CII Policy Watch July 2015

1policy watch

this IssueInsideMessage From the Director General. .......... 1Chandrajit Banerjee, Director General, cii

policy Barometer ....... 14

industry Voices .......... 16

cEo Speak ...........................................................................................2

July 2015, Volume 4, Issue 2

PolicyI nfrastructure development

has been the mandate and focus of the successive

Governments over the years. over the last decade, 2002-2012, india has made significant progress in attracting private investments in infrastructure sector with private sector investing approximately USD 250 billion in various infrastructure projects. of late, the sector has been reeling under severe stress suffering from challenges across the projects due to difficulties in project financing, projects take-off and liquidity constraints.

the present Government has taken charge at a time when investor sentiment was at an all-time low. in the last one year, the Government has successfully addressed the critical bottlenecks with better project preparation, strengthening the concession framework with proper risk allocation and enabling faster clearances of projects which have somehow helped restore investors’ confidence. the Union Budget this fiscal also stands testimony to the Government’s increased emphasis to revive capital expenditure by increasing incremental outlay by Rs. 70,000 crore.

as a part of the mega plan of the Government to develop 100 Smart cities, the decision to come up with 12 smart cities and coastal economic zones under the ambitious Sagarmala project would provide greater impetus to sustainable urbanization in the country and also contribute significantly to economic growth. cii is also enthused by the recent ‘hybrid

annuity Model’ launched by the Ministry of Road transport & highways which provides a transparent, time-bound mechanism to fast-track decision making in highways development. it is important that such innovative models be replicated across the infrastructure verticals. in the critical area of long-term financing for infrastructure, the proposed 5/25 scheme is indeed laudable as it would help banks to extend long-term loans of 20-25 years while refinancing them every five or seven years. Further, some structural changes made in infrastructure investment trusts (invits) would enable the industry to raise fresh equity and at the same time attract long-term finance from foreign and domestic investors.

Simultaneously, a refreshing change has been brought in Railways with the Government using the public private partnership (ppp) route for implementation of critical projects including high speed rail and modernization of existing stations.

also, the Government’s decision to introduce ordinance to amend some provisions of the Right to Fair compensation and transparency in land acquisition, Resettlement and Rehabilitation (amendment) act, 2013 is indeed laudable keeping in mind time and cost-related challenges in obtaining consent.

the amendments to the Electricity act proposing a segregation of wires and supply businesses in the power sector will further intensify competition in the sector. this proposed business model will not only increase private sector participation

and competition in the supply sector, but will also bring about efficiency and cost competitiveness while at the same time arrest huge aggregate technical and commercial (at&c) losses. allocation of coal blocks is another area which has undergone a paradigm shift in the past year with Government putting in a transparent mechanism for e-auctioning of coal blocks. thus far, the Government has allocated more than 66 blocks both to public and private sector and has raised over Rs 4 lakh crore in revenue.

cii has always been of the view that for india’s infrastructure story to evolve and develop, a concerted effort of all stakeholders is imperative. Going ahead, there are challenges but we are hopeful that the incumbent Government has the capability to deal with the complex infrastructural issues.

cii on its part will continue to work closely with the Government in its role of a facilitator and stimulator to spur the growth momentum and consequently help in building the brick and mortar sector of the country.

this policy watch issue takes an in-depth look at the sectoral issues and seeks to outline some specific recommendations that cii would pursue in its dialogue with various policy stakeholders in the Government. i hope that you will find it useful. n

Chandrajit BanerjeeDirector Generalconfederation of indian industry

G V Sanjay Reddy, chairman, cii National committee on infrastructure and Vice chairman, GVK power & infrastructure limited

Focus: Infrastructure

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I n f r a s t r u c t u r e d e v e l o p m e n t undoubtedly has been the focus area of successive Governments. With the Government completing one year at the Centre, what do you think have been the key factors driving the sector and what more needs to be done considering the massive capacity augmentation targets?

infrastructure development undoubtedly has enjoyed special focus and emphasis over the last decade and a half. this can be well gauged from the fact that investment in infrastructure as a percentage of GDp has risen from 4.9 per cent in 2002-03 to about 7.2 per cent in 2012-13 and is expected to reach 10 per cent of GDp by 2016-17. a significant aspect of india’s infrastructure story has been the contribution of the private sector. From zero private involvement in the early nineties to a remarkable 37 per cent in 2012, it is a pointer that reflects new and emerging india.

in recent times the sector has witnessed a significant slowdown, both in order book as well as increase in stalled projects as a result of systemic challenges faced across the project life-cycle right from unfavorable market conditions, fuel linkages, substantial unsettled claims, financial and equity crunch to name a few.

we must acknowledge that the Government has taken several initiatives to revive ppp in the infrastructure space including reviewing the concession framework, appropriate risk sharing mechanism, fast tracking decision making and increasing public outlay. Government’s decision to constitute a National investment and infrastructure Fund (NiiF) could not have come at a more appropriate time when the sector is plagued with financing challenges. E-allocation

of coal blocks and amendments to the

Electricity act are other important initiatives

that would drive the next phase of reforms in

the power sector. Further, the Government’s

decision in amending key provisions of the

Right to Fair compensation and transparency

in land acquisition, Resettlement and

Rehabilitation (amendment) act, 2013 is

indeed noteworthy keeping in view mega

initiatives of the Government including Make

in india and Smart city Mission. Going

forward, it is important that the Government

takes up issues related to stranded projects on a case to case basis and see that they are resolved so that projects where capital is already invested go into operation at the earliest.

overall, there is a renewed vigor that a new set of reforms and enthusiasm in the market will pave the way for a sustained era of high growth and momentum. that being said, the Government’s job is not yet over. Given the high expectations, it is imperative for the Government to deliver in order to achieve and sustain the desired growth momentum.

