DSIJ Mindshare

The Infra Deficit: Impeding India's Growth

There is an infrastructure deficit in India and people are impatient and angry with the lethargic ways of the Central and state governments. The roads in cities and metros are overflowing with traffic, the skies above metros too have air traffic jams with aircrafts hovering above awaiting clearance to land even while planes on the ground move in queue awaiting their turn to takeoff. Similarly, the ships can be seen stranded out in the sea, waiting for their turn to get a berth at any of the major ports in India. So the circle of congestion on land, air and sea is complete! But this is not all. A large part of India, especially small towns and villages in rural areas, have to do without electricity for 1016 hours every day! India’s infrastructure of roads and highways, airports, ports and electricity is falling woefully short even as traffic on roads and highways, air and sea is burgeoning and demand for electricity is growing exponentially every day. The huge infrastructure deficit in India today can hardly inspire confidence in India’s aspiration of becoming the superpower of tomorrow.

So why is there such a huge deficit of roads and highways, airports, ports and power in India. For this, we need to understand why these infrastructure segments of roads and highways, airports, ports and power have not been able to keep pace with development in other sectors of the economy.

Why The Deficit?
To wipe out the deficit in infrastructure, the BJP-led NDA government under the stewardship of Prime Minister Atal Behari Vajpayee had launched its ambitious 5,846 km Golden Quadrilateral (GQ) project in 1999 and had also planned to launch the 7300 km NorthSouth & EastWest corridors later. The GQ project had made great headway during the Vajpayee government’s tenure. But after the Congress-led UPA government under Prime Minister Manmohan Singh took over in 2004, the GQ project virtually languished during the first 5-year tenure and the project still remains to be completed even after almost two years of the second term of the UPA government. There is nothing to boast about the NSEW project’s implementation. Hence, instead of decreasing, the infrastructure deficit has increased.

But, of course, the huge infrastructure deficit is not a 5 or 10-year phenomenon. The deficit has accumulated over the years since Independence when, after the exit of the British, our founding fathers in their wisdom decided to chart a socialist path for our country. As covenanted by the socialist ideology, the government took it upon itself to develop all physical infrastructure in the country, including roads and highways, ports, airports and generation of power and, as mandated by the socialist ideology, the infrastructure space was kept out of bounds for the private sector. But the government’s obligations to meet the objectives of equity and social justice through welfare schemes and social spending to uplift and empower the underprivileged sections of the[PAGE BREAK]

society, apart from its primary obligations of meeting the needs of external and internal security, constrained its budgetary resources and, as a result, allocation to infrastructure took a backseat. Hence, infrastructure grew at a tardy pace and the sheer bureaucratic lethargy made matters worse as some of the projects never took off and tardy implementation of other projects resulted in cost and time overruns, while large-scale corruption drained away vital resources of the government into the underground economy, further exacerbating the situation on the infrastructure front.

On the other hand, the other sectors of the economy which were open for the private sector grew at a rapid pace. While commerce and industry hit the top gear due to private investments, infrastructure got stuck up in the first gear. Over a period of about 50 years after Independence, the gap between the infrastructure and the other sectors of the economy kept increasing and the result is there for us to see. The large infrastructure deficit is a legacy of our failed tryst with socialist destiny.

Now, that we know the reasons for the huge infrastructure deficit, let’s take a hard look at the extent of deficit in each of these segments and what needs to be done to steer their development on to the fast track.

Roads & Highways
All roads in major metros and other cities are overflowing with vehicular traffic and bumper-to-bumper traffic jams have become order of the day. Remember Wipro Chairman Azim Premji giving vent to his frustration about getting stuck up in traffic jam on Airport Road every day while on his way to his office in Bengaluru? In fact, Premji had even gone to the extent of threatening to move out of Bengaluru if the traffic situation did not improve. The situation in Mumbai is probably worse, especially in south Mumbai and western suburbs. Traffic snarls are commonplace on all arterial roads simply because the development of road infrastructure in Mumbai has not been able to keep pace with the explosive growth in traffic.

