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Sustained Friendly Business Environment must to meet Eleventh Plan Targets, Shri R V Shahi, Former Secretary, Ministry Of Power

Sustained Friendly Business Environment must to meet Eleventh Plan Targets
[R V Shahi's Weekly Column for Infraline, December 24, 2007]

The National Development Council which met last week approved the Eleventh Plan (2007-12). It envisages a Total Plan outlay of Rs. 14,21,711 crores. The outlay for infrastructure is of the order of Rs. 2,060,193 crores, which is substantially higher than the expenditure on infrastructure incurred in the Tenth Five Year Plan, of the order of Rs. 871,445 crores. Within the infrastructure group, power sector, as usual, has the lion's share, of the order of Rs. 666,525 crores. It may be important to highlight that the investment in the power sector which would be made in the process of developing Ultra Mega Projects and such other projects, Captive Plants and Merchant plants are not included in these estimates. Therefore, investment in power sector is likely to be much more than envisaged in the Eleventh Plan document.

In the past we have experienced huge shortfalls in achievements vis-?-vis targets. While in the Eighth and Ninth Plans the achievement was less than 50% of the targets, even in the Tenth Plan, though marginally higher it was less than 60%. A detailed analysis of the reasons for these shortfalls indicates that a substantial portion of the shortfall was on account of inadequate preparations before commencement of the Plan. It is well known that power projects have long gestation periods, which include not only the construction cycle time but another cycle of pre-construction preparations and activities which take almost two years. Inadequately prepared projects, with lot of vital inputs and clearances not properly tied up, but included in the Plan, obviously lead to non achievement. Other reasons for shortfalls include (a) mismatch in manufacturing and supply of plant and machinery, (b) inadequacies on the part of construction, erection and commissioning agencies and the (c) local problems on account of rehabilitation, resettlement of land owners and land evictees and industrial relations.

The Western Region of the Confederation of Indian Industry (CII) organized the India Energy Conclave - 2007 to discuss "India Energy - Emerging Opportunities & Challenges" at Ahmedabad on December 07, 2007. The Conclave also included an international exhibition "Energy Expo - 2007". It was nice of the CII to have invited me to light the lamp and inaugurate the conference and exhibition. Apart from listening to addresses by distinguished experts and presenting a key note address I also chaired, toward the end of the conference, an Interactive Round Table of CEO's. Since the entire deliberations focused on a number of issues which are directly relevant to achieving the targets in the Eleventh Five Year Plan, it would be worthwhile bringing out the important observations, conclusions and recommendations of this Conclave.

The important challenges facing the power sector in the matter of meeting the target have now been captured by the Indian industry and they are gearing upto addressing these. Raising the financial resources has been highlighted as one of the major areas of concerns. But, it was felt that the following factors, if kept in mind and properly analysed, would indicate that in the ultimate analysis, if stakeholders and the Government acted on the lines suggested, finance may really not be a constraint.

  1. There is a highly favorable perception about the Indian power sector amongst Indian and global capital market players. In the last three years while the compounded annual growth rate in net profit in the listed power utilities has been in the range of 15-18%, the CAGR of the market capitalization during the same period has been as high as 154%.

  2. Financial closures of good power projects is no longer posing a serious bottleneck. Viable projects and credible developers are, in fact, attracting competing financing agencies with attractive rates.

  3. A large number of financial institutions have started thinking positively to invest in equity of these new project companies, apart from their participation in the lending consortium. A few years back this approach was almost non existent.

  4. The central public sector undertakings in the power group have shown the way how to access equity fund through new issues such as IPO and this opens up enormous possibilities for similar companies under the control of the State Governments.

  5. Even Green field Project companies, on the basis of valuation linked to future revenue, are getting very favourable response from equity capital market.

  6. Long term funds by accessing provident fund and insurance money is being favorably considered particularly for infrastructure projects.