With equity tied up and 70 per cent funding for infrastructure expected through debt, do you think the steps taken by the Government to improve long-term financing (creation of National Investment & Infrastructure Fund, 5/25 rule) are sufficient or else what more could be done?

Equity is still a major constraint for the infrastructure sector as most of it

A New Set Of Reforms Will Pave The Way For A Sustained Era Of High Growth

G V Sanjay Reddychairman, cii National committee on

infrastructure and Vice chairman, GVK power & infrastructure limited

Source: jupeart\shutterstock.com

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CEOSpeak

comes through FDi. it is critical to revive international investors’ confidence in the sector. while the investment requirements are huge, the current issue of increased Npas in the system has further aggravated the problem. also, the bottlenecks in the system are making it difficult for the infrastructure sector to bridge these massive investment requirements.

taking into account the issue of long-term infrastructure financing, the proposed 5/25 scheme is indeed a step in the right direction which will plug the asset-liability gap and would also help banks extend finance to these long gestation infrastructure projects for 20-25 years with an option to refinance every 5 or 7 years. however, the current scheme of refinancing should be made available even for projects which have loans of less than Rs. 500 crore. the decision to constitute a National investment and infrastructure Fund (NiiF) is apt given the current environment but further details on its mandate, composition and functioning are awaited.

long-term financing of infrastructure at affordable cost needs specialized mode and alternate means like insurance/pension funds, sovereign funds etc. it is true that the bulk of infrastructure financing is predominantly being done by commercial banks but with

Basel-iii norms about to be adopted soon, it may affect infrastructure funding.

A lot has been said about the increased public outlay this fiscal to revive capital investments in the economy. However, the execution of infrastructure projects on ground still remains a concern. What are your views and suggestions?

investors’ sentiment and confidence at present are affected due to various reasons.

these include over-leveraged balance sheets of private sector, increasing reluctance of banking sector to lend to infrastructure sector etc. anticipating high levels of revenue growth, many developers have factored in future projections which created overleveraging of their balance sheets. Reduced revenue realisations affected debt servicing by concessionaires as the contracted debt servicing obligations could not be met. this caused widespread default in accounts of the concessionaires. thus, the private players, owing to liquidity constraints, are finding it hard to participate in present projects being awarded. increased capital outlay definitely has the potential to kick-start capital investments in the economy but finally it is the quality of execution and time taken for implementation that holds the key.

while the intent of the Government is clear and the start seems to be impressive, some of the initiatives deserve more attention. Some of the policies in its current avatar lack the operational details as to how the ambitious targets will be achieved. it has been only one year that the new Government is in place so i expect that a lot of these issues will be resolved in the coming 12 months and the infrastructure sector will see good days once again. nSource: perfect lazybones\shutterstock.com

Source: pedrosek\shutterstock.com

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Has the Government’s much publicized 5/25 scheme been able to take off to the extent envisaged? What do you think needs to be done to make it more effective?

the 5/25 scheme of RBi has been beneficial for existing infrastructure projects which typically have long asset life/concession periods but have been financed with shorter repayment schedules due to the asset liability mismatch of banks. lenders to these projects are currently in the process of implementing this scheme in order to align the repayment schedules to match existing cash flows. this will help relieve debt servicing stress in these projects.

Going forward, it would help if the threshold for implementing the 5/25 scheme is lowered from Rs 500 crore currently to around Rs 250 crore as this scheme could then be implemented for smaller projects like those in the renewable sectors, particularly wind and solar.

With NPAs rising in the infrastructure sector & lenders tightening the noose on financing infrastructure, what are your expectations?

in the last few years, the torrid pace of private sector activity has outstripped

the requisite planning, administrative and regulatory capacity. we are now in a period of assimilating the implications of this mismatch. the infrastructure sector has gone through some tough times due to lack of availability of fuel, delay in getting environment and other critical approvals during the construction stage and lack of requisite equity funding. project promoters have had to deal with overleveraged balance sheets and have been reluctant/ unable to bid for new projects.

lenders have now become cautious and are increasingly refinancing existing projects which are operational or nearing completion rather than funding greenfield projects.

• Exemption from environmental clearance for expansion of linear projects (for expansion of Row upto 40 million) will help speed up construction of road projects.

• Allowing easier exit for promoters ofcompleted road projects will help churn their capital from completed projects into greenfield projects.

With Basel-III norms around the corner and infrastructure players relying primarily on commercial banks for funding their long-term needs, what do you think could be the alternate funding instruments/structures for financing long-term infrastructure needs of the country?

