Growth in the infrastructure sector is a prerequisite for the overall growth of the Indian economy. India was placed 89th in the basic infrastructure rankings in the World Economic Forum’s the Global Competitiveness Report 2011–2012, which does not augur well for India’s plan to transform itself into a major economic power. This also reaffirms the need for continuous development in this sector to achieve the desired level of economic growth. Significant public-private partnerships (PPP) are required to bolster the overall development of the infrastructure sector. The Planning Commission of India has projected an investment of $1 trillion during the 12th five year plan (2012-2017) with at least 50 per cent expected from the private sector.
Presently, the Indian infrastructure sector seems to be in limbo on account of political uncertainty in the run-up to the 2014 general elections. Various regulatory and policy constraints pertaining to land acquisition, environment clearances and other approvals are adversely impacting the project participants – developers, investors, contractors and operators. A large number of projects are stuck at various stages of implementation owing to a variety of regulatory hurdles and sector-specific bottlenecks, leading to significant time and cost overruns. This does not just affect the economic viability of specific projects: the subsequent negative feeling impacts the sector overall.
Land acquisition has been a sensitive subject and a major roadblock. Several projects have stalled over land acquisition issues, primarily following resistance from local communities and litigations. These issues may increase on account of the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Bill, 2013, recently passed by the Lok Sabha and the Rajya Sabha, which will replace the existing law of 1894. Though the intent of the new law is to make the process of land acquisition more certain: decrease litigation; increase predictability; and avoid resistance from landowners, it includes rigorous provisions which are expected to make land acquisition more expensive and time-consuming. The compensation payable under the bill has been increased several-fold and acquisitions must go through an added layer of social impact assessment, which will extend the acquisition process by a year. The immediate reaction in the infrastructure sector is that the legislation will substantially increase the time frame for land acquisition and cost of projects.
Many projects are delayed by the need for environmental clearance. This reduces project developers’ and financers’ confidence about a project’s viability. The lack of clarity is seriously dampening project execution and implementation. Projects are mostly held up because of the procedural complexities.
Non-receipt of or delay in obtaining approval from the government (central, state and local) has been a major obstacle. Several power plant projects have been delayed and some operating power plants are running well below capacity on account of delays or non-receipt of approvals. These include continued delays in obtaining statutory permits for captive coal blocks. Compounding this, there is uncertainty about coal pricing and power tariffs, and weak off-taker quality (the precarious financial conditions of state utilities).
Availability of funding
Delays in land acquisition and in approvals for projects have impacted project funding. Negative macro-economic conditions have also dampened project funding.
Funders also face problems. The infrastructure sector is one of the biggest contributors to banks' growing bad loans. This is resulting in the project financers taking a cautious approach and thus reducing the availability of funding to the infrastructure sector.
The sector that seems to be most gravely affected is telecoms, whose image has taken a serious dent since January 2012 when 2G licences issued by the central government were cancelled following a ruling of the Supreme Court of India.
The government has embarked on various regulatory and policy reforms, which bodes well for the infrastructure sector. The government has constituted the Cabinet Committee on Investment to identify key projects and prescribe time limits for the issue of requisite approvals and clearances by the ministries and departments for the projects. The committee will also monitor the progress of identified projects. Since its constitution, the committee has taken many significant decisions including the decision of 26 August 2013 to set a stipulated time frame for the ministries to clear 36 big-ticket infrastructure projects in the power and road sectors. The government has also set up a web-based information system for entrepreneurs to provide details of their project as well as the issues that are inhibiting its implementation.
To give impetus to the PPP segment, the Reserve Bank of India (RBI) has provided many concessions to lending in the infrastructure sector. The RBI has allowed the debts due to the lenders in PPP projects to be considered as secured by the relevant project authority in terms of the concession agreement, subject to conditions. This enables easier term financing.
To enable fund raising from a broader base, under the current ECB guidelines, there are several concessions given to the infrastructure sector relating to credit enhancements, import of capital goods, availment of trade credit, etc. However, considering the recent fluctuation in the foreign exchange rate, significant hedging costs, the revenue stream for most projects being generated in Indian currency, and the pressure of the current account deficit India is facing, parties should exercise caution.
To ensure that power projects depending on imported coal from Indonesia do not face viability issues on account of a substantial increase in import costs and non-availability of alternative coal linkage, the Central Electricity Regulatory Commission (CERC) recently allowed a compensatory tariff to be paid to power generating companies such as Adani Power and Tata Power. The compensatory tariff will be revised or withdrawn as and when the hardship is removed or lessened. This approach by CERC has been welcomed by the sector as it helps to avoid wasting of huge resources locked up in such projects.
In the aviation sector, the permission to foreign airlines to invest in domestic airlines has enabled players like AirAsia, Etihad and Singapore Airlines to enter the Indian domestic airline market and provided the aviation industry with the much needed stimulus.
Issue to ponder
Private parties usually bid for projects and it is incumbent on private parties’ to go through the land acquisition process, and obtain environmental clearance and other approvals. So technically from the time of the award of the project until the commencement of the work, substantial time is taken and a huge sum of unaccounted money is spent. It is a debatable point as to why the government does not start bidding procedures after the land acquisition process has been completed and the necessary environmental clearance and further approvals obtained. This may enable the government to receive the best bid and also attract private parties who are capable of implementing the project and willing to have more skin in the game. This will help in combining the strength of the public sector and the private sector, which is the very basis of the PPP model.
To ensure that the infrastructure sector serves as the catalyst for putting the Indian economy back on track it is imperative that procedural bottlenecks be removed through positive regulatory and policy reforms and clear commitment by the political establishment with regards to execution and implementation of projects. This will go a long way in improving market sentiment and the viability of projects.