Now, let’s look at the situation from an all-India perspective. India has about 33 lakh kms of road network (second largest in the world), out of which about 66,000 kms are highways and expressways. The figures may look impressive, but just to put them in the right perspective, China has built 25,000 kms of access-controlled four-to-six lane expressways in the last 10 years itself, while we are still struggling to complete the 5,846 km Golden Quadrilateral project since last 11 years! One would recollect that Kamal Nath, the Minister for Road Transport and Highways, Govt. of India, had set an ambitious target of constructing 20 kms of roads per day. This meant that the NHAI was required to award road projects of 7,000 kms per year, which works out to about 600 km per month, i.e. at least 6 tenders per month, assuming an average of 100 kms per tender. However, NHAI is nowhere near this monthly target and the fact remains that there has been no major tenders in the last three months. Many projects are on the shelf even after 68 months of completion of qualification (RFQ) process, while other projects are frequently getting restructured, thereby further delaying the procurement process. In[PAGE BREAK]

short, Kamal Nath’s dream of delivering 20 kms of roads per day has remained just a pipedream!The Investment Commission headed by Ratan Tata estimated that the passenger traffic would grow at 1215 per cent, while the cargo traffic would grow at 1518 per cent per annum and India needs investments to the tune of Rs 4,50,000 crore over a period of five years to improve road infrastructure further. The government is budgeting Rs 50,000 crore per annum on road development, so the private sector can chip in the balance amount of Rs 40,000 crore per annum. A large component of the highways is being developed through public-private partnership (PPP) model. Two BOT models – the annuity model and upfront/lump-sum payment model – have been successfully implemented. “The BOT/DBFOT concept has instilled a sense of ownership and accountability among the concessionaires which has resulted in efficient implementation and maintenance of the projects. Quality implementation leads to less cost incurred during the operations period which in turn sees satisfied road users at the toll plazas,” says Virendra Mhaiskar, CMD, IRB Infrastructure Developers. “NHAI should be more open to innovative designs – both for pavement i.e. the road surface as well as structures, in order to allow companies to benefit from value engineering,” suggests a GMR spokesperson. Of course, there is a view that, apart from the BOT/DBFOT/BOOT/BOLT model, the road projects can be given to private players through competitive bidding on the lines of competitive bidding for telecom spectrum. This would align developer’s interest with that of the citizens.

There are quite a few issues dogging roads and highways projects. “The major bottlenecks in implementation of (road) projects are land acquisitions, forest clearances, utility shifting, design approvals, bad planning by concessionaire and shortage of manpower and raw materials” says Mhaiskar. Another major issue is the high cost of funding of these projects which needs to be addressed by the government. “There has to be special concession for the infrastructure sector to ensure that first we should be able to get money for long term, which mean 1020 years or 2030 years. Second, for infrastructure projects, interest cost of 10 per cent plus is too high, because these projects take a long time to mature due to which interest cost mounts making the projects unviable. Hence, there has to be some kind of incentives for people who lend money to infrastructure projects,” avers Praveen Sood, Group Chief Financial Officer, HCC.  “One of the main requirements of a successful BOT Project is its financial viability. This is directly linked to the lenders’ comfort in funding the project. Hence, at the very conception stage, the DPR consultants have to factually work out the viability of a project before recommending it to be bid out on BOT basis,” suggests Mhaiskar. As for land acquisition, environmental clearances and settling project-affected people, Yogen Lal, Chief Operating Officer, Unity Infraprojects, says “Land acquisition and enchroachments are major issues, while environmental clearances and approvals take lot of time. The government needs to formulate appropriate policies on land acquisition and removal of enchroachments. Environmental clearances and other approvals should be given in a time-bound manner. These would facilitate speedy implementation of infrastructure projects.” Concurring with the view, Jai Mavani, Executive Director with a reputed consulting firm in India, says “Implementation of infrastructure projects is a big issue on account of problems relating to land acquisition and environmental clearances. The success of a policy is in its implementation, but that’s where we are found wanting. This is because the political will is lacking to deal with issues of land acquisition and relocation of project-affected people. The government has to[PAGE BREAK]

address these issues as companies cannot be expected to deal with such social issues.”

The government has also allowed 100 per cent FDI under the automatic route to attract foreign investments in all road development projects and has offered incentives such as 100 per cent income tax exemption for a period of 10 years, grants and viability gap funding for marginal projects through National Highways Authority of India (NHAI) and concessions for collection of toll.

