Investing in infrastructure Development

Investing in infrastructure Development

 

Infrastructure development needs sustained investments of a long-term nature. Not only is a rigorous monitoring of sector-wise targets critical for the success of the entire investment programme, it is also necessary for the policy environment to be dynamic in nature

 

Equitable development is dependent on sustained growth of an economy which is critically reliant on the sustainable development of infrastructure. Infrastructure is, therefore, a driver for inclusive growth. However, investments in infrastructure are not easily available due to requirements of lumpy capital investment with very low returns. Such investments are justified normally on grounds of social benefits rather than on financial viability.

 

India is poised to become the third largest economy in terms of GDP in the next two decades. At present, along with China, it is one of the fastest growing economies in the world. The growth momentum needs to be sustained to ensure that the fast pace of growth does not peter down. Absence of world class infrastructure facilities in India is often considered as one of the major impediments to growth. With the sprawling urbanization, demand for infrastructure continues to rise faster than the capacity in the economy to satisfy such demands.

 

Infrastructure sectors 

Glancing across the major infrastructure sectors, it is found that apart from telecom where teledensity is extremely high (79.28 in May 2012 as compared to 0.31 in 1981) and tariffs one of the lowest in the world, other sectors are yet to achieve levels of stable growth coupled with quality services. 

 

India has a road network of 33 lakh kilometres which is the second largest in the world. These roads carry 65 percent of the freight traffic and 80 percent of the passenger traffic of the country. National Highways carry 40 percent of the traffic, yet constitute only 1.7 percent (71,772 kms) of the total road network in the country and rural roads cover a length of about 26.5 lakh kms. Only 20 percent of this National Highways network is four-lane, 50 percent two-lane and 30 percent single-lane. The State Highways have also suffered from prolonged neglect. 

As regards Indian Railways, the largest rail network in Asia comprising about 64,000 route kilometres, there has not been much growth in the network since independence. At the time of independence, the route kilometres stood at 53, 596 kms. Hence, just about 10,000 route kilometres have been added in the last 65 years resulting in saturation of routes and restricted capacity. Naturally,

the share of goods and passengers carried has come down drastically since independence.  

India has a total installed capacity of 2.03 lakh MW of power as against 1,362 MW in 1947. Thermal power forms 66.32 percent of this capacity and about hydel power 19.2 percent. The per capita consumption has increased 49 times since independence and stood at 813.3 kwh for the year 2010-11. This was, however, less than one-third of the world average per capita consumption of power. The power sector suffers from a peaking deficit of 9.8 percent and an energy shortage of 8.5 percent due to underinvestment and poor maintenance. The distribution segment of the sector suffers from average Aggregate Technical &Commercial losses of 27 percent and as per the 13^th Finance Commission’s projections, in absolute terms, these losses are projected to increase to Rs. 1.16 lakh crore by the year 2014-15.

 

At the end of the 11th Five Year Plan, India was the 9th largest civil aviation market in the world with a passenger handling capacity of over 220 million and cargo handling capacity of 3.3 MT. However, air travel penetration continues to be low at 0.04 air trips per capita per annum. The Indian civil aviation sector was able to attract private investment of about Rs. 30,000 crore in four airports at Delhi, Mumbai, Hyderabad and Bengaluru. Airports Authority of India had a plan to develop 35 non-metro airports in the country. Of these, 26 have been developed and the balance would be completed in the current financial year.

 

The Indian maritime sector handles 95 percent of India’s foreign trade by volume. There are 13 major ports and 187 minor/ intermediate ports in the country. In the year 2011-12, the major ports handled 560.1 million tonnes of traffic and the total cargo handled by all the ports together was 915 million tonnes. The average turnaround time at major ports has increased from 3.93 days to 4.67 days between 2006-07 and 2010-11. There has also been a deterioration of 3 percent in the pre-berthing detention time.

 

Infrastructure development through the Five Year Plans 

In the initial Five Year Plans, it was widely believed that agriculture needed the necessary push to sustain the economy and the basic needs of food for the masses needed to be met. There was also considerable importance attached to setting up heavy industries. Infrastructure requirements were proposed to the extent of meeting the aforesaid objectives and were never the stated objective of the Plan exercise as such. However, there was heavy allocation of resources towards irrigation and power since the two were necessary for the development of the agrarian economy and industries. At a later stage in the 60s and the 70s, development of roads also picked up momentum.

