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Removing constraints Vital for Infrastructure Development, Shri R V Shahi, Former Secretary, Ministry Of Power

Removing constraints Vital for Infrastructure Development
[R V Shahi's Weekly Column for Infraline, December 10, 2007]

Last week, Infrastructure Development Finance Company (IDFC) alongwith its subsidiary company IDFC-SSKI organized the second Infrastructure Conference (2007) at Singapore. The event held on 3rd and 4th December aimed at deliberating on the challenges involved and opportunities available in infrastructure development in India, with special focus on power sector. Participants consisted of senior representatives from various Funds, Asset Management Companies, Banks and Research Analysts. Senior officers from Indian Power Companies, and from other companies in infrastructure participated and made presentations. Dr. Rajiv Lall, M.D. & CEO of IDFC made the opening remarks. Dr. S. Jaishankar, India's High Commissioner in Singapore addressed the delegates. I had the privilege of presenting the key note address. Some of the important points which emerged during the first plenary session from the opening remarks and key note addresses, and subsequently during meetings, are as follows:

  1. Indian economy has now entered an orbit of growth - in the range of 9 to 10% annual increase - and it appears that this level of sustainable growth rate could be pursued and could most likely be achieved.

  2. The point that there is some slow down in the US economy, and that it might have an impact on a global basis, was also deliberated. It was, however, pointed out that effect of US slow down could obviously have an impact all over, but since the Indian economic growth rate is primarily driven by domestic consumption, the slow down may have comparatively much less impact in so far India is concerned.

  3. In the last 50 years, no doubt, substantial changes have happened in India, but because of the large size of population of the country, even now almost over 25% of Indian population is below poverty line. Even most of those who are above poverty line have to have access to a number of economic benefits for a reasonably good level of standards of living. Weaknesses of India therefore are emerging as greatest opportunities for effecting a sustained high level of economic growth rate because domestic consumption has to increase in almost every segment of economy. For example, per capita consumption of power, of energy, of steel, housing, fertilizer, aluminum etc. are all far below the global average levels and many times lower than the levels reached in developed countries. Therefore, if India has to provide even the average level of global consumption, it has to substantially increase domestic consumptions. Fortunately, recent increase in the purchasing power of people, slowly reducing proportion of families below poverty line and availability of skilled manpower are all contributing towards the acceleration of growth in every sector.

  4. Another point that came up was in relation to political stability in the face of coalition Governments and sustainability of reform agenda. This issue cropped up particularly perhaps in the context of some of the recent developments vis-?-vis agreement concerning nuclear power. It was pointed out that if we look at the last about 10 years of coalition politics in India, it needs to be underscored that core of the reform agenda has remained intact. The far reaching policy changes that were brought about in 1991 by the then Congress Government in terms of large scale unshackling of Indian economy, bringing about a regime of delicencing of economic activities, permitting FDI in several areas of industry and trade, were not only followed by the NDA Government commencing from late 90's but they were further reinforced. Even during the coalition period of last 10 years, there could be minor differences here and there, but the thrust and momentum have continued. In the new UPA Government which is supported by the Left Group, we have seen privatization of airports, further liberalization in civil Aviation sector, telecom sector and in the power industry. Electricity Act 2003 was legislated during the old NDA regime, but with the support of the Congress, then in opposition, has been effectively implemented by major decisions on and notifications of the statutory policy instruments like National Electricity Policy, Electricity Tariff Policy etc by the present UPA Government. Therefore, it is abundantly clear and established that the reform agenda and initiatives have emerged as instruments which are indifferent to political configurations, be they NDA Group or UPA Group. Rightly so, therefore, the Indian corporate, the domestic capital market and the global Capital markets, have very positively responded which has been reflected by the rapid increase in the market capitalization of almost all the Indian companies.

  5. In the infrastructure sector, the current Five Year Plan (2007-12) requires an estimated capital expenditure of the order of almost 500 billion US dollars. Power occupies the topmost position requiring 40% of the total equal to about 200 billion US dollars. Railways account for 20% and National Highways 15%. Thus, Power, Railways and National Highways alone need 75% of the total capital expenditure. The balance 25% (about 125 billion US dollar) are needed for State and district roadways, ports, civil aviation, telecom and drinking water etc.

  6. It has been widely recognized that power sector which holds the key to development of any other sector, needs to be supported. In the last few years the approach of bankers, financiers and equity capital market has been not only very positively oriented but some of the Equity Issues of power companies launched in the recent past have met with overwhelming response. As a matter of fact, an analysis of change in the market capitalization of the listed power companies including NTPC, PFC, Power Grid, Tata Power, Reliance Power, GMR, GVK etc. indicates that, in last 3 years, while their profits have increased with a compounded annual growth rate (CAGR) of about 19%, the compounded annual growth rate of the market capitalization has been of the order of 154%. This shows the level of confidence reposed by the capital market in the Indian power sector.

  7. From 1991 to 2002 (11 years) we could attract hardly about 7000 MW of private sector contribution in the Indian power sector. The three power projects, through one initiative namely Ultra Mega Power Project (UMPP) alone, which have been finalized, contribute more than 12,000 MW of capacity. What is, however, more remarkable to observe is the response, and even more importantly the highly competitive and aggressive tariff that this initiative has yielded. Similar initiatives by the State governments are also being responded by developers positively.

  8. It is now widely recognized that apart from long-term-locked-up generation capacities, through Power Purchase Agreements, a good proportion of untied capacity is a must for developing a vibrant and competitive electricity market. Inspite of power trading being declared as a distinct licensed activity and despite Regulatory Commission granting trading licenses to about two dozen agencies, the trading volume has remained below 3% of the total power generation and supply in the country. It is therefore realized that unless short term transactions and transactions delinked from long term PPA's are encouraged and facilitated to a level that it constitutes almost 10 to 15% of the total volume, the desired goal of the new Electricity Act 2003 will not be fully achieved. Therefore, the new awakening on development of merchant plants, captive power plants also being able to supply power to the grid are the initiatives in the right direction. What is gratifying to suggest is that financial market is also responding to these initiatives with the same wave-length.