Banks have been the primary source of financing infrastructure projects in india. while they are expected to continue playing a critical role as infrastructure financiers, other avenues of financing are expected to increasingly play an important role in the near future.

infrastructure Debt Funds (iDFs) have started getting active in financing infrastructure projects that have completed one year of satisfactory operations after RBi’s recent guidelines which broadens their scope of investment to projects not having a tripartite agreement.

infrastructure investment trusts (invits) are another potential route through which long term investors may be able to invest in the infrastructure sector in future.

infrastructure companies are also increasingly looking at the long term bond market for funding their requirements. Some relaxation by the insurance regulator for investment in lower rated bonds and deepening of the bond market will help attract funds from long term investors like insurance companies and pension funds. n

Lower Threshold For The 5/25 Scheme Will Benefit Smaller Infrastructure Projects

Dr Rajiv Lallchairman, cii National committee on

infrastructure Financing and Executive chairman, infrastructure Development Finance

company limited

Source: Sergey Nivens\shutterstock.com

in the past few months, the Government has started taking important steps towards resolving some of these pressing problems:

• Biddingforcaptivecoalmines and allocation of subsidy for stranded gas based plants are a step towards resolving fuel issues for thermal power plants.

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The railways is now clearly being projected as the growth engine by the Indian Government, as the growth strategy of India depends on the growth of railways. We saw a brief outline of the same in the Union Budget where Suresh Prabhu, Minister for Railways, had mentioned while announcing it. So what is your takeaway from this and what, according to you, is the way forward?

Even before the Union Budget, in the economic survey, the chief Economic advisor had said that the economic multiplier of the investments in indian railways is 5.7. if you take that roughly at 6, it is clear that the economic impact of the investment and turnaround of the railway system has a huge impact on the GDp. it is difficult to quantify but a multiplier of 6 means that Rs. 1 lakh crore investments in railways has the potential to galvanize the GDp by Rs. 6 lakh crore.

in his short tenure, Suresh prabhu, Minister for Railways has done the following to improve the indian railways:

he has quantified the amount of •capital that is urgently required in the railways; Rs. 8.5 trillion, out of which Rs. 1-1.5 trillion is for the current year. Minister Suresh prabhu has set aside the apprehensions of resource mobilization by signing a MoU of Rs. 1.5 lakh crore with life insurance corporation (lic).

his second act was to create a garland •of special purpose vehicles (SpVs) where a seed investment from the railways can capitalize 2-3 times investments by the interested parties, like coal india ltd, Steel companies, Ntpc, ports, State Governments, urban local bodies for

redevelopment of city centre station/s

and to commercialize the vertical station

space across the nation.

Minister Suresh prabhu basically said

that the railways capitalization plan

need not be constrained by the extent

of funding available to the railways

within the system, but it also depends

on the ability to capitalize from outside

the system by creating SpVs.

he has outlined a vision of what it takes to modernize and how resources are going to be raised to enhance the passenger experience-through station development, better quality of food and service on train, etc. and to remove choke points. the entire indian railways is divided into 1150 sections, out which 450-500 are choke points. within these, we can prioritize 20-30 choke points, like the Mughal Sarai where all goods, steel, iron ore, etc from east india comes, including the passengers.

his basic strategy is not to increase the rolling stock but to decongest and unclog the choke points either by providing tracks or by providing by-passes.

the operational focus involves clear identification of critical problem of unclogging choke points and after that increasing the rolling stock.

Special Purpose Vehicles Critical For Railways' Capitalisation Plan

Vinayak Chatterjeechairman, cii task Force on Railways and chairman, Feedback infra private limited

Source: panimoni\shutterstock.com

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When we come to Indian railways, it is about the management styles; how the organization had functioned i.e. it has been a mono-lid of a power. Do you think these factors can be a hurdle and hamper the visions outlined? Because even if the resources come in, the actual implementation has to be done by the officials in the Ministry of Railways.

the Minister has said that railways is soon going to have an independent regulator for the same. it will delineate tariff and freight structures, create a level playing field, and at the same time will also be empowered for taking decisions relating to arbitration and dispute resolution. this is one area which he has institutionally addressed.

if the railway board has to work at par with Mr. prabhu’s pace, some of the initiatives need to come from outside the railway board, i.e. through high speed corporation for high speed & bullet trains, separate corporation for station development authority, i.e. institutions created outside today’s framework which will have modern management practices and thus will not be held back.

he has a band of experts who individually advise him to galvanize new methods of operation.

Drawing from his earlier “raftaar” as the Power Minister, his aim when he came up with the Electricity Act was to see how the private sector’s role and participation could increase. Do you see the same trend in the railways given the current culture and atmosphere? Second, is there energy efficiency in railways, which is a huge area of concern and can help in cost-cutting as well. What are your thoughts on that?

he has articulated it well, and after all these issues are dealt with and are settled down, we are looking at a huge upsurge

in private sector participation both in terms

of domestic and foreign direct investments

across different sectors. these areas include

leasing of rolling stock, locomotive tenders,

construction of railway infrastructure

for de-choking, station redevelopment

(once the ppp formats are over and the

vertical space and areas around it is

commercialized) and somewhat in the

bullet train segment. it should take around

two quarters for all the positive measures

to fall in place.

What about Energy?

the Minister had said that railways is the

biggest consumer in terms of power, and

he has found that the power purchase

agreements (ppas) are not particularly

friendly and therefore, by taking a fresh

look at the ppas that the railways has,

he will be able to bring down the power

consumption as a percentage of total cost.

over and above that, if he manages to

use the vast station and other lands in

harnessing solar energy, it will also lead

to reduction in power consumption.

What about project awarding? This is one huge issue with the railways and there is a huge gap in how tenders are floated and companies are selected. Do you think the improvement in systems and processes are going to be the key areas which investors would like to see moving faster?

the fact that Mr. prabhu has been appointed

the Railway minister, itself removes the

apprehension that this will happen and they

have already made some suitable changes.

they have delegated powers, and have asked

for greater accountability and transparency.

there is a huge history and it will take time,

but the direction is right and fast.

