SECOND high level commitie report ON INFRASTRUCTURE PROJECT
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The document is a report from the High Level Committee on Financing Infrastructure that makes recommendations to improve infrastructure financing in India during the Twelfth Five-Year Plan period from 2012-2017. The Committee assessed investment needs across 10 infrastructure sectors and found that actual investments have lagged targets and projections. It recommends establishing an Infrastructure Development Council chaired by the Prime Minister to guide policy. It also recommends reforms such as developing capital markets, reviewing regulations, and attracting more private and international investment to help close India's large infrastructure funding gap.
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SECOND high level commitie report ON INFRASTRUCTURE PROJECT
- 1. Second Report of the High Level Committee on Financing Infrastructure GUJARAT NATIONAL LAW UNIVERSITY Presented by: Jeel Langadia (16MB03) Mani Dwivedi (16MB05) Mayur Jaguwala (16mb07)
- 2. Context • The rapid growth of the economy has placed increasing stress on physical infrastructure in terms of capacity as well as efficiency. • Actual investments for Eleventh plan: Rs. 19 lakh crore • Estimated investments forTwelfth plan: Rs. 45-50 lakh crore. • Financing investment of this order required a review of the existing policies as well as adoption of innovative ways of financing. • The High Level Committee on Financing Infrastructure was thus formed.
- 3. Committee’s Objectives forTwelfth FiveYear Plan Assess investment in ten major physical infrastructure sectors To suggest ways to enable the requisite flows of private investment To make recommendations for government to develop capital markets for intermediating long- term savings for investments To examine the role of international capital flows in infrastructure financing To identify any regulatory/ legal impediments constraining private investment in infrastructure
- 4. India ranks 85 out of 144 in infrastructure investment. India also lags other countries in project implementation. Projects suffers from 20 to 25 per cent time and cost over-runs. Delays in projects due to slow resolution processes.
- 6. Continued… The pace of investment has not picked up even during 2013-14 and several bottlenecks and barriers have continued to persist. Thus, it was unlikely that theTwelfth Plan projections made earlier would materialise. Thus, investment projections contained in the Interim Report need to be revised based on actual investment in the Central sector during 2012-13 and revised estimates (RE) of 2013-14. The total investment during theTwelfth Plan was now projected at Rs. 30,93,558 crore as compared to Rs. 27,29,179 crore achieved during the Eleventh Plan at 2011-12 prices
- 7. Sectoral Projections Sector Twelfth Plan (Projected) Eleventh Plan Public Sector Private Sector Expected Growth (2012- 17) Electricity Rs. 9,08,463 crore Rs. 7,90,481 crore Rs. 5,20,127 crore Rs. 3,88,336 5% Renewable Energy Rs. 1,70,628 crore Rs. 1,02,004 crore Rs. 25,652 crore Rs. 1,44,976 crore 27% (Public) 21% (Private) Roads & Bridges Rs. 5,82,598 crore - Rs. 4,28,288 crore Rs. 1,54,310 crore 14% (Public) 10% (Private) Telecom Rs. 3,23,008 crore Rs. 4,38,787 crore Rs. 3,01,747 crore 2% Railways Rs. 3,39,816 crore Rs. 2,31,935 crore Rs. 2,97,054 crore Rs. 42,762 crore 11% MRTS Rs. 1,06,866 crore Rs. 49,184 crore Rs. 72,304 crore Rs. 34,563 crore 34% (Public) 44%(Private)
- 8. Continued… Sector Twelfth Plan (Projected) Eleventh Plan Public Sector Private Sector Expected Growth (2012- 17) Irrigation Rs. 2,92,708 crore Rs. 2,66,375 crore Rs. 2,92,708 crore Negligible - Water Supply & Sanitation Rs. 1,49,068 crore Rs. 1,36,021 crore Rs. 1,44,636 crore Rs. 4,431 crore - Ports Rs. 95,424 crore Rs. 55,347 crore Rs. 20,067 crore Rs. 75,360 crore 30% (Public) 26% (Private) Airports Rs. 33,629 crore - Rs. 9,191 crore Rs. 24,438 crore 30% (Private) Storage Rs. 39,948 crore - Rs. 16,177 crore Rs. 23,771 crore 8% (Public) 40% (Private) Oil & Gas Pipelines Rs. 51,403 crore - Rs. 33,764 crore Rs. 17,638 crore 46% (Public) 60% (Private)
