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Infrastructure projects: Ray of hope
S Sivakumar |
March 24, 2003
India's infrastructure development is a classic example of the inability of policymakers to transform ambitious plans into action. There are various issues such as counter guarantees, state level issues, delay in financial closure, ability and willingness of the end customers to pay and need to develop independent regulators who can monitor and guide development of the sector.
However the recent performance of the road sector is a welcome change. This article tries to analyse the fairly successful road development, port development and the formidable challenges faced by the other infrastructure sectors.
The road sector as is common with other parts of India's infrastructure has been in a dilapidated state. In 1997, 98 per cent of the national highways ( a stretch of 54,000 km ) was 64 per cent single lane and 34 per cent two lane roads. In 1998, the government articulated the National Highway Development Plan and created the National Highways Authority of India (www.nhai.org) to implement the plan.
Essentially the plan was to be implemented in two phases. Phase 1, the Golden Quadrilateral, which will convert the national highway connecting the four major metros to four lanes, a stretch of 5,846 km. The target date for completion was set at June 2004.
Phase 2 of the project involves the North-South and East West corridor which plans to link Srinagar to Kanyakumari and Silchar to Porbander, a stretch of 7,300 km. The target date for completion was set at 2009. The total estimated cost of the entire project was pegged at Rs 54,000 crore (Rs 540 billion).
The novelty with financing of the project was the levy of cess on petrol and diesel and allocating it to the central road fund, which was dedicated to the funding of the NHDP. The funding plan as per 1999 prices was the cess on petrol and diesel which would finance 37 per cent of the NHDP, 37 per cent from external funding, 18.5 per cent from market borrowings and 7.5 per cent from private sector participation.
A snapshot view of the project today indicates that approximately 20 per cent of the GQ project is completed, 78 per cent is under implementation and 2 per cent of the project is yet to be allocated. The GQ project is scheduled for substantial completion by end of 2003, ahead of its targeted completion in 2004.
The NSEW corridor is expected to be completed by 2007, ahead of its earlier planned schedule of 2009. The National Highways Authority of India has also been creative in terms of evolving financial structures that better balance the risk and return. The build operate and transfer has been implemented under toll and annuity methods.
While under the toll method the entire risk is shifted onto the private enterprise, the annuity method does better risk allocation. The construction and maintenance contracts are combined and bids are invited for road development with a promised stream of annuity payments by the NHAI as per the concession agreement to the concessionaire.
The payments commence only after the road construction is completed and certified by an independent consultant. A market-based allocation and determination of annuity payments would enable speedy development without compromising on the viability of the project.
The Special Purpose Vehicle route envisages an equity investment of about 30-40 per cent by the NHAI and the construction/maintenance contractor approximately 5-10 per cent, the balance is to come through market borrowings. This route gives some sense of ownership to the contractor but places the risk and return with the NHAI.
This structure also leverages the NHAI's ability to access low cost international funds from development institutions. Overall the NHAI is using a variety of financing methods to fund road development. The success of road development offers important lessons for other sectors.
A well thought out strategic plan articulated by the government, provision of funding with public, private, market-based and external borrowings, a schedule for implementation with careful cost estimates, clearing hindrances for private participation, well empowered regulatory authority, transparent procedures for awarding contracts and monitoring progress and a variety of financial structures to balance risk and reward with the private sector.
The jury is still out in terms of how the returns for these projects will evolve over the next 20-25 years.
The port sector has also witnessed significant progress in recent years. In 1990-91 the average ship turnaround time was 8.1 days, by 1995-96 it worsened to 8.5 days, as of March '02 it declined to 3.7 days. Though we are yet to catch up with international standards where the turnaround time is in hours, we are getting better.
In some ports such as JawaharlalNehru Port Trust , the turnaround time is 1.04 days. In 1996, against an installed capacity of 177 million tonnes, Indian ports handled 215.3 million tonnes. Apart from the inefficiencies from outdated equipment and low labour productivity, the congestion at ports led to pre-berthing delays and longer ship turnaround time.
Given that the bulk of India's trade (95 per cent by some estimates ) is carried by sea routes, inefficiency adds to transaction costs. In 1996-97, the government opened up the sector for private sector participation.
A tariff authority was constituted by amending the Major Ports Act of 1963, increasing authority for financial and administrative decisions in major port trusts and a policy for corporatisation. More importantly no guarantees were given for financial return or for the traffic.
The JNPT signed an agreement with P&O Australia for the development of a two berth container terminal on BOT basis for a period of 30 years from 1997. The total investment in the project was Rs 900 crore and it was completed ahead of schedule and operations commenced in 1999. The terminal handled approximately 9,43,881 twenty feet equivalent units in 2001-2002 and it has surpassed initial projections.
Approximately 161 million tonnes per annum of capacity enhancement is expected with an investment of Rs 10,810 crore mainly by the private sector.
The power sector has been struggling to reform without success for several years. In the initial stages the focus was only on power generation, totally neglecting the transmission and distribution loss.
India's transmission and distribution loss is as high as 30.9 per cent due to theft, inadequate load distribution and indiscriminate grid extension. In 1990-91 the revenue recovery per unit was 82.2 per cent of cost and by 2001-02 it dropped to 68.6 per cent.
The core issue of augmenting State Electricity Board finances is now being addressed and hopefully can spur investment in the sector. In the telecom sector the welcome development is that cell phones have led to rapid increase in teledensity and it is increasingly done by the private sector.
However the independence of the regulator needs to be restored so that the forces of competition are kept strong, keeping in mind the long-term development of the sector.
Infrastructure development has a bi-directional causality with economic growth. The recent success with the road sector, port sector must be extrapolated to other infrastructure sectors.
The key issue is the ability to think through the reforms in a holistic manner, augment the domestic sources of finance, encourage private participation, empower an independent regulator to be proactively responsible for development of the sector, minimise ad-hoc government intervention and credible enforcement of contracts.
While recent success does create hope, the challenge is daunting as well.