Signs of Revival

Government policies and programmes lend momentum to infrastructure sectors

When the National Democratic Alliance (NDA) government took charge, hopes were sky high. The NDA had a majority in the lower house of Parliament. Prime Minister Narendra Modi had an excellent track record as the chief minister of Gujarat and it was believed that he could “scale up” his administrative skills to deliver similar results at the centre.

Two years down the line, expectations have rationalised. Stakeholders have come to realise that it is considerably more difficult to come to terms with the complexities of running the central government. In addition, global conditions have been slow.

Progress has been mixed. There has been visible acceleration in activity across infrastructure sectors and there is the promise of more, and faster, development. But grey areas also remain in every sector and some of the overarching problems that affect the entire space have not been solved.

For example, land acquisition remains a significant issue. The government wasted a lot of political equity in trying to push through land amendments via the ordinance route. But, it hasn’t worked out. Statutory clearances also remain slow in many cases.

Environmentalists and local residents continue to protest and to raise (sometimes pertinent) issues – the centre (and sundry state governments) has not yet found ways of engaging civil society cooperatively. In addition, many projects remain stalled, often for lack of financial sustainability; lenders remain wary of infrastructure lending, since banks have huge outstanding non-performing assets (NPAs) in these segments. In addition, of course, each sector has its specific challenges and issues.

That said, there has certainly been some improvement in delivery. The roads and bridges sector has seen the speed of construction in-

creasing and there has been steady progress in project awards. Power has seen a turnaround in many senses as fuel linkages have been sorted out for thermal plants, and the Ujwal Discom Assurance Yojana has led to some improvement in the finances of cash-strapped state discoms. There has been strong capacity addition and investments in transmission. For the first time in many years, India is power surplus. Activity in the renewables sphere has also speeded up, though the target of 175 GW of renewables by 2022 is probably not achievable.

In the urban zone, the combination of the Atal Mission for Rejuvenation and Urban Transformation, the Smart Cities Mission and the Swachh Bharat Mission (SBM) has ensured that activity continues, although the rapid pace of urbanisation has outstripped the pace of creation of urban infrastructure. On the water supply and sewage front, more ambition is probably required. Pilot 24×7 schemes, for example, have worked in many places and it is time to scale up. Sewage treatment capacity lags way behind demand and it is to be hoped that greater emphasis on the SBM will accelerate work in this segment.

Overall, the pace of asset creation and service delivery could undoubtedly be improved if there were more private players in the urban sphere and it is up to policymakers to find ways to induct private capital and know-how. It is also time to review half-successful schemes like bus rapid transit systems. Why have they worked out in Ahmedabad and Pune and not seen uptake in other cities? The metro segment, on the other hand, continues to make excellent progress and many of India’s larger cities will soon have functioning metros.

Oil and gas and ports and shipping are two sectors where dynamics are very largely driven by global events. The low price of crude and gas has impacted the oil and gas sector since late 2014. This has undoubtedly been beneficial for India’s trade account and fiscal deficit, since over 80 per cent of crude and about 30 per cent of gas are imported.

Low prices have offered leeway to free the price of diesel and petrol at a retail level and to reduce the subsidy on kerosene and gas. In fact, the government has collected higher excise on retail fuel sales as well, rather than just passing on the price cuts.

Lower prices have also enabled greater downstream activity with liquefied natural gas imports reviving stalled power plants. There has been some activity in transportation pipelines and even some interest in the city gas distribution segment.

There have been some downsides to low prices though. Activity in the exploration and production upstream segment has not taken off. The new Hydrocarbon Exploration and Licensing Policy has been approved, but stakeholders say that there are areas of concern with the proposed risk-sharing systems. Bluntly, there is unlikely to be a great deal of interest in developing India’s hydrocarbon resources until the international price cycle starts uptrending again.