Airports
If you are travelling in a plane to any metro in India, chances are that you will reach your destination an hour or two late, if not more. The major airports are congested with heavy air traffic and, as a result, the planes cannot take off or land on time. The reason is that most of the airports are simply not equipped to handle the huge traffic they are required to handle currently. We also do not have adequate number of airports and the existing airports are therefore forced to handle air traffic beyond their capacity to handle.

India has 454 airports, out of which 16 are designated international airports. These airports currently handle about 15 crore passengers and 250 mn tonnes of cargo every year. Considering that the six major airports (Mumbai, Delhi, Bengaluru, Chennai, Kolkata and Hyderabad) handle about 75 per cent of passenger traffic, the strain on the airport facilities shows up in chronic delays and sometimes even cancellation of flights. But thanks to private participation, the modernization of Mumbai and Delhi airports have improved the service and efficiency levels at these airports and the new world class airports in Bengaluru and Hyderabad too deliver high on operational parameters and service levels. However, all other airports, including Kolkata, Chennai, Pune, Nagpur, Lucknow, Ahmedabad airports, fall woefully short in terms of infrastructure, operational efficiency, passenger facilities and services.

The setting up of new airport has also acquired environmental dimension, as the opposition of Environment Ministry headed by Jairam Ramesh to Navi Mumbai airport has amply demonstrated. Apart from the environmental issue, airports projects have to contend with other issues such as land acquisition. “Land availability and acquisition is a bottleneck for greenfield projects and expansions. For very small airports, the financial viability is itself in question as these airports don’t have the requisite passenger volumes to make it attractive for private investment,” says a GMR spokesperson. So how do private airports sustain themselves? Speaking about the experience of Delhi and Hyderbad airports, the GMR spokerperson says, “Measures have been taken to increase the revenue from aero, non-aero and property development. Each of the airports is generating adequate cash to completely service the debt. Concession agreements of these airports guarantee us certain returns on investment.”[PAGE BREAK]

The country aims to have 500 airports operational by 2020, and investments to the tune of USD 30 bn are expected to go into the development of airport infrastructure till 2020. The policy initiatives taken by the government include 100 per cent FDI under automatic route for greenfield airports, while Foreign Investment Promotion Board’s approval is be needed for FDI beyond 74 per cent in existing airports. Also, 100 per cent tax exemption is given for new airports for a period of 10 years. Vision 2020 envisages creating airport infrastructure for handling 28 crore passengers per annum by 2020. Hence, there would be plenty of investment opportunities in areas of airport upgradation and modernization, greenfield airports, maintenance of airports and aircrafts and manpower training.

Ports
The burgeoning maritime trade and commerce between India and the rest of the world is creating congestion at the ports, with the result that delays in loading and unloading of cargo at our ports have become a routine affair. We have 12 major and 187 minor ports along our 7,517km long coastline, with the major ports handling 74 per cent of the total cargo traffic, while minor ports handling the balance 26 per cent. The cargo traffic at Indian ports has reported a CAGR of 10 per cent from 579 million tonnes in 200506 to 846 mt in 200910, primarily driven by the growth in imports and exports. But the cargo handling capacities of our ports still fall short of international norms due to inadequate infrastructure facilities at the ports. As a result, the turnaround time for ships of over two days at Indian ports is much higher than the turnaround time of 1012 hours at other Asian ports such as Singapore, Hong Kong, etc. Also, the dwell time of cargo at our major container terminals at 1.88 days for imports and 3.78 for exports is much higher as compared to the dwell time of 0.85 day for break bulk and 0.6 day for containers at Singapore port. The high turnaround time of ships and dwell time of cargo increases transaction cost and reduces competitiveness of Indian ports. To overcome this problem, support rail and road infrastructure is vital. “What is important for a port’s success is the road and rail infrastructure that connect a port to its hinterland, specifically we need dedicated freight corridors and double stack capability on trains. We may well have an efficient port but its performance is likely to get severely hit if we do not have adequate road and rail networks for cargo to be evacuated quickly,” says Prakash Tulsiani, MD, APM Terminals.

To provide a boost to maritime trade and commerce, the government undertook two major projects, viz. Sethusamudram project, which envisaged dredging of Palk Strait in South India to facilitate maritime trade, and Sagarmala, a USD 22 bn project for modernization of major and minor ports. Since all the 12 major ports are owned and run by the Central government, all maritime activity was dominated by the government in the past.