  9. During XI and XII plan periods, covering 2007 to 2017, Power Generation capacity planned is 78,000 plus over 90,000 (i.e. about 1,78,000 MW). For the current plan, more than 55,000 MW are already under construction with full financial closure. Besides about 10,000 MW of Merchant Plants and about 8,000 MW of captive plants are also being developed. These facts highlight the radical shift and intensity of momentum that the India Power Sector has now acquired due to several legislative and policy initiatives having been put in place in last five years, and due to the confidence which has been created all around.

  10. Another positive development which is visible now is the approach of the capital market for equity funding to support the promoters. Though it has been the usual trend in respect of all other industries that apart from promoter's contribution in equity, financial sector also contributes through equity, beyond the lending that they do, to meet the capital expenditure. In case of power sector, however, because of the risk perception that the capital market had about this sector, normally it was expected that it is the project developers who would mobilize entire equity requirement. This expectation, though harsh, was a reality and it did stand in the way in convenient financing of power projects. In the last couple of years there is a positive shift in the thinking. The financial sector has started recognizing the need for equity support as well, and what is more important to note is that they have started seeing a definite benefit for them by way of enhancement of share value. Most of these organizations have the strategy that at appropriate time the promoters would be asked to go into the equity market, which will enable the other equity investors to fully or partly exit and substantially enhance returns on their investments. They do recognize that the debt components have their own limitations in so far as overall returns to them are concerned.

The key note session was followed by a panel discussion with the objective that to further smoothen the process of rapid progress on infrastructure projects, there could be specific constraints which would need to be identified and appropriately addressed. The panelists consisted of senior representatives from the Education sector, Construction group, Highway, Housing and Power. After brief presentations by each of the panelists the important constraints which would require to be resolved were identified. A number of initiatives in each sector which have been put in place in last few years, with positive outcomes, were also highlighted. However, it appears desirable to present the important constraints rather than the achievements so that it could be useful for applying correctives aimed at mitigating these constraints in the near future. The major constraints as highlighted are outlined below:

  1. Availability of skilled manpower was highlighted as an important constraint by most of the panelists. The inadequacy is being experienced in every sector and in all activities. It was suggested that crash programmes may be necessary to develop and train adequate number of personnel on specific trades. Industry, Technical Institutions and Universities may have to quickly come to understanding so that in an institutionalized and structured manner specific courses of short durations could be delivered and trained personnel could be provided to construction industry as also to utilities.

  2. The Government intervention and further improvement in the role of the Government, to facilitate various inputs and decisions, was identified as another important constraint. It was suggested by many that inspite of keen desire and various policy initiatives at the apex level in the Government, problems are faced in terms of procedures and implementations at working levels. There is tremendous scope for effecting easy and smooth procedures as also changes in the mindsets of people who have to facilitate development of various projects and provide a number of inputs, decisions, sanctions and clearances. Also, based on feed back, regular reviews of policies, and effecting changes wherever required, could further accelerate the pace of developing infrastructure.

  3. Acquisition of land, of late, is emerging as a serious issue and bottleneck. Government intervention seems imminent. Many of the projects in the infrastructure sector are facing this problem. While Government role was considered to be important in resolving these issues, most of the panelists felt that a substantial shift in the approach of developers is also necessary. We cannot think of approaching this problem in the same manner as we did say 20-25 years ago. Expectations of affected people are now different. They see their aspirations not being recognized and considered while the projects develop. They expect prosperity for them with advancement and progress of projects. Developers need to skillfully identify the areas of converging attitudes and approaches. No one - sided thinking can succeed. It was also recognized that more and more of developers have started recognizing realities and are coming out with innovative approaches and solutions.

  4. One of the biggest hurdles which stand in the way of speedy development of infrastructure projects, and particularly of power projects, is the lack of manufacturing capability in the Indian industry. Suddenly the pace of activities in all sectors has multiplied causing enormous stresses and strains on the manufacturing sector. In case of power not only equipment manufacturers of main plants namely Boiler, Turbine and Generator are hard pressed, but also those in the category of balance of plants are posing to be serious bottlenecks. Mismatches in manufacturing and supplies have put most of the schedules of projects construction and commissioning out of gear. While many of these agencies have taken urgent steps to augment their capacities, it was felt that this process needed to be extensively covered and accelerated.

  5. In power sector, the activities in the Eleventh and Twelfth plans are three to four times of what has been handled in any Plan in the past. Ability to execute these projects in the scheduled time frame is a major challenge. Lack of adequate number of large and capable construction agencies is a severe constraint. Concerned Government agencies as well as industry bodies need to get together and launch several initiatives and measures to tide over this problem.

  6. In the Public Private Partnership (PPP) Scheme of the Government, ability to handle various issues does give some cause of concern. Objectivity, transparency and schedule all need to be properly tied-up. Complexity of the scheme and inability to resolve once some problem comes up are impeding the progress on implementation of Public Private Partnership Scheme.

From the trend of discussions in the conference as also in the one-o-one meetings (I myself had six such meetings), it was quite clear that financial investors are very positive, in fact upbeat, about Indian power sector. It has further confirmed my own belief that it is not the fund which is a major issue, but it is our own preparedness to present right and ripe projects to investors and lenders. The six constraints highlighted above are all resolvable. We all need to attend to them.

Copy right : R.V. SHAHI