 

In the mid-80s onwards, the thrust of the development process was towards obtaining state of the art technology for the country. This resulted in impressive development of communications technology. It was only from the Ninth Plan onwards that there was a definite thrust towards infrastructure development in the Five Year Plans. In each of the previous two Plan periods, the investment in infrastructure has almost doubled. This is evident from Figure 1.

 

 

Infrastructure investment and GDP 

Investment in infrastructure as a ratio to GDP was expected to increase from 5.7 at the end of the Tenth Plan to 8 percent in the terminal year of the Eleventh Plan. It is anticipated that infrastructure investment as a percentage of GDP would be 10 percent in the terminal year of the Twelfth Plan. Figure 2 depicts the investment of infrastructure as a percentage of GDP over the Tenth and Eleventh Five Year Plans. It also shows the projected percentage for the Twelfth Plan.Data published in May 2011 shows that the United States of America invests 2.5 percent of its GDP in infrastructure against China’s 9 percent and Europe’s 5 percent.

 

 

 

Sectoral analysis 

The sectoral analysis of investment made in infrastructure sector reveals that electricity continues to absorb about one-third of the total investment in both the Plan periods followed by the road sector at approximately 15 percent. However, the rate of increase has been the highest in telecom, airports and oil and gas pipelines between the Tenth and Eleventh Five year Plans.

 

Infrastructure Development programmes 

Some of the important infrastructure development programmes include the National Highway Development Programme (NHDP) for development of National Highways. It has been one of the most successfully rolled out programmes till date. The Pradhan Mantri Grameen Sadak Yojana (PMGSY) is a programme for the development of rural roads to connect over 1,000 habitations with all-weather roads. To develop and integrate the North-Eastern states with the country, a programme called Special Accelerated Road Development Programme for the North Eastern region is being implemented. A massive programme for urban renewal has been undertaken through the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) by focussing on urban infrastructure. Rural infrastructure comprising irrigation, roads, housing, water supply, electrification and telecom connectivity is being undertaken through Bharat Nirman. In the power sector, electricity is proposed to be provided to all rural households under the Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY).

 

Approach to the Twelfth Plan 

The Twelfth Plan Approach Paper stated that the thrust on accelerating the pace of investment in infrastructure should continue for reasons of accelerating growth. However, since there would be a continued strain on public resources during the Twelfth Plan due to their requirement in backward and remote areas, private investment would be required to meet the targets.

 

Financing of infrastructure and private participation 

Traditionally, infrastructure development in India has been financed through public investments, especially by the Central Government rather than the State Governments although, of late, investments from the States have also been forthcoming. The share of the Central Government has gone down from 40 percent of the investment in the Tenth Plan to 34 percent in the Eleventh Plan. The share of the State Governments has also declined from 35 percent to 30 percent between the Tenth and the Eleventh Plans. It naturally follows that the share of private investment is increasing steadily as can be seen from Figure 3.

 

 

The share of the public sector in infrastructure investment has gone down from 75 percent in the Tenth Plan to 36 percent in the Eleventh Plan and expected to go down further to 50 percent during the Twelfth Plan.

 

Public Private Partnerships

 

The big thrust to infrastructure investment has come due to the participation of the private sector. Public Private Partnerships (PPPs) have been the primary means of channelizing private investment into infrastructure sector which is considered rather unattractive by the private sector for reasons of poor return and long gestation periods. The rationale for PPPs lies in not only supplementing scarce public resources but also in harnessing private sector efficiencies to provide quality services to the public at large.  

Public Private Partnerships are intended to meet the public objectives of infrastructure provisions through private means. These are sought to be achieved by way of long-term contract agreements which specify the standards and specifications of the assets to be constructed and maintained. Most of these projects are user-charge based wherein the authority to collect the user charge/ toll/fee is delegated to the private partner.  

Concerted efforts have been made by the government towards creating an enabling environment for the development and long-term sustainability of PPPs. These include the setting up of an institutional framework comprising an appraisal and approval mechanism, schemes of financial support including the Viability Gap Funding (VGF) Scheme.

 

Institutional framework 

In 2004, a Committee on Infrastructure (CoI) was constituted under the chairmanship of the Prime Minister for evolving policies with a view to creating world class infrastructure in the country. In 2009, the CoI was replaced by a Cabinet Committee on Infrastructure (CCI), also under the chairmanship of the Prime Minister. A committee called the PPP Appraisal Committee (PPPAC) has been constituted to appraise and recommend PPP projects for approval. An Empowered Institution (EI) has been set up for the purpose of sanctioning VGF to state level PPP projects. 

