Forward March

The National Democratic Alliance government has assumed office for a second term. It is good news for the economy in general and the infrastructure sector in particular. This win has assured a degree of certainty and continuity of the announced and ongoing programmes and schemes, and policy and regulatory reforms for the sector, for at least the next five years. The focus on infrastructure is not a choice but a necessity as it can help jump-start the slowing economy.

The country’s infrastructure landscape is changing, and surely for the better. Focus on modernisation, mechanisation and digitalisation of infrastructure to promote ease of doing business is quite evident, and India is continuously improving its ranking as per the World Bank’s Doing Business Index Report. The regulatory framework and concession agreements are slowly adapting to the changing needs of industry stakeholders. The infrastructure sector has also survived structural shocks such as the implementation of the goods and services tax and demonetisation. New sources of funding too have opened up.

The government’s flagship programmes and projects such as the Bharatmala Pariyojana, Sagarmala, Housing for All, the Smart Cities Mission, the Atal Mission for Rejuvenation and Urban Transformation, NABH Nirman, the dedicated freight corridor and the Mumbai-Ahmedabad high speed rail will play a pivotal role in driving infrastructure and construction demand in the future. Undoubtedly, there are plenty of opportunities in the sector. According to Union Budget 2019-20, an investment of Rs 100 trillion has been envisaged for infrastructure over the next five years. What is needed is a focus on implementation of announced measures on the ground.

Attempts to address some of the overarching problems that are restricting growth of the infrastructure sector need to be made at the earliest. India’s economic growth touched a five-year low of 7 per cent in 2018-19, which is not a good sign for infrastructure growth. Land acquisition and obtaining clearances are still the two top challenges for project implementation. Private investment is still limited due to poor project design and structuring. And then the sectors have their own set of challenges.

Setting the stage: Policy reformmeasures gain traction

Ease of doing business has become the new buzzword across infrastructure sectors. New and innovative technologies and digital solutions are being increasingly tested and adopted.

Laws have been enacted with respect to arbitration, insolvency and bankruptcy and the offtake of stressed assets. In June 2019, the Reserve Bank of India issued a “prudential framework for resolution of stressed assets by banks”. The circular has increased the period to implement a resolution from 180 days to 365 days. For the power sector, where lenders have an exposure of around Rs 2 trillion, the new circular has come as a breather. Meanwhile, the Insolvency and Bankruptcy Code has proved to be a game changer for deal activity, with stressed assets becoming an attractive opportunity for private equity and other strategic investors.

The government has made attempts to monetise its brownfield infrastructure assets to raise funds for the development of greenfield infrastructure. Monetisation of revenue-generating road assets under the toll-operate-transfer (TOT) model and the proposed privatisation of six operational airports are a few cases in point. Plans are on the anvil for the creation of National Infrastructure Credit Enhancement Limited, an entity for financing infrastructure that will seek to bolster lower-rated bonds issued by companies.

Some long-awaited sector-specific policy measures were also introduced during the year.

In a major development for the aviation sector, Parliament passed the Airports Economic Regulatory Authority Amendment Bill, 2019, which enables the government to bid out private airport projects on the basis of predetermined tariffs. The move is expected to fast-track the development of greenfield airport projects. Meanwhile, the National Air Cargo Policy Outline, 2019, was also released.

In March 2019, the cabinet approved the recommendations of the High Level Empowered Committee regarding the resolution of stressed thermal power plants (TPPs). The cabinet approved the grant of linkage coal for short-term power purchase agreements (PPAs), as against the earlier norms of granting coal linkages only to those TPPs that have medium/long-term PPAs. For the oil and gas sector, the government introduced a slew of enabling measures to increase exploration activities in unexplored/ unallocated areas.

On the urban infrastructure front, the Central Ground Water Authority of the Ministry of Jal Shakti notified revised guidelines for ground-water extraction in the country. These guidelines came into effect on June 1, 2019. As per the new guidelines, a water conservation fee will be levied on the use of groundwater, depending on the area, type of industry and quantum of groundwater extraction. Further, the guidelines encourage the use of recycled and treated sewage water by industries and provide for action against polluting industries.

In the past, there had been a number of issues with respect to the stability of the Indian Customs Electronic commerce Gateway, but these have now been resolved. A new port community system has also been launched by the Ministry of Shipping and has been extended to all the major ports. Non-major ports are also being requested to deploy this system.

Mixed progress on the ground

Analysing the past year, progress on the ground varies considerably across infrastructure sectors.

On the transport front, the road construction rate increased to 30 km per day in 2018-19 from 12 km per day in 2014-15. Cargo transportation through national waterways registered a considerable year-on-year growth of 31 per cent to stand at 72.31 million tonnes. There is also a growing focus on providing connectivity to the north-eastern region, with a number of rail and road projects on the anvil.

The Airports Authority of India’s plans to privatise six airports finally saw the light of day, with operations, management and development of three airports – Ahmedabad, Lucknow and Mangaluru – being awarded to Adani Enterprises Limited for a lease period of 50 years. The Regional Connectivity Scheme – UDAN – continued to make progress. In January 2019, 235 routes were awarded under UDAN Round 3, which also brought in the provision of developing six water aerodromes, the first such initiative in the country. Meanwhile, the first international flight from Guwahati to Dhaka was flagged off under UDAN International.

On the urban transport front, between January 2018 and March 2019, about 245 km of metro rail network was commissioned or completed, with the total operational network reaching over 655 km. Meanwhile, since the operationalisation of the first bus rapid transit system in Pune in 2006, another 325 km has been operationalised.

