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Published:Thursday, January 23, 2020 8:38 AM

National Infrastructure Pipeline: An Endeavor to rejuvenate the Indian Power Sector

National Infrastructure Pipeline: An Endeavor to rejuvenate the Indian Power Sector

The Union Finance Minister Nirmala Sitharaman introduced National Infrastructure Pipeline (NIP) worth Rs. 102 lakh crores on 31st December 2019. This came in line with government’s ambitious vision to make India a $5 trillion economy by 2024-25. The vision 2025 is a comprehensive approach towards nation’s growth and ease of living by focusing on infrastructure development of country. Investments in affordable & clean energy, digital services, quality education, convenient and efficient transportation & logistics, doubling farmer income, good health & well-being and housing & water supply are the goals that would plug out infrastructure deficiencies and boost quality of services in rural and urban areas of India.
The preparations for this step were undertaken by constituting a task force comprising secretaries from Department of Economic Affairs (DEA), Ministry of Finance (MoF), Department of Expenditure and CEO of NITI Aayog. The task force paved way of a roadmap for five financial years from 2019-20 to 2024-25 under Rs. 100 lakh crore infrastructure plan that included both brownfield & Greenfield projects. The sector specific roadmap emphasized development of projects in Irrigation & rural infrastructure, Roads, Ports, Energy, Railways, Telecommunications, Agriculture and food processing, Social and Industrial infrastructure by annual phasing of investments and implementing agencies. Other core functions of task force included financial assistance to ministries, project monitoring and evaluation of annual investment/ capital costs.
Power Sector Vision
The Power sector in India needs a lot more than smart infrastructure to make rapid progress and bring reforms swiftly. Also, in order to create a robust electricity network & effective services portfolio for providing uninterrupted supply of power a continuous investment inflow is required.
At the demand side, AT&C losses must be curtailed which are currently at 8-41 percent (except J&K). Aggressive digitalization in the sector is envisaged as less than 5 percent of smart meters have been installed as on June 2018, except online systems for bill payments & lodging of complaints no services were digitalized. Apart from this challenge, huge debt over DISCOMs have resorted them to perform regular load shedding. The task force report on NIP showcased a Vision 2025 that highlights following crucial things to be achieved by FY-25.
Phasing of Investments
The Power Sector which holds up a major share of 32% out of total infrastructure investment made during the last decade aims clean and low-cost power with increased per-capita electricity consumption and renewable energy share. Under the envisioned National Investment Pipeline (NIP), Power Sector has been segmented as conventional power, renewable energy and Atomic Energy having a share of 11.76, 9.3 and 1.54 Lakh Crore respectively. However, no phasing has been done for 6.26 lakh crore under conventional power.
While assessing implementing agency wise contribution, the major contribution has been intended from Private Players which contributes to 44% of total investment, states and centre to contribute 30% and 26% respectively of the total planned investment. However, the status of projects in task force report shows that there are unclassified projects worth Rs. 8 Lakh crores with power sector as the prime sector.
The Implementing Agency wise planned investment in various segments of Power Sector is given below:
To make power sector a lucrative investment destination and keeping economic throttle agile with an investment plan of 22.6 Lakh Crore it must be ensured that share of power sector in infrastructure investments keeps up the pace along with strong fiscal stimulus. However, the government’s position to boost higher penetration of e-vehicle segment and renewable energy push would set up the field for participation by investors.
Challenges in NIP
While the report of task force on NIP highlights ample positives to enable infrastructure as an enabler of growth, there are few concerns as well. One such critical issue is financing the infrastructure investments by both state government and private sector participation. Except for a few states many them are facing an economic downturn given the current economic landscape of states with challenges like poor tax buoyancy and liability burden due to poor condition of state power distribution companies.
The recent assessment by Reserve bank of India of state finances for FY-20 shows the dilapidated financial health of many states emphasizing due to the outstanding dues which have climbed up to 25 percent of GDP. The reason being examined are fiscal shocks in the form of Ujjwal DISCOM Assurance Yojana (UDAY), farm loan waivers and implications of GST. Poor performance of State Public Sector Enterprises such as power distribution companies has continued as source of fiscal risk. Post UDAY scheme the state’s debt position deteriorated in line with power distribution sector.
