Another year of the National Democratic Alliance government has passed by. For the economy in general, and infrastructure sectors in particular, the past one year has shown mixed progress with some hits and some misses.
There have been new policy announcements across sectors, which could have a huge impact some years down the line. The pace of capacity creation as well as project award has increased for most of the sectors. A few new sources of funding have opened up though it will take time for these to fructify into investments on the ground. Modernisation and mechanisation of infrastructure continue to draw the government’s attention, with the launch of several web portals and mobile applications, digitisation of operations, etc.
That said, some of the overarching problems that affect infrastructure sectors are yet to be addressed. Land acquisition still remains a major challenge. The grant of statutory clearances also remains slow in many cases. Private investment is still limited due to poor project planning and structuring. And then there are sector-specific challenges.
Setting the stage: Policy initiatives gain traction
As in previous years, new policy measures were announced to make the business environment even more conducive for stakeholders. India’s biggest tax reform, the goods and services tax (GST), subsuming all forms of direct and indirect taxation came into effect on July 1, 2017 and is expected to bring the much-needed growth in infrastructure.
Broadly, the impact of GST on the infrastructure sectors seems to be mixed, with the transport, mining and road sectors being positively impacted while the electricity, water supply and sewerage, aviation, and oil and gas sectors are being negatively impacted. One of the biggest beneficiaries of GST will be the transportation sector, which is expected to benefit significantly from reduced logistics costs. The mining sector will also benefit from the unified tax regime as it currently attracts a number of indirect taxes. On the other hand, for electricity generation companies, indirect taxes will remain a significant cost factor post-GST.
Much of the success of GST now depends on its implementation, which seems challenging due to a host of factors. Thus, infrastructure companies need to gear up for the implementation of the biggest tax reform in India.
Laws have been enacted with respect to arbitration, insolvency and bankruptcy and the offtake of stressed assets. Model concession agreements are in the process of being modified.
Some long-awaited sector-specific policy measures were also introduced. The launch of the Open Acreage Licensing Policy (OALP) and the National Data Repository are notable policy developments in the oil and gas sector. By allowing exploration and production companies to choose the areas they want to explore, the new policy attempts to address a major drawback of the New Exploration Licensing Policy regime that forced exploration companies to bid for projects chosen by the government. The new policy also gives the government a chance to attract exploration companies that are more serious about doing business.
On the energy front, the new coal linkage policy that advances transparent allocation of coal linkages via auctions; the amendment to the National Tariff Policy, 2006, which will mean that all transmission projects will henceforth be awarded via tariff-based competitive bidding; and amendments to the Mega Power Policy, 2009, with time extensions granted for equipment import certificates for mega projects, are welcome moves. Besides, the Wind Repowering Policy, the Wind-Solar Hybrid Policy, etc., announced in 2016, are expected to help the renewables sector grow in the coming years.
The performance of major ports in India has often been negatively affected by the need for approvals for investment and other managerial decisions by the central government and tariff regulation by the Tariff Authority for Major Ports. In this regard, cabinet approval for the replacement of the Major Port Trusts Act, 1963, with the Major Port Trusts Authorities Bill, 2016, which advances greater autonomy in decision making to port trusts, is a big achievement.
For the railways too, in what could be termed as one of the biggest and most awaited structural reforms in the sector, the cabinet approved the setting up of an independent regulator, the Rail Development Authority, to recommend passenger and freight fares and set service level benchmarks.
The launch of innovative implementation models such as the hybrid annuity model (HAM) has contributed significantly to the increase in activity in the road sector. Meanwhile, foreign direct investment norms have been eased for air transport and brownfield airport projects.
Progress on the ground: Asset creation picks up pace
There has certainly been progress on the ground in most of the infrastructure sectors. The pace of capacity addition has improved. Among the transport sectors, the railways witnessed a capital expenditure Rs 1.1 trillion in 2016-17, almost three times the average of the period 2009-14. The pace of capacity creation in terms of broad gauge lines and electrification almost doubled during the same period. After 92 years, the railway budget was amalgamated with Union Budget 2017-18.
The roads and bridges sector witnessed record progress in project award along with a substantial increase in the speed of construction. The HAM model was a major contributor, accounting for 44 per cent of the total projects awarded in 2016-17. Expressway development has also gained momentum with 10 expressway projects at various stages of implementation. Meanwhile, several global and domestic investors are eyeing operational and revenue generating assets in the road sector. Big players such as IL&FS Transportation Networks Limited, Hindustan Construction Company Limited, NCC Limited, Sadbhav Infrastructure Project Limited, the GMR Group and Gammon offloaded stakes in their projects
Further, during the year, there was a record capacity addition by major ports. The government’s biggest and most ambitious programme for the maritime sector, Sagarmala, moved a step forward from the concept stage, with the release of the National Perspective Plan in April 2016.
