve the same. Swifter and more proactive pursuit of regulatory clearances and permissions will enable swifter execution of projects.
 
Urban Infrastructure
India is rapidly urbanising, with increasing urbanisation rates. From a 30 per cent urban India in 2011, which is about 340 million people living in Indian cities, it is expected that we would have 600 million people in urban India (40 per cent urbanisation) contributing to over 70 per cent of Indian GDP in the next 20 years. It has now been quite clearly established that cities are engines of economic growth and not a matter of debate whether urbanisation is to be supported or not. Urbanisation is a natural process of economic agglomeration which will happen with economic growth, and it is then a question of quality of cities, which is of concern. 

The focus of inclusive growth cannot any more be on rural India as urban poor are probably worse off than rural poor in India. Across in Indian cities, quality of life is declining and lack of basic urban services of water, waste management, city roads, and urban transport is far short of even basic levels. Various policy papers, high powered or empowered committees churn out reports on urban infrastructure investment requirements, financing gaps with some possible solutions but some basic questions remain unanswered as how all these would be done and financed. As per some latest published estimates, around $1.2 trillion investment in urban infrastructure and services is required over the next 20 years for catching up on infrastructure investment backlog and for new urban infrastructure investments to support the urbanisation process. While there are concerns on policy, governance, and planning issues in Indian cities, there is also the need to figure out how urban infrastructure and services investments would be financed. If we carry on with the present approach to developing urban infrastructure constrained by the state of municipal finances, and sometimes supported central programmes, it would not be possible to meet even a major fraction of the required investment. This means that the quality of life in Indian cities would decline further instead of improving. Some cities across the world have demonstrated that such decline can be reversed over a period of 10 years but these need careful policy and institutional actions which need to be implemented at the urban local body levels. 

The usual approach which we see from urban de­partments of the government is a prescription that talks about public private partnerships (PPPs) and commercial borrowings. While these approaches are desirable for bridging the urban infrastructure financing gaps, it needs to be recognised that these are only ‘instruments' which would be successful only if the underlying key issues are resolved. PPPs could improve the quality of operation and maintenance in urban servicers in addition to enabling private investment in urban infrastructure but is not a panacea and PPPs do not work when the capacity and finances of urban local bodies are in a mess. 

Recommendations: The budgeting exercise in India is more than just fiscal planning and often used as an opportunity to make major policy and institutional announcements and more so if there is a fiscal aspects involved. I would suggest that the budgeting exercise considers the following as fiscal and financial prescri­ptions for reforming the urban sector in India  
and improving quality of urban infrastructure in Indian cities.

• Monetising urban land and capturing indirect value from urban infrastructure provisioning;

• Increasing property taxes which seem to be the mainstay of urban local body finances;

• Attempting cost reflective pricing for all urban ser­vices, may be with targeted subsidies for urban poor;

• Ensuring certainty in timing and amount of gove­rnment grant devolutions;  

• Equitable or proportionate sharing of all tax revenues between the state and urban local bodies

• Creating urban regulatory institutions which provide an oversight on the quality of urban services and provide for appropriate economic regulation  

• Create incentive structures for developing cleaner and sustainable cities.

The authors are with Feedback Infrastructure Services. Dhruba Purkayastha is President, Ami Mistry is Senior Manager – Transportation Advisory, Prithweesh Ghosh is Manager – Transportation Advisory, and Mohit Sinha is Senior Manager – Transportation Advisory & Engineering Division.