In view of these it would be reasonable to assume that financial resources may not prove to be a constraint for the growth target in the power sector, particularly keeping in view also the positive perception about the power stocks outside the country.

It is well known that the in the beginning of the Eleventh Plan in 2007, already about 55,000 MW of projects are under construction. Many more projects are in the pipelines and very soon they would also come at the stage of construction. Three things appear very important to not only keep the momentum but to pitch up the pace : (a) manufacturing industry must do everything possible to see that the enthusiasm regained and interest revived, among developers and financers, are not allowed to dampen. Their task is not only to mobilize to produce plant and machinery but also to ensure that there is no slackness during construction and erection stage. Unfortunately during the last two to three years when the construction of new projects increased to about two to three times, almost in every project the manufacturing sector together with their associated construction agencies have been giving uneasy moments to all the power project developers. This point has been laboured extensively in the last one year. Some response has also been created. But these agencies need to act with greater degree of promptness and seriousness and higher amount of preparations.

What was, however, particularly brought out in this Conclave was about the need for sustained business friendly environment in the country. Through historic Electricity Act 2003 and a number of other policy documents subsequently notified, no doubt, a highly enabling framework has been put in place for a very powerful take-off. The response of private sector in a very significant way is also visible. Ultra Mega Project initiative and private sector response thereon amply vindicates the seriousness of industry towards power sector. To say the least, the capital market has become most bullish about this sector. But it needs to be underscored that this interest can really be translated into definite contribution by Indian and foreign private sector only if the procedural loose ends and vital inputs needed for power project developments are properly tied up and provided. The type of assistance and the degree of commitment of the Government both at the Centre and State levels which has been shown in the case of Ultra Mega Projects is an example. And, a proportionate reciprocation by the industry, if the governmental agencies came forward to address some of the important issues, clearly establishes the need for new approach of this type on our public - private partnership

Recently the report of the International Finance Corporation (IFC) of the World Bank on "Doing Business - 2008" has come out. Though India has moved twelve ranks up but it is still ranked at 120 in the assessment on favorable business climate. China ranks at 83. It is interesting to suggest that the India's rank at 120 is in comparison with South Asian rank of 107, Sub-Saharan Africa - 136, High income OECD countries - 22, Europe and Central Asia - 76, East Asia & Pacific - 77, Latin America & Caribbean - 87 and Middle East & North Africa - 96. The IFC report makes a very revealing observation - a remark which all of us should seriously examine, introspect and act upon. It says that India can move 55 notches up from its rank at 120, in doing business and enhance its business environment, if the best practices already in action in some of the States and Cities in India can be replicated across the country. Therefore, if we just followed the bench mark practices in our own country, India's rank could move from 120 to 65 - what a satisfying jump with a potential to create significant impact on the perceptions world over. The things that have improved in the last few years in India include in the field of making trade easier in India and also trade reforms aimed at reducing time to import. To give a few examples, the procedures entailing almost 30 days time in effecting exports has been streamlined. As compared to 28 days which used to be taken in 2006 it has been reduced to almost 15 in 2007. Similarly, in the matter of import involving preparation of document, inland transportation and handling, custom clearance and technical control and port and terminal handling, which used to take more than 40 days is now reduced to about 20 days after streamlining of the procedure. India's rank in respect of some of the issues gives cause for concern. These are the areas where we need to revisit our approaches, systems and procedures - (a) starting a new business - rank 111, (b) dealing with licenses - rank 134, (c) employing workers - rank 85, (d) registering property - rank 112, (e) paying taxes - rank 165, (f) trading across borders - rank 79, (g) enforcing contracts - rank 177, (i) closing a business - rank 137.