The energy sector has shown mixed progress. Under Saubhagya – the Pradhan Mantri Sahaj Bijli Har Ghar Yojana – 100 per cent household electrification has been achieved across all states except in 18,734 households in Chhattisgarh as of July 2019.

While renewable energy capacity addition once again surpassed the conventional power capacity added in 2018-19, its own performance compared to the previous year has not been impressive. The renewable energy segment added only about 8,600 MW of its targeted capacity of 15,602 MW in 2018-19. This was the lowest addition in recent years with the solar and wind segments meeting just 59 per cent and 38 per cent of the total targets.

The declining trend in the country’s crude oil production continued with output falling by more than 4 per cent in 2018-19. Import dependence on crude oil to meet the rising energy needs increased to a high of 83.7 per cent in 2018-19 as compared to 82.9 per cent in 2017-18.

The city gas distribution segment witnessed noteworthy activity over the past year, with a large number of geographical areas being awarded in Rounds 9 and 10. Industry response to both rounds was overwhelming.

With regard to infrastructure financing, credit growth for the sector in 2018-19 was the highest in the past seven years, in both absolute and percentage terms. Power, roads, telecom and other sectors witnessed double-digit growth in bank lending, the largest source of funds. Private equity and venture capital investments in infrastructure more than doubled to Rs 751 billion across 53 deals, as compared to 36 deals worth Rs 333 billion in 2017-18. However, the primary market stood dry. Fundraising through initial public offerings (IPOs) slowed down considerably during 2018-19. Around Rs 15 billion was raised through nine IPOs in 2018-19 compared to 12 public floats collecting Rs 71 billion in 2017-18. Meanwhile, the sector remains highly and dangerously debt-laden and the recent Infrastructure Leasing & Financial Services crisis has contributed to an ultra-cautious mindset of lenders.

The way forward: Plugging the gaps at the earliest

The importance of infrastructure sectors in creating a strong and sustainable economy is well known. However, a number of issues and challenges have held back these sectors from reaching their full potential.

Legal disputes have become one of the primary reasons for time and cost overruns in infrastructure projects. At present, over Rs 1.5 trillion worth of projects are stuck due to litigation. Lack of effective contract management is often cited as the biggest reason for this.

Land acquisition and obtaining statutory approvals are the other key pain points for the sector. A large amount of bad/restructured loans (worth about Rs 10 trillion) are on bank books, over 40 per cent of which pertain to infrastructure and related sectors.

And then there are sector-specific issues. In the power sector, aggregate technical and commercial losses rose after a couple of years of substantial reductions. The gap between the average cost of supply and the average revenue realised also rose in 2018-19 after dropping for two years prior. Coal shortages cut down thermal plant load factors, and gas-based capacity remained idle. Stressed thermal power assets are quite significant, standing at 38 GW and entailing a total cost of Rs 2.91 trillion.

Indian Railways’ operating ratio increased from 91.3 per cent in 2014-15 to 96.2 per cent (revised estimates) in 2018-19.

In the telecom sector, private service providers Bharti Airtel and Vodafone Idea are making losses and struggling to deal with their debt, while public sector undertakings Bharat Sanchar Nigam Limited and Mahanagar Telephone Nigam Limited have huge accumulated losses.

These challenges notwithstanding, what needs to be emphasised is the fact that the government’s intent to develop infrastructure is strong and clear. In this regard, it has  been making serious efforts to address each of the existing issues. Several consultations and discussions are being held with the concerned stakeholders to work out appropriate solutions.

Going forward, it needs to be understood that quick decisions, swift implementation and timely completion of projects are fundamental to infrastructure development and thus to economic growth, in the absence of which the above-mentioned challenges will persist.

The need for effective project management is increasing day by day as more infrastructure projects are planned, developed and commissioned. Many of the issues that have hampered infrastructure projects in the past can be avoided or at least minimised with proper contract management, thus paying more attention to structuring, risk allocation, monitoring and enforcement.

As per the Economic Survey 2018-19, India has an annual infrastructure investment requirement of $200 billion. However, so far, only about $110 billion has been spent annually, leaving a deficit of around $90 billion per annum. Given the limited scope for expanding public investment at the scale required, accelerating private investments is a necessity.

It will not be possible to have successful PPPs in infrastructure sectors in the absence of more empowered and stronger public counterparties. Utilities, particularly in the water, transport and power sectors, should be made financially strong. Political commitment, continuous reforms and the role of state governments will be critical in this transformation. Meanwhile, the newer models that have been adopted by the government, such as reverse build-operate-transfer in the road sector, should be adopted in other infrastructure sectors as well.

Instead of being involved in infrastructure creation, the government should focus on bidding out/auctioning special purpose vehicles with all the necessary approvals and clearances in place. This will not only attract private sector investment but also help in building a pipeline of bankable projects.

The winning of the first TOT bundle by the Macquarie Group has set a good example of public asset monetisation. This is a precursor to more such offerings in other sectors such as airports, ports, railways, oil and gas, and transmission. For instance, NTPC Limited owns a number of TPPs and Power Grid Corporation of India Limited sets up transmission lines. These can be bid out to private players for operations and maintenance. Further, oil and gas pipelines, tank farms of oil marketing companies and overhead transmission lines of the railways can also be monetised. Apart from this, in the power distribution segment, the industry eagerly awaits concrete action on reforms such as the UDAY 2.0, separation of carriage and content, and redesigning of the tariff structure.

Of course, none of these solutions are going to be easy to implement. However, one needs to accept the fact that the infrastructure sector stands at a crossroads today. To ensure stronger and sustainable growth of the infrastructure sector, strong political will, strategic planning and action on the ground are needed.

Yashu Ramnani