The concession for one major long-delayed airport project, Mopa in Goa, was awarded to GMR Airports Limited and GVK Power & Infrastructure Limited emerged as the successful bidder for Navi Mumbai airport. These developments bring hope for the greenfield airport segment where, apart from Kannur and Shirdi, progress has been limited. Low crude prices have significantly reduced operational costs and passenger traffic is growing strongly. The release of the National Civil Aviation Policy, 2016, has generally been seen as a positive for the sector.
The power sector, especially renewables, took major strides. Capacity addition in renewables exceeded that in conventional power. In fact, India’s solar power generation capacity crossed 10 GW in 2017, a more than threefold jump in less than three years. Meanwhile, the coal supply chain improved and fossil fuel prices stayed low, resulting in a comfortable situation for thermal generators. There was also considerable capacity addition in the transmission segment.
The Ujwal Discom Assurance Yojana (UDAY) continued to show promising results, with aggregate technical and commercial losses reducing from 24 per cent in 2015-16 to 20 per cent in 2016-17 (for 23 UDAY states). Under the scheme, as on March 31, 2017, 27 states were on board, in stark contrast to just 10 states having joined the scheme till end March 2016. The Rs 2.32 trillion worth of bonds issued under the scheme account for more than 85 per cent of total restructurable debt of discoms.
In the urban space, there has been considerable activity in terms of the number of projects approved, capacity added, etc., under schemes such as the Smart Cities Mission, the Atal Mission for Rejuvenation and Urban Transformation, the Swachh Bharat Mission and the National Mission for Clean Ganga. With respect to mass transit, though the bus segment did not witness much activity, the metro segment made excellent progress with the completion (sections of the Bengaluru, Chennai and Kochi metros) and the award of some major projects.
The oil and gas sector is highly dependent on global developments. Global crude and gas prices are slated to stay down and that has been good news for India, which imports about 80 per cent of its crude and 45 per cent of its gas. Meanwhile, the Petroleum and Natural Gas Regulatory Board granted authorisation to lay, build, operate and expand the city gas distribution (CGD) network in almost 25 cities under bidding rounds 5, 6 and 7.
The industry has now acknowledged that alternative sources of financing are needed to support infrastructure development. Hence, attention is being focused on the institutional investor segment, given the long-term nature of the liabilities for many types of institutional investors and their corresponding need for suitable long-term assets.
The bond market, which has so far contributed little to infrastructure financing in the country, witnessed heightened activity in the past year. Green bonds and masala bonds have become popular. India’s maiden sovereign wealth fund, the National Investment and Infrastructure Fund, has identified the first batch of road projects for funding.
The future: Big prospects, big challenges
Going ahead, there are vast opportunities across multiple sectors, given the large pipeline of projects. In terms of policy, the intent seems to be strong but implementation will be crucial.
Meanwhile, some of the key issues that affect the entire infrastructure space are yet to be resolved. Project development and preparation are often lacking, resulting in legal disputes between stakeholders. Private investment has been slow to flow in amid uncertainty over the bankability of projects. The land acquisition issue remains critical and is still a major cause for projects getting stalled. Safety and security remain other key concerns. Further, there are sector-specific issues. Several greenfield airport and port projects remain stalled. The railways are losing market share in the freight and passenger business to other modes of transport such as roads and air. Capacity addition has not kept pace with the growth in traffic.
The power sector is still weighed down by several daunting issues such as slow pick up in power demand from discoms, non-remunerative tariffs, stressed assets, and water scarcity for thermal power plants.
Domestic gas production continued to remain static in 2016-17 with domestic production reporting a marginal decline of about 1 per cent over 2015-16 reaching 88 million metric standard cubic metres per day. The shortfall is being met by liquefied natural gas imports. It is hoped that the OALP fields will significantly add to the output in the next few years.
The city gas distribution segment has witnessed a lukewarm bidding response in some of the new geographical areas (GAs) due to poor market potential and elevated competition for those GAs that have a high potential. Progress in the pipeline infrastructure segment also remains limited.
In the urban sector, 24×7 water supply projects are grappling with inadequate project viability and the lack of credible project partners. The slow progress of bus rapid transit projects is attributed to the encroachment of public spaces, technical issues in ensuring consistency of road width throughout the corridor, inadequate coordination with multiple agencies for obtaining approvals, etc.
Timely project execution is the need of the hour. No doubt it will take a while to improve the overall state of infrastructure and make it comparable to world standards. However, the positive is that the problems have been identified and concrete steps are being taken to turn things around. Going forward, not only will policy implementation be vital, but an evolving policy structure taking into account sector-specific requirements will hold the key to growth.