By when do you think we will be able to start seeing the changes that railways is trying for?

From 4th quarter onwards, i.e. from winter

onwards. it is taking some time for most

of the changes to sink down into the

system. So i feel from winter onwards

we should be able to see very exciting

changes. n

Source: SNEhit\shutterstock.com

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of the 1.4 billion people in the world who have no access to electricity, india accounts for over 300 million! this makes it imperative for independent power producers (ipps) to consider india as one of their primary growth markets. Moreover, in the last general elections, it was for the first time in independent india's 67-year-old history that providing 24X7 electricity access to all the citizens became an election issue. the new Government has announced that it aims at providing 24X7 electricity access to citizens by october 2016. however, the irony is that india’s per capita power consumption, about 940 kilowatt-hour (kwh), is among the lowest in the world despite cheaper electricity tariffs. My intention through this article is to have a closer look at what is causing this dichotomy and explore possible solutions.

Current Scenario And Existing Challengesthe financial profile of india’s State power Utilities (SpUs) including generation, transmission, distribution and trading companies owned by State Governments remains weak with aggregate annual book losses reaching Rs. 295 billion as per the latest records of the State Electricity Boards. what is noteworthy is that 93 per cent of the SpUs’ losses are concentrated

Power Distribution - In Need For Urgent Revival

Rajiv Ranjan Mishraco-chairman, cii National committee on power and Managing Director, clp india private limited

at the level of distribution companies. Generation/t r a n s m i s s i o n / t r a d i n g companies contributed only 7 per cent of net aggregate book losses. what continues to remain a challenge is that the average power purchase cost per unit for discoms in the States of Rajasthan, haryana, tN and Up is much higher than Ntpc limited’s average selling price. this reflects the lack of sufficient long-term power tie-ups by these discoms and their high reliance on short-term power.

with the financial health of the discoms in disarray, there has been a cascading effect on the value chain, with delayed payments to generators, leading to delayed payments

to coal suppliers and equipment suppliers, stretching their working-capital cycles and affecting their leverage profiles.

it’s unfortunate to witness latest reports on a mounting list of 57 thermal power units across the country that are shut down due to lack of demand despite the onset of peak summer. of india’s total installed generation capacity of 2,68,603 Mw, the peak demand met on May 23, 2015 was less than half at just 1,34,892 Mw, according to official data available from the central Electricity authority (cEa).

Source: More power to india-the challenge of Electricity Distribution, a Report by world Bank

Segment-wise Trend of Losses Incurred

Peak Demand vis-à-vis Peak Met - FY 2014-15

Units Peak Demand

Peak Met

Surplus/Deficit () (in %)

peak Demand (in Mw)

1,48,166 1,41,160 (4.7)

peak Demand (in million Units)

10,68,923 10,30,785 (3.6)

Source: load generation balance report 2015-16, cEa website

the Government in the recent past has set ambitious capacity addition plans in renewables space especially for solar power and for transmission & distribution projects. the Government’s focus on strengthening the last mile connectivity and its focus on green energy is commendable indeed. however, whenever i hear about these ambitious targets the question that comes to my mind is that how will the state discoms be in a position to pay for these new capacities, if they are already struggling to pay for the existing capacities?

the National tariff policy 2006 stipulates that the ‘recovery of Regulatory asset should be time-bound and within a period not exceeding three years at the most’ (and the current discussion paper on tariff policy has proposed recovery period not exceeding seven years). But lack of adherence by States to use this selectively and not revising tariffs in a timely manner to reflect actual cost has resulted in the value of regulatory assets piling up to a staggering Rs 70,000 crore and the interest component alone costs around Rs. 9,500 crore. the current discussion paper on proposed tariff policy recommends that

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SERc arrive on tariffs that progressively reflect the cost of supply in the future. SERc are expected to create a roadmap with a target that tariffs are within 20 per cent of the average cost of supply. the road map would also have intermediate milestones based on the approach of a gradual reduction in cross subsidy. however, the challenges that i foresee in implementing these is that SERc doesn’t operate as an independent entity and the tariff regime proposed doesn’t take into account peak demand.

The Way Forwardwith these looming challenges in the sector i believe it’s time for us to evaluate a few radical changes.

Focussed Approach Towards Power Subsidy: Recently we witnessed more than 20,000 consumers in a single district giving up their claim to subsidized lpG cylinders so that the Government can utilize the surplus money to provide clean energy to the poor. Similarly, the SERc should focus on directing the power subsidy only to the needy. Special prepaid meters can be installed directly for those consumers who are below the poverty line. it is imperative for State Governments to rationalize their power subsidies, which currently exceeds their revenue deficits. while it has been the prerogative of the State Governments to provide subsidized/free power to certain section of consumers, they need to keep sustainability in view to ensure that benefits to one section of consumers don't harm the interests of others in the state.

this is only possible if States empower their regulator to be independent. an alternative formulation that can be looked at is having Regional, rather than State-level regulators, thereby increasing their independence and ability to withstand populist pressures.

Mobilize Stranded Capacities: States should take a stand on stranded capacities and selectively help mobilize these stranded assets depending on the potential benefits they offer in terms of operating efficiencies and cost savings, as against setting new capacities. this is a better option than buying

costlier short term power.