However, the government has now consciously oriented its maritime policy towards encouraging private sector to participate in port development and operations. The policy has borne fruit and significant investments have been made in new ports and port terminals on BOT basis by Indian and foreign players. As a result of [PAGE BREAK]

increased private sector participation, the private sector’s share of cargo handling increased to 34 per cent in 200910, compared to 27 per cent in 200809 and just 5 per cent a decade ago. In the next five years, the private sector’s share is expected to go up to 50 per cent.

To attract more private sector investments, the government has also permitted 100 per cent FDI under the automatic route for port development projects and provided 100 income tax exemption for a period of 10 years. The National Maritime Development Policy (NMDP) was specifically formulated to facilitate private investments, improve service quality and promote competitiveness among ports. In fact, 276 projects were identified under the NMDP for the development of major ports at an investment of USD 12.4 bn, with 67 per cent (or USD 8.2 bn approx.) of the proposed investment envisaged from private players.

The maritime traffic is expected to grow at a rapid pace going forward, with the traffic at major ports expected to reach around 800 mn tonnes by 201314. The containerised cargo traffic is expected to grow at a scorching pace of over 17 per cent per annum till 201516. Hence, the scope for investments in building up this capability at other ports is huge. Moreover, the growth in merchandise exports has been projected at 13 per cent per annum, with a large portion of foreign trade expected to go through the maritime route – 95 per cent by volume and 70 per cent by value. This underlines the need for large investments in development of ports and port infrastructure.

Power
Power outages are common in villages and towns as well as in cities and metros on India. The situation in rural areas is worse, with 1416 hours of power cuts every day. The denizens of metropolises do not have to face such long hours of outages, but smaller cities and towns face power cuts of 26 hours every day. The loss of production and manhours due to power outages is colossal and the blame squarely lies on our failure to bridge the gap between the demand for and supply of power.

The deficit in power supply is primarily because our current total electricity generation at 65,631 million units (MU) falls short by about 7.5 per cent of our energy requirement of 70,952 MU. During peak hours, the demand is much higher at 114,737 MW, while the generation is 102,460 MW, a shortfall of 10.7 per cent. The problem is compounded because of the transmission and distribution (T&D) losses, which are high at 25.47 per cent, as also the high AT&C losses of 28.44 per cent. No wonder, we still have about 96,000-odd villages where electricity has still not reached, while over 5 lakhodd electrified villages have to live with 1216 hours of power cuts every day.[PAGE BREAK]

In order to bridge the gap between demand and supply, the government started with reforms in the power sector, under which state electricity boards were vertically unbundled to bring in operational efficiency in generation, transmission and distribution. It has also adopted a policy of open access in transmission and distribution to usher in competition among power utilities. Already, distribution licences for several cities in India have been given to private players. The government has also permitted 100 per cent FDI in generation, transmission and distribution of power, apart from providing income tax holiday for a block of 10 years in the first 15 years of operation and waiver of capital goods’ import duties on mega power projects (above 1,000 MW generation capacity). The government has already awarded four ultra mega power projects (UMPPs) of 4,000 MW each to the private sector, out of a total of nine UMPPs.

But there quite a few issues such as land acquisition, fuel and water availability which power projects have to grapple with. “Issues like land acquisition, fuel and water availability, huge order backlog with EPC vendors will continue to pose challenges to the sector’s capacity expansion plans in the coming years. Policy frameworks to address land acquisition and fuel allocation at a faster pace should be in place. Policy support for addressing environmental issues is needed. Water availability is a major challenge and hence more water reservoirs and dams should be constructed,” says the GMR spokesperson.

The opportunity in power sector is still huge with an estimated requirement of additional 78,000 MW of generation capacity in the next two years. There is also 150,000 MW of hydel power still waiting to be tapped.

The Road Ahead
India growth story is all set to fly high, but for the lack of infrastructure. “The way India is growing and things are happening, the only impediment to the entire story is infrastructure, which is lagging behind. But the infrastructure sector has been given due importance by the government and the plans are ambitious as well as very encouraging, which means that government wants to kick start infrastructure development in a big way,” says Sood. As per the Consultation Paper on Projections of Investments in Infrastructure during the 11th Plan (20072012) period, the total investments required for the infrastructure sector will be of the order of USD 500 bn. The Paper also estimated that the investment requirements for the 12th Plan period (20122017) would be of the order of USD 988 bn. The share of private sector investments is projected to go up to 30 per cent in the 11th Plan period from 17 per cent in the 10th Plan period. It is expected to go up further to around 50 per cent in the 12th Plan period.