The ports and shipping sector is heavily driven by international trade. Global demand has been low and traffic has been flat for a while. Capacity building continues, but slowly, and project awards have also been slow. The Sagarmala-based schemes for developing a string of ports to enable domestic trade and the creation of inland waterways are ambitious concepts in theory. In practice, there hasn’t really been much movement on the ground yet. Shipping concerns are also suffering from the lack of global trade activity and the lack of demand also means that shipyards are idle. Defence-related contracts could, perhaps, help keep shipyards afloat.

Civil aviation has been a beneficiary of low fuel prices, enabling domestic airlines to cut costs. Lower fares have, at the same time, meant higher passenger traffic, and freight has grown too, though not at the same pace as passenger traffic. The long-awaited National Civil Aviation Policy, 2016 has many positive proposals which should help airlines expand their footprint. Matters on the ground have moved, but more slowly. Every greenfield airport project is running way behind schedule. Even new capacity at existing airports has not been developed at the desired pace. The potential for turning India into a maintenance, repair and overhaul hub remains untapped as well.

The railways have been hit by high levels of competition from road transporters and the aviation sector. The premier transport provider, Indian Railways, is struggling to maintain profitability and to find resources for the vast investments that are required to refurbish and expand its network and rolling stock, raise safety standards and impart efficiency to its processes. Freight traffic has been almost flat, while passenger traffic has declined. Operating ratios remain high (and are projected to rise). There are proposals for a complete overhaul of processes and norms for investment, including foreign direct investment (FDI), have been eased. But the railways will take time to turn around.

In the telecom sector, growth continues, in terms of subscriber numbers at least. There is also a welcome uptrend in terms of internet traffic and data usage. Another surge is expected as more long term evolution 4G networks are rolled out and data rates get more competitive with the entrance of a big new player. But vast investments are required to deliver adequate quality of service on India’s creaky mobile networks. Telecom operators are spectrum starved and unhappy at the high base prices set for the upcoming spectrum auction. Policy changes and rationalisation are required to sort out spectrum trading, and mergers and acquisitions and other issues.

The sector, though, has run into a peculiar set of problems. There has been a lot of acrimony centred on call drops and, more generally, on QoS issues. There have been outright accusations by operators that the regulator is favouring a new entrant. Under the circumstances, it is very likely that existing issues and challenges will not be negotiated to the satisfaction of all stakeholders, since there is an attitude of mutual suspicion. Cash-strapped operators could be under a great deal of pressure until the situation in the sector stabilises. A shakeout is likely at some stage.

Overall, the financing of infrastructure remains stressed. There have been laudable attempts to make it easier to access finance and also for developers to exit projects. FDI norms have been eased. The deleveraging of stressed balance sheets has certainly helped revive the roads and bridges sector.

But, a glance at financing patterns makes it clear that financing for infrastructure is still quite difficult to access. In key areas like telecom, cement and petroleum, investment has actually decreased. Only about eight road construction projects have achieved financial closure in the past two fiscals. Overall, bank credit across infrastructure increased by only 4 per cent in 2015-16 compared to 2014-15. But there were several infrastructure initial public offerings (IPOs) in 2015-16 including Interglobe Aviation’s (Indigo) large Rs 30 billion IPO.

A part of the problem is the cautious attitude of lenders, especially banks, which are licking their wounds due to the massive NPAs incurred in the infrastructure sector. Another issue is the weak global growth environment.

Nonetheless, investment demand also remains weak. There is a chicken-and-egg problem. The government has tried to improve the policy environment both in terms of policy changes as well as incremental positive changes in processes. However, these moves have not yet started to deliver visible results on the ground. Until there are clearer signs of revival, investors and developers are likely to remain cautious.

In many respects, the government has probably been too cautious and incremental in its approach, except for the early abortive attempt to ease land acquisition norms. It is only now, well into its term, that it has looked to make significant policy changes.

In many infrastructure segments, the issues are extremely deep rooted and drastic changes in approach may actually be required to address long-standing problems. Also, these are long gestation spaces by their very nature. It will take time for policy and process changes to filter through and for developers to regain the confidence to bid for new projects. There are indeed signs that activity is gradually reviving. Let us hope that the resurgence gains momentum.


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