Stronger Collaboration Between The States And The Centre: Enforcing reforms has always been a challenge as power is a concurrent subject, which means it won’t be possible to introduce radical changes without the State and the central Governments’ collaboration. at the initial stage one must start with a focus on enforcing reforms on those States by the centre where its Government exists. other States can be brought under its umbrella subsequently.

currently, discoms are not being paid the full extent of subsidy committed by State Governments, due to which discoms have to borrow at market rates, which increases their financial losses. it is also seen that there is a constant gap between the subsidy released each year in comparison to the subsidy booked, further weakening the financial position of the utilities. the need of the hour is a better monitoring system and compliance in collaboration with the centre to eliminate such inefficiencies in the system.

i believe that the implementation of these measures will benefit the sector at large. however, there needs to be concentrated effort and determination to pursue these reforms to ensure that the sector is profitable as a whole on a sustainable basis. nSource: tERi’s policy Brief Report January 2015

Source: Gritsana p\shutterstock.com

Rs. Crore

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as the Modi Government enters its second year at the helm, there is an urgent need for it to put in place an appropriate legal framework. Such a framework must address concerns pertaining to:

Monitoring the performance during •the project life-cycle of public private partnerships (ppps) or infra assets.

taking timely corrective action to ensure •that infrastructure assets are optimally utilized during the life cycle of the concession while securing viability of the investment made in a timely manner. the latter element must address stranded investments in the infrastructure sector arising from unforeseen and unmitigatable developments materially impacting the project economics.

it is expected that the Kelkar committee (constituted for rebalancing and revitalizing the ppp) will recommend significant changes on both these counts. it is imperative that pM Modi ushers in third generation indian infrastructure reforms for reviving the infrastructure market in india.

while the planning commission circulated a draft of the proposed public contracts (Settlement of Disputes) Bill 2013 in May 2013, it was inadequate in most aspects. the needle has not moved to reduce project disputes, which have been constricting the growth of indian infrastructure.

Need for a holistic solution to fundamental challenges facing indian infrastructure: the primary issue of stranded and sticky infrastructure investments remains to be addressed holistically. a significant component of this issue is the miring of investments in prolonged disputes leading to significant delays. this has a debilitating impact on the lenders and investors awaiting resolution in either case, thus besmirching the investment sentiment in the face of the ambitious investment

objectives of the Modi Government. Many media reports indicate that 4 out of every 10 central Government infrastructure projects are running behind schedule or have overshot original cost estimates, evidencing the heavy toll taken on project execution by delayed regulatory approvals, financial constraints and stalled land acquisition. according to data presented by the Ministry of Statistics and programme implementation (MoSpi) before the lok Sabha on 18 March, 2015, the cost of one such project is expected to increase 20 times and another is set to miss it's original completion date by 21 years.

in a number of judgements, the Supreme

court of india has recognized that infrastructure projects must not be interfered with or delayed in their implementation since that would hurt public interest with time and cost overruns. however, project disputes continue to stall the successful delivery of infrastructure services. in most cases, project development disputes continue to arise primarily because of ineffective procurement design, improper risk allocation and the absence of a robust legal and contractual framework to address unforeseen circumstances impacting the project.

to impart greater certainty and restore investor confidence, settlement of disputes is an important facet of the overall architecture of the suitable legal policy framework, which needs to be evolved/ strengthened focusing on the following elements:

For each of the select infrastructure •sectors, dispute resolution by an expert adjudicatory authority with an expert appellate body must substitute all existing dispute resolution mechanisms.

this mechanism must be backed by:•

Effective time bound processes –put into play through a legislative framework.

Effective, empowered and suitable –autonomous yet accountable institutions staffed with competent experts qualified in all relevant fields such as law, economics, finance, engineering, project management.

clear object ives for ident i fy ing •infrastructure projects/assets where intervention is warranted to ensure against opening the flood-gates in undeserving cases to tackle the following:

predatory and negligent bids: a –possible solution would be to develop a floor price to eliminate such bids

claims/interests of losing bidders. –

An Effective Public Dispute Resolution Bill Is Required

Amit KapurMember, cii National committee on

infrastructure and partner, J. Sagar associates, advocates & Solicitors

Vishnu Sudarsanpartner

J. Sagar associates, advocates & Solicitors

co-authored by

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CEOSpeak

Ensuring against undeserved windfall –profits.

Not providing incentives for irrational/ –irresponsible bids.

Guidelines on how to design the •intervention to maintain the balance between affordability, viability and pragmatic action in larger public interest without falling into moral hazards. this should be enshrined into a binding document with clear verifiable outcomes.

Safeguards for balancing conflicting/•divergent interests including fair dealing with a set of options available to deal with such situations with guidelines for choosing between solutions like specifying possible modification after award of contract to ensure no subsequent litigation by unsuccessful bidders.

Mechanism for monitoring implementation/•performance to ensure fair outcomes. the settlement of disputes mechanism proposed de-hors the above and will not achieve the purpose envisaged.

it is important to bear in mind that there exists a universe of institutions for dispute resolution comprising of the court system, arbitral tribunals, statutory regulators/tribunals, and the aDR Mechanism (including conciliation, Mediation, lok adalats, and Dispute Resolution Boards.) against this backdrop, any expert institutional framework for infrastructure ppp dispute resolution must:

Fit into the overall national dispute •resolution architecture under the constitution of india and existing tribunals for select infrastructure sectors.

have a defined and focused jurisdiction •and legislative framework to ensure expeditious/time bound adjudication without multiple alternate interventions (adapting lessons from the challenges faced in india regarding timely decisions in arbitrations as also the regulatory mechanism like the Electricity act, 2003). it is important to:

limit the jurisdiction of the tribunal –to ppp in infrastructure as defined by the Ministry of Finance.