The energy sector vision documents a planned capacity of 619 GW as compared to current 368 GW installed capacity. The capacity addition plan holds an enormous amount of optimism as the growth trend of installed has seen an average growth of 8% from FY-14 to FY-19. Yet with such a capacity addition vision an annual average growth rate of 20% is required which seems to be a humongous task to follow.
Factors contributing to the success of NIP
This segment highlights key contributing factors which would firm up the pedestal for success of National Infrastructure Pipeline. As a robust and resilient infrastructure is fundamental and essential for power sector, on the other hand, it must be ensured that the financial health of various stakeholders such as lending agencies and interested investors in sector. Also, proper care must be taken by investment enablers or governing bodies.
While India has invested in its core infrastructure over the years, yet the challenge is to mobilize adequate investment in which runs into several trillions of dollars. The investment gaps in infrastructure would have to be addressed through various innovative approaches with the collaboration of both public and private sector.
Banking Sector and issue of NPA resolution
The RBI has slashed interest rates by a cumulative 135 basis points during 2019, more than any other central bank worldwide over the period and considered one of the largest rate reductions in India’s history, in hopes of reviving lending. But lending continues to lose pace, and investment remains caught up in its plunge. The current predicament will somewhere impact investment interests of private players and given the amount of investment desired from private sector (almost 44%) players it would be important to address ongoing lending issues in banking sector.
The banking sector and Non-Performing Assets (NPA) crisis comes hand in hand when one talks about Indian Infrastructure sector. However, to give some amount of relief to banking sector from NPAs government constituted various debt resolution mechanisms from time to time such as Corporate Debt Restructuring Cell (CDR), Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, special mention account (SMA) and Joint Lenders’ Forum (JLF), Strategic Debt Restructuring (SDR), Scheme of Sustainable Structuring of Stressed Assets (S4A) and Asset Reconstruction Companies (ARC).
The recent remedial measure, Insolvency & Bankruptcy Code, came in 2016 as the most significant legislative reform that promised to solve NPA crisis, deadlock in availability of credit and revival of GDP growth. However, many sector experts believe that not every sector can be reshaped by IBC especially power sector where social considerations are as important as commercial criteria. The subsidies are unavoidable, potentially, this problem is critical in power sector and to add up more the stressed power assets pose another key quandary. If the thermal power plants will go through process of NCLT, then it will lose its sheen by losing power purchase agreements & fuel supply agreements. It indicates that there is no perfect fit for all for projects hence keeping the Indian banking sector vulnerable.
There has been a cascading effect of drowning banking sector on other sectors too. From FY-16 to FY-18, the asset quality of infrastructure finance companies (IFCs) got affected largely by power sector. The sector plagued by stressed thermal power sector, DISCOM over dues and uncertainty in renewable energy projects substantially affected the infrastructure credit.
The issue of improving IBC process needs a more holistic solution where all stakeholders (including government, banks, power companies and public) are gruntled along with this the process proves to lead towards realistically fair transactions. Interestingly, one such remedy for resolution of stressed asset is given by Former Chief Economic Advisor of India in one of his working paper at Center for International Development, Harvard University. The recommendation goes on to give a resolution by creating a holding company for power sector which would be capitalized by the government and this holding company shall be operating as an asset rehabilitation agency.
As per ICRA’s assessment, the first half of FY-20 witnessed a mere increase to Rs. 21.2 lakh crore from Rs. 21.1 lakh crore in infrastructure credit. This mild growth was mainly attributed to diminishing of banking sector credit to infrastructure segment because of conversion of bank’s exposure to DISCOM’s bonds, subdued lending amid asset quality issues and capital constraints. Though the IFCs recognized stress in thermal power sector and its consequences on it, any stress due to ambiguity in renewable energy projects will be a forthcoming challenge. According to ICRA, total IFC’s exposure to renewable energy projects was around 9 percent or 90,000 crores as on September 2019. Today, the IFCs are shying away to lend money to developers for infrastructure projects, quite evident by the downfall of Infrastructure Leasing & Financial Services Ltd (IL&FS) in September 2018 and Dewan Housing Finance Corporation Ltd (DHFL) in June 2019.