Financial Support  

Under the VGF scheme, the Central Government provides grant of upto 20 percent of the project cost to the private entity for implementing a PPP project. In the last financial year, a total of 390 projects were approved by PPPAC and EI involving a total investment of Rs. 3,05,010crore. A dedicated organization, called India Infrastructure Financing Corporation Limited (IIFCL) has been set up to provide low cost and long-term funds to PPP projects.

Standardization of documents 

The Central Government has evolved and mandated standardized bidding documents for PPP projects in infrastructure sector. Further, Model Concession Agreements (MCAs) have been developed for the implementation of PPP projects. The bidding documents as well as the MCAs provide considerable flexibility for project-specific changes. Standardization enables adoption of international best practices in the Indian context. 

Progress of PPPs 

Public Private Partnerships have been undertaken in roads, ports, airports, urban transport and power transmission at the Central Government level. At the State Government level, such partnerships are flourishing in sectors such as water supply and sanitation, solid waste management, etc. Some representative PPP projects are Delhi, Mumbai Hyderabad and Bangalore airports, Jhajjar transmission project in Haryana, Hyderabad and Mumbai metro rail projects, Jaipur Kishangarh National Highway, Gurgaon Expressway, container terminals at Tuticorin, Chennai and JNPT, Ultra mega power projects, concessions for operation of container trains. 

In one of its reports, the World Bank has stated that India has been the top recipient of PPI activity since 2006. It accounted for almost half of the investment in new Private Participation in Infrastructure (PPI) projects in developing countries implemented in the first semester of 2011 and remained the largest market for PPI in the developing world. A report prepared by the Asian Development Bank states that India stands in the same league as developed economies like South Korea and Japan on implementation of PPP projects. On a score of 100, Australia got the highest score of 92.3, followed by South Korea 71.3, India 64.8 and Japan 63.7.

 

Constraints and measures to boost infrastructure investment 

It is widely believed that there is considerable appetite in the market to absorb infrastructure, including PPP projects. However, there are delays related to land acquisition and environmental clearances. Long term funds are also not easily available and banks have reached exposure limits related to sectoral lending. To mitigate the aforesaid constraints related to absence of long term debt in the market, the Finance Ministry has approved the mechanism for setting up infrastructure debt funds. The intent is to provide refinancing to projects once they are into commercial operations. The infrastructure debt funds would be able to attract insurance and pension funds which are long term in nature. 

Conclusion 

“…we have given a major push to infrastructure, particularly through PPP. A lot of investment avenues are opening up in Railways, roads, ports and civil aviation.” -Dr. Manmohan Singh, Prime Minister 

Infrastructure development needs sustained investments of a long-term nature. Not only is a rigorous monitoring of sector-wise targets critical for the success of the entire investment programme, it is also necessary for the policy environment to be dynamic in nature so as to adapt easily to the global economic environment. Further, since private investment is expected to flow in through PPPs for the development of infrastructure, it is imperative that the institutional structures are strengthened and investment decisions are based on well-laid down principles so as to avoid future liabilities for the government. The Twelfth Plan will, perhaps, propel the economy into a high growth trajectory. That would be possible only if infrastructure develops at a pace faster than the economy. 

 

Institutional Mechanism for Monitoring of PPP Projects

 

The Cabinet Committee on Infrastructure (CCI) has recently approved a proposal from the Planning Commission to set up an Institutional Mechanism for monitoring and enforcement of provisions in PPP projects. With an increasing reliance being placed on PPP projects across many wings of the government, it has become necessary to adopt a well-defined institutional structure for overseeing contract performance effectively. The Institutional Framework requires project authorities to create a two-tier mechanism for monitoring the performance of PPP projects: 

1. A PPP Projects Monitoring Unit (PMU) at the project authority level

2. A PPP Performance Review Unit (PRU) at the Ministry or State Government level, as the case may be.

 

The PMU is to prepare a report to be submitted to PRU within 15 days of the close of the relevant month. The report is to cover compliance of conditions, adherence to time lines, assessment of performance, remedial measures, imposition of penalties, etc. The PRU is to review the reports submitted by the different PMUs and oversee or initiate action for rectifying any defaults or lapses. This is an important governance mechanism in an area which will see a lot of activity in future. It will ensure good governance, accountability, efficiency and economy in spending. The Planning Commission will have a central role in ensuring high quality monitoring. The Cabinet will have a chance to monitor every quarter. 

By : Namita Mehrotra The author is Director (Infrastructure) in the Planning Commission