Secure that the institutions are –

created with adequate capacity in terms of having the requisite number of trained and experienced staff drawn from branches of law, economics, finance, project management. this is particularly necessary to ensure that the proposed tribunal is not inundated and rendered ineffective in resolving diverse/complex issues in a time bound manner.

Since 2002, Supreme court and various high courts usually do not normally interfere with decisions by such multi-disciplinary expert bodies (like regulators and appellate tribunals) due to 2-tier expert adjudicatory mechanism. it is important that the proposed framework provides for the 2-tier expert bodies, with a final appeal of substantial question of law to the Supreme court.

lastly, the decision-making authorities must be subject to objective criteria for securing accountability of the decisions. this could draw from well-established precedents like:

Regulatory impact assessment •

oversight committee of the parliament•

an annual plan based assessment •

of performance of the authority in

question with objective monitoring of

outcomes.

Evaluation of efficacy in decision making •

including factors like timely decisions

based on relevant considerations, etc.

Requirement for a written justification •

by the decision making body/pursuing

agency for change in pol icy or

dispensation mid-stream wherein they

are obliged to elucidate:

how and why the public interest –

underpinning the change would

outweigh the adverse impact

the mechanism to compensate –

adverse effects on the ppp projects.

any further delay by pM Modi in arresting this

issue is certainly going to stem the growth

of indian infrastructure and the economy. For

Modinomics to survive, it is time to accelerate

the pace of infrastructure reforms. n

[Views of the authors are personal and do not reflect the views of the firm]

Source: lightspring\shutterstock.com

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With the Government setting up an ambitious target of 30 km/day in 2 years, how much do you think has been the progress on ground in terms of project preparation, financial closure etc.?

the Government has clearly taken significant steps to get things going having inherited a very challenging situation. while i expect the pace of new project awards to pick up, resolving the liquidity crisis faced by the sector due to non settlement of dues and clearing the backlog of stalled or incomplete projects will ultimately determine how swift progress on the ground is. consequently, contribution to the 30 km/day target will largely come from Engineering, procurement and construction (Epc) tenders in the near to medium term. the creation of a quality Detailed project Report (DpR) and bringing a project to market sensibly is a 6-9 month process – i think we need to give the Government some more time to see that exponential pick up in execution.

A lot has been said of the equity tied up in various highway projects. With the Government now permitting concessionaires to divest entire equity post 2 years of construction, how much change do you think will it bring in the

sector both in terms of investments and confidence?

it will certainly help but i think the Government could have made a much bigger impact by permitting a full exit at commercial operation Date (coD). the free flow of capital is an essential ingredient for economic growth. it will help to reduce risk premiums, which have soared in the roads sector, and it will also alleviate the liquidity crunch faced by most developers who could deploy that much needed capital to complete stalled projects and repay debt, thereby creating healthier supply chains which will ultimately de-stress our banks. take for example developers whose

projects are facing years of delay due to tardy land acquisition – coD is not achieved due to the fault of the Government authority and the project requires a large amount of overrun funding which the developer is forced to borrow since the Nhai consistently disputes or delays all payments. Not only are we required to fund the overrun thereby stressing our balance sheets (until the claim is received), but we also have to wait till coD+2 years to exit, which ultimately could turn out to be 8-10 years after we made our initial investment. a balanced approach would be to allow developers who have faced delays to exit their projects at coD, or have coD+2 years replaced with the Scheduled Four laning Date (SFlD)+2 years. the impact on the sector would be tremendous.

Government this fiscal expects 1500 kms to be awarded on PPP mode and balance on EPC basis. How much more time do you anticipate for PPP projects to recover and flourish?

the completion of stalled projects, the raising of equity (ideally through flexible, quicker exits), timely payment of claims including payment of arbitration awards, will drive the de-leveraging of balance sheets and take us on the road to recovery. Strong monitoring and enforcement and timely resolution of disputes is key. we should strengthen existing institutions (arbitration and conciliation) and raise them to global standards rather than look to create new institutions and committees. it is also essential that Government authorities like Nhai start to treat the private sector as a partner with equitable sharing of risk, rather than simply a source of finance – recall the very definition and spirit of ppp. amendment of the prevention of corruption act will also go a long way in achieving this. Ultimately, we must respect the wisdom of global capital markets and create institutions and processes which are at par with the world’s best. only then an environment for ppps will truly flourish. n

Relaxed Exit Norms To Have Favourable Impact On The Roads And Highways Sector

Arjun DhawanMember, cii National committee on

infrastructure and president, hcc ltd.