Effective Project Monitoring
In recent years, projects such as Power for All, Smart Cities Mission and Ultra Mega Power Plants (UMPP) transpired as the biggest infrastructure projects in India. The report published by Ministry of Statistics and Programme Implementation’s (MoSPI) highlighted that 20 percent of central sector projects got delayed from their scheduled date of completion with an average time overrun of 45 months. This is largely because long term projects involve multiple stakeholders, vendors, government intervention and limited resources. The primary reasons for time and cost overruns in multiple power sector projects are geological challenges, land acquisition issues, shortage of manpower, regulatory uncertainties and ineffective dispute resolution mechanism. Hence, project monitoring plays a key role in determining its successful implementation which will further reduce risks of potential NPAs.
While understanding sector scenario, focus should be on areas like implementing agencies/ PSUs, contractors across the value chain. Likewise, poor execution planning process, mediocre capabilities due to technology inadequacy and unavailability of skilled staff is another constraint. The emphasis should be given to effective pre-planning and planning stage along with proper site investigation and due diligence together with upgraded procurement & contract management process.
In accordance with the task force report on NIP, a government framework for monitoring has been devised and it will be put in action soon. The framework includes four different project categories along with desired monitorable & action plans. The categories of project include Project under Implementation, Project achieved financial closure (FC), Project under development and at conceptualization stage. This framework is expected to solve the issues related to project monitoring.
Impetus to Private sector participation
The private sector has offered more than one-third of infrastructure investments since last decade. The PPP model is one such door that has spurred maximum private investments in Infrastructure sector. The power sector has also reaped the benefits of PPP model in its value chain as one can’t ignore the success stories of PPP models practiced in power distribution of Delhi & Gujarat. In another push to PPP participation in power sector, Letter of Intent has been awarded to Tata Power Company Limited to own the license for power distribution and retail supply of electricity in Odisha's five circles, together constituting Central Electricity Supply Utility (CESU) of Odisha. The World Bank has ranked India as a second country for Private Participation in Infrastructure in terms of number of PPP projects & associated investments. Also, these investments are expected to ramp up in coming years and to further contribute in GDP growth.
In India, considerable business models have been prospered in private sector participation in infrastructure segment such as Build Operate-Transfer (BOT) contracts, Design Build-Finance-Operate-Transfer contracts, Rehabilitate - Operate – Transfer and Hybrid Annuity Model etc. However, some of these models are not applicable to Power Sector.
The current position of AT&C losses gives a measurable quandary to power sector and given this scenario NIP has decided to resort on increased PPP models in DISCOM to energize state distribution companies. The private sector participation works out as a general reform process where emphasis will be given to a deep pool of experienced developers with required competence and execution capacity.
The NIPs package of 102 lakh crore is roughly close to 40 percent of India’s current GDP. These funds will be useful to revive Indian economy from its current slowdown but not limited to implementation only as economic revamp is amalgamation of many factors. Yet this National Infrastructure Pipeline will add up a huge stimulus to Power Sector but as the challenges are enormous and solutions are not unilateral. Even though, the plan proposes a single window entity to give green nod to projects and help them in investment cycle.
However, this would be interesting to see that how NIPs optimistic approach will have strong bearing over the economy by facilitating creation of jobs, improving quality of life and providing access to infrastructure for all. The reforms suggested by task force to ramp up infrastructure investments and project monitoring framework will certainly ensure dynamic changes in infrastructure sector. Coincidentally, if one focuses on challenges there is an urgent need to carve out settlement option for unsettled & stuck-up projects where an institutional mechanism is needed to provide time bound resolution of disputes. 

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