However, much more needs to be done to accelerate investments in infrastructure. Funding of infrastructure projects is a major issue. A study by McKinsey suggests that to avert shortfall in funding for infrastructure development, the government needs to urgently reform the financial sector to free up capital and attract new investors such as mutual funds, pension funds and overseas infrastructure funds. The study was critical of [PAGE BREAK]

restrictions on insurance, pension and provident funds and shallow bond market and constraints on external commercial borrowings. “Investors are averse to risks associated with construction projects and hence infrastructure companies raise funds through private equity, debt, external commercial borrowings or IPO. We need to develop the financial ecosystem in India to attract private investments in the infrastructure sector. We also need to channelise funds from insurance companies and pension funds for development of our infrastructure,” says Mavani. “To increase the flow of funds for infrastructure, India needs to accelerate the development of domestic bond market and refinance highcost debt,” suggests the GMR spokesperson.

There is also a need to provide more incentives for investments in infrastructure projects. “The government should provide long-term tax incentives for infrastructure projects since these projects have a long gestation periods and take 1015 years to break even. The government must also rationalize the tax structure and review section 80(1)(a) to provide tax incentives. Government must act as a facilitator for infrastructure projects in order to attract more investments from private players,” says Lal.

Apart from the need for finance, the implementation of infrastructure projects needs to be put on the fast track. The statutory bodies of the Central government such as Airports Authority of India, National Highways Authority of India, Central Electricity Regulatory Commission and National Shipping Board have been given the responsibilities of formulating policies and/or implementation of the projects. The implementation of the projects leaves much to be desired. For example, the NHAI is the regulatory authority for development of highways in India. However, lack of coordination between the NHAI Head Office and its regional offices (ROs) / project implementation units (PIUs) have resulted in creating bottlenecks in the implementation of many important road projects.

To conclude, the government needs to push the infrastructure sector more. Only when our infrastructure deficit vanishes will India’s economy take off on a high growth trajectory.

Infra Stocks – The Coming Second Wave!
The infrastructure stocks such as HCC, GMR, Jayprakash Associates, IRB Infrastructure Developers, etc. have not fared too well on the bourses, but this is an aberration and will change for the better going forward. Remember the minibull run in infra companies in 2007 when all companies which had anything to do with infra caught investors’ fancy? In fact, some of the companies which were remotely connected with infra had also inserted the word ‘infra’ in their names to gain premium from the investors.

Infrastructure is a long term story and we believe in the long-term prospects of infrastructure companies. We feel that these companies are good long term bets and one can allocate 15 per cent funds into infrastructure stocks, including stocks of companies which are into road development, airports, ports, power generation, transmission and distribution, cement, steel as well as infrastructure financing. So go ahead and invest in infra companies to ride the coming second infra wave.

DSIJ MINDSHARE

Mkt Commentary28-Mar, 2024

IPO Analysis29-Mar, 2024

Expert Speak29-Mar, 2024

Mindshare29-Mar, 2024

Multibaggers28-Mar, 2024

DALAL STREET INVESTMENT JOURNAL - DEMOCRATIZING WEALTH CREATION

Principal Officer: Mr. Shashikant Singh,
Email: principalofficer@dsij.in
Tel: (+91)-20-66663800

Compliance Officer: Mr. Rajesh Padode
Email: complianceofficer@dsij.in
Tel: (+91)-20-66663800

Grievance Officer: Mr. Rajesh Padode
Email: service@dsij.in
Tel: (+91)-20-66663800

Corresponding SEBI regional/local office address- SEBI Bhavan BKC, Plot No.C4-A, 'G' Block, Bandra-Kurla Complex, Bandra (East), Mumbai - 400051, Maharashtra.
Tel: +91-22-26449000 / 40459000 | Fax : +91-22-26449019-22 / 40459019-22 | E-mail : sebi@sebi.gov.in | Toll Free Investor Helpline: 1800 22 7575 | SEBI SCORES | SMARTODR