Source: Gustavo Frazao\shutterstock.com

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CEOSpeak

What is the current status of port sector? What do you think have been the key factors driving the sector and what more needs to be done considering the massive capacity augmentation targets?

overall growth in the port sector in terms of cargo throughput over the years has been 5-7 per cent. however, Non Major ports administered by the littoral State Governments have achieved higher growth rate as compared to the Major ports under the Ministry of Shipping, Government of india. in the year 2014-15 the overall growth in all the ports in india was approx 5.37 per cent and the total volume was approx 1025 million tonnes. thus, the country achieved a major milestone of 1000 million tonnes of cargo throughput in ports first time. the main cargo handled is crude oil, petroleum, oil and lubricants (pol), coal, iron ore, fertilizer and containers. container growth in the year 2014-15 was 10.79 per cent and the total volume was 11.72 million tEUs. the cargo growth in the past 5 years has been muted and the reasons are not far to seek. port demand is a derived demand and therefore, it reflects the status and growth of economic and manufacturing activities. it is generally accepted that in the last 5 years till the new Government came to power in 2014, the indian economy was paralyzed with lack of action, policy and administrative support and therefore, it languished despite huge potential. in this background a number of policy initiatives like Make in india, Ease of Doing Business and other follow-up measures are expected to boost the economy and resultantly, we can expect healthy growth rate of 10-12 per cent in port throughput going ahead. as far as capacity expansion in the port sector is concerned, it is an ongoing programme which needs to be accelerated with Sagarmala concept so as to prepare the ports to become smooth mode of transport interchange and engines of efficiency. Since implementation of the capacity expansion and other measures is dependent on the

management in the ports, the delivery mechanism needs to be professionalised and well trained in breaking new grounds and problem solving.

Government has announced several initiatives in the maritime sector including Sagarmala project, impetus to Shipbuilding and Ship repairs etc. What are your expectations from the Government?

Undoubtedly, all initiatives to improve ports' working and efficiency, to encourage coastal and inland transportation are most

development along with ship building and ship repair will ensure transport connectivity, and strong links with the manufacturing centres. ports to be developed as smart cities is a wonderful concept and if translated into action will not only boost economic development but also port cargo volumes, and thus, all round increase in economic activities. Economic and logistics zones around ports including smart cities as an integral part of cluster based approach will certainly lead to economic development, in turn boost imports and exports linked to ports and employment. however, we need to grow out of incremental improvements and additions in these areas to engineer big transformational changes with new ideas and readiness to break totally new ground to make up for the lost time. it is expected that the Government will buttress institutional mechanism so as to lead execution of the projects and sort out operational issues.

With the Government announcing corporatization of Major ports, do you think that this move could be an enabler for unlocking the growth potential of Major ports?

corporatization of Major ports will indeed be a very constructive step in the direction of instilling accountability in port management, bringing efficiency in operations and speeding the decision making process so necessary in any business dealing with round the clock operations. trust structure of port management has outlived its utility long time back and the British who brought it to india have jettisoned the system two to three decades back and it is high time that india too buries it. Many of the Major ports are running with operating losses and Return on capital Employed (RocE) of most of the Major ports is woefully low as compared to cost of capital (coc).

however, corporatization is an enabling reform which must be followed by professionalization of management and public listing which alone will achieve the objectives of brining about high efficiency, effective management and necessary investments. n

Cluster Based Approach For Port Development Will Boost Economic Growth

Rajeeva SinhaMember, cii National committee on

infrastructure and Director, adani ports & SEZ ltd

welcome in the context of harnessing efficiency in transportation of cargo across india and to manufacturing or consumption centres. cluster based approach for port

Source: aleksey Stemmer\shutterstock.com

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CEOSpeak

What is your view of the aviation sector? Do you think that the present Government has done enough for the sector in the last one year and if not, what more can be done given the massive capacity augmentation targets?

the indian aviation sector is witnessing a high paX growth in the range of 10-12 per cent from the last few years and is expected to continue the trend. india is slated to become the third largest aviation market globally. this is poised to translate into growth for airport sector too. infact, because of high growth and capacity constraints, india, for the first time is witnessing the development of dual airports in cities such as Mumbai and Goa.

Unfortunately, the regulatory framework for the airport sector is a major deterrent to the privatization effort which will ultimately become a major bottleneck on airport

infrastructure development. today, you have world class airports in india which are ranked amongst the best airports in the world. however, the airport companies are bleeding and suffering due to regulatory issues. in the last one year, there has been some positive signals from the Government in airport sector. RFQ has been floated for privatization of 4 indian airports, speed up in process of concessioning of Navi Mumbai and Goa airports and the draft civil aviation

policy. however, i see sorting out regulatory issues as a necessary pre-requisite for successful privatizations.

With Government now focusing to develop 5 airports in Tier II-III cities, do you think the private sector would be interested?

it may be premature today to comment whether private sector will be interested in these opportunities or not as we do not even know the names of the cities where these airports are to be developed. private sector would be interested only if there is a fair return they can get on the investment. the challenge would be the lack of traffic necessary to ensure viability. in such a situation there can be two ways out. Either look at a grant based privatization or let aai take up development of these airports based on the funds it generates through privatization of Delhi, Mumbai and other tier i airports that it plans to privatize. in case option one is taken, the key issue for the policy makers would be to make these airports viable from a privatization perspective. it essentially requires to address some of the policy level concerns that adversely impact the viability of small airports both from an airline as well as airport operators’ perspective.