Two actions are needed - (i) In all these areas the concerned agencies need to revisit the present procedures, see the ranks of those countries which are high on these factors, analyse the practices they are following, and examine why these practices cannot be adapted with required modifications in our case. (ii) Second set of actions relate to identification of bench mark performance within Indian states and cities about which the IFC report has highlighted that adoption of these would enhance India's rank by 55 notches. These could be straight away adopted in other places. To the rest of the world we need to demonstrate our commitment and seriousness on the need for a sustained business friendly environment. It might happen that inspite of best efforts in all these factors we may not succeed fully. What is important is that it would demonstrate our efforts, concerns and commitment to create and to enhance favorable business climate. Definitely we would also succeed greatly in most of the efforts to improve. In the power sector, it is gratifying that some of the States have started adapting Ultra Mega Project Model. This Model is built on the basic premise that if the Government agencies create industry friendly climate, continue with hand holding, as and when and, to the extent needed, address such genuine concerns of developers which only Government agencies can handle with effective result, then industry more than reciprocates. Whichever Governments in whichever States do this would get the commensurate, quite often more than commensurate, results.

At conceptual plane, a systemic approach to improvement in procedures leads to individual cases not being subjected to a case by case treatment and therefore delays automatically get addressed. This approach, however, requires a change of mindset of authorities, of the whole system and above all of individuals who are in the chain of decision making. An approach of control and discretion, and a desire to decide each case, goes contrary to allowing and encouraging systemic dispensation of a group of cases. In the Government system, over the years, what has been seen that individuals want to keep to themselves the process of decision; they would like to examine each case, would raise host of queries, would like the affected agencies to approach them before such decisions are taken. If we recall the days when import of plant, machinery, spare parts etc. were fully controlled and a large organization namely DGTD had all the powers to decide each case on merit. The philosophy behind this was a very judicious spending of foreign exchange. Even with this type of an excessive control, the country's foreign exchange reserves were not at all comfortable. DGTD operations were wound up. The existence of the organization was done away with. Industry felt relieved under such a liberalized system. We have seen that not only working has improved but also country's foreign exchange reserves have gone up. There is a great message in this. Each step of liberalization has led to more efficient operations and much fruitful results. It is this approach which should guide us in enhancing the business environment and friendly climate - a climate in which investors and developers not only feel comfortable but they should feel convinced that the Government and the system need them, invite them and welcome them.

I recall, in the five years that I worked in the Ministry of Power, in each Monday meeting of Senior Officers (almost 95% of Mondays in the five year period we could do these meetings), one issue which we always discussed was in relation to a question "Why people or company's representatives need to come to us?" The agenda always used to be, apart from other items, whether through systemic improvement we could do away with such a requirement of agencies coming to us for sanction, clearance or even for recommendation. The purpose was that we should evolve a process which should automatically provide this rather than in dealing with individual cases. Looking back, one could say with satisfaction that we succeeded to a great extent. Through major legislative, policy and administrative initiatives and accompanying procedures, the need for individual examination of cases has been radically reduced, if not totally eliminated. The process continues in the Ministry of Power. Similar process is also being considered in many other Ministries, and if these administrative changes are put in place, there is no doubt that investment climate in India would improve and assessment of agencies like World Bank on these factors would reveal a much higher rank for the country in coming days. This type of an approach together with, as extensive as possible, deployment of I.T. Hard and Softwares into the process of functioning of Government agencies could lead to magnificent outcomes. According to the Eleventh Plan document the capital inflow during the plan is of the order of almost 207 billion U.S. dollars. We all should strive to achieve this. With better business climate this should be possible.

Agencies directly dealing with power obviously cannot bring about the total change. If we have to inspire greater degree of confidence among the investors and other stakeholders then all the other connected Government agencies relevant to development of power projects would have to have a similar approach. There is a scope for improvement in all these areas and, infact, in all the other areas of infrastructure as well. For the power sector, in a separate paper, I have articulated that there are good reasons to believe that funding would not be an issue provided we could formulate viable projects with necessary linkages and inputs and for doing that all Government and related agencies need to work in tandem so that this moves in a smooth way. Similar approach would be necessary for any other sector where we have plans to expand.

Copyright : R.V. SHAHI