A lot has been spoken about prospects of the aviation sector but the intent to execute and deliver on ground is missing. What are your view points?

aviation sector presents a lot of potential because of high demand from middle class and a strong GDp growth but to tap the potential some essential policy decisions need to be taken especially on the regulatory philosophy (including decision on till mechanism) and availability of easy long term funding. n

Sort Out Regulatory Issues For Successful Privatization

Sidharath KapurMember, cii National committee on

infrastructure and cFo- airports, GMR Group

Source: Maxim Blinkov\shutterstock.com

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Policy Barometer

CII Recommendations For Key Issues In The Infrastructure Sector

Area Issues Recommendations

Infrastructure Model concession agreement • Ensure equitable allocation of risks in the Model concession agreement (Mca) with emphasis on:

addressing project specific risks. –

provision for market linked compensation for Government’s –failure to perform its obligations.

Reviving stalled projects it becomes increasingly important to revive stalled projects to •provide thrust to infrastructure development in the country. at this crucial time, there is a greater urgency to fast track projects on case to case basis.

ineffective Dispute Resolution Mechanism- Substantial funds of developers locked in disputes

the existing Dispute Resolution Mechanism process is •ineffective as it goes through the rigmarole of reconciliatory meetings (Dispute Resolution Board) followed by arbitration. it is important that arbitral awards be time-bound and made binding. Moreover, these should be respected by both the parties.

Regulatory Mechanism it is extremely important that a robust and credible regulatory •mechanism is created that is autonomous, accountable and independent in functioning, free from political and bureaucratic controls.

PPP Scope and mechanism for re-negotiation

it is extremely difficult to make projections and write contracts •in a dynamic and changing economic scenario for 15-50 years. at par with global practices, ppps should have arrangements for re-negotiation under an empowered institutional mechanism.

Exit provisions allow complete exit for the developers immediately after •project becomes commercially operational which would release much needed equity to plough back into other infrastructure projects. though this has been done recently for the roads and highways sector, this should be replicated across the infrastructure sector.

long-term Financing while the proposed 5/25 scheme is indeed laudable, however, •it is critical that alternative long-term financing models are devised.

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Policy Barometer

Area Issues Recommendations

Power infirmities in Standard Bid Documents for case ii Bidding

it is important to revert to the Build own operate (Boo) •bidding structure framework to ensure lower tariffs and better efficiency in plant operation. at the same time, allow complete pass-through of fuel price cost and let fixed cost be the biddable parameter. Do away with multiple tranches of capacities to avoid the risk of capacities getting stranded.

inefficiencies in Standard Bid Documents for case i Bidding

it is important that:

States are advised to go ahead with old documents after •incorporating complete fuel price pass through and let fixed cost be the biddable parameter.

100 per cent recovery of fixed cost is allowed in case of •fuel shortage.

Multiple tranches of capacities are done away with to avoid •the risk of capacities getting stranded.

land acquisition, environment and statutory clearance

• introduce fast track mechanism for land acquisition proposals related to infrastructure projects.

• procedural and structural reforms necessary to expedite environment and forest clearances and make them time-bound with provisions for deemed permission to avoid stalled projects.

Urgent need to review forest conservation and environment •protection and other related acts to ensure project development is not impeded.

Stranded assets • Government should deal with stressed assets whose viability is in peril through Empowered Group of Ministers (EGoM) or guidance to regulators or a mix of both.

• change of ownership of stranded assets can help in unlocking capital.

Ports connectivity and capacity augmentation

Government through its recently announced mega ’Sagarmala‘ •initiative has shifted the focus on the three pillars of coastline development as its deliverables — port modernisation, efficient evacuation and coastal economic development, supported by enabling policy and institutional linkages. it is extremely important that time-bound milestones are adhered to while implementing this initiative.

Roads & Highways land acquisition and related clearances

• 80 per cent of the encumbrance free land must be provided on or before appointed date and balance to be handed over within 90 days of the appointed date.

• change of scope needs to be finalized within 12 months from the appointed date.

• Ro of Nhai should be empowered to sanction the la compensation, approval of utility shifting estimates and other payments related to pre-construction clearance activities.

approval for borrow areas to be part of MoEF clearance •process itself by Nhai.

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Industry Voices

port sector has emerged as the frontrunner for infrastructure development in the country. with ppp evolving as the preferred mode for implementing projects, india’s maritime sector is poised for revival. the country this fiscal has already achieved a major milestone of 1000 million tonnes of cargo throughput for the first time. with the Government’s mega Sagarmala initiative to transform the sector and the recently announced ‘the tariff policy 2015’ guidelines in place, the sector is indeed growing steadily but a lot would still depend on timely execution of the projects along with better project preparation and clearances in place before awarding projects.

Rajiv Agarwal Managing Director & cEo, Essar ports limited

infrastructure development thanks to the Government initiatives over a year has been treading on a recovery path. these measures be it strengthening of ppp mechanism, plug and play concept, Smart cities mission, Sagarmala project etc indicates the importance well laid out infrastructure holds for the country. however, the challenges, particularly with respect to ineffective dispute resolution mechanism, project preparation, and availability of long term finance at affordable costs need to be addressed expeditiously. in short, ‘Build india’ has to be the enabler for making ‘Make in india’ a success.

Ajit Gulabchand president, construction Federation of india and chairman & Managing Director, hindustan construction company limited

public private partnerships (ppps) in india has helped the Government to adopt a long term approach to infrastructure planning and management. the incentives embedded in a ppp project have derived greater value for money expected over the project's life cycle. our approach towards ppps have demonstrated and captured the benefits of marketplace and the new initiatives of the Government are definitely going to enhance the Government's goal for public infrastructure and supplement the economy to attain double digit growth trajectory in the coming years.

K Ramchand president & cEo, il&FS transportation Networks ltd

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