- 9. Overarching Recommendations • A reorientation of programmes and policies was vital for time-bound delivery of world-class infrastructure. • Therefore, Committee recommends the constitution of a council to guide policy formulation with a view of attracting domestic and foreign investment. Infrastructure Development Council Chairmanship of Prime Minister Ministers of Finance and infrastructure Ministries and Deputy Chairman, Planning Commission
- 10. Continued... Creation of an arbitral architecture Dedicated to resolution of disputes Disputes of infrastructure project Address the role, functions and powers of regulatory commissions The manner of selection of regulators The accountability of regulatory commissions Further, due to absence of credible dispute resolution mechanism resulting in projects delay and increased costs, Committee recommends: The Committee recommends a thorough review and reform of the regulatory laws and practices with a view to:
- 11. The Committee further recommends that: The Government may take urgent action to ensure that project authorities honour their respective contracts and discharge obligations. The Land AcquisitionAct may be reviewed and suitably amended to cover land acquisition for all infrastructure projects. To review and modify lengthy and complex provisions in Land AcquisitionAct in order to ensure expeditious commencement of the construction of infrastructure projects. Increase in the tax-free infrastructure bonds. RBI amended its prudential norms on Advances to Infrastructure Sector under which loans granted will be classified as secured loan.
- 12. Equity Funding • Proactive action by Ministries to welcome Foreign Direct Investment (FDI) • ForeignVenture Capital Investors to be allowed to invest. • IIFCL's scheme to accelerate investment. • Government policy reforms to attract larger flows of equity funding. Refinancing of Debt • Setting up infrastructure debt funds (IDFs) • Pre – payment of bank loan. • Reinventing IIFCL for a larger role RESTRUCRING • NPA • Debt services • Bank loan
- 13. Particulars Problems Recommendation by committee 1. Funding of Equity 1. Slowdown in fresh equity investment due to over leveraged balance sheet 2. International market also flushed with liquidity. 1. Open foreign venture capital to invest in India ‘’ core investment companies’’. 2. Refinance of debt 1. Banks are deficient in long term liabilities 2. Risk averse in long term fund. 1. RBI issued guidelines that ensure debt finance in which risk based ROI: - higher at construction lower at operation period 2. Forms IDFs , (to under take re finance project loan).
- 14. Particulars Problems Recommendation by committee 3. Restructuring of NPA 1.Viability of project period 20to 30 years but bank expect return in 12-15 years.They declares after period as NPA RBI & department of Financial Services closely examine special characteristics on infrastructure lending for NPA recognition. 4. Restructuring of Debt Services Bank lends upto 12to 15 year , and recover principle with interest. Payment through ‘’Bullet Payment’’ 5. Restructuring of Bank Loan For restructuring , provisioning is required for infrastructure loan by concerned bank. But bank lends to limited short period. NO requirement of provisioning by banks. Debt paid before 3 years of concession period.
- 15. Particular Problem Recommendation by committee 6. Development of Bond Financing FII’s don’t have trust over infrastructure bond issued by companies. 1. IIFCL Provide Guarantee for specified infrastructure bond 2. IIFCL lends 20% of project cost to approve projects 3. In order to raise in investment govt. gives credit rating to infra companies.to attract FII’S.S 7. longTerm Finance Large Project finance period 25to 40 years , Risk to lender and investor. 1. Floating rate of interest. 2. Bond market creation.
- 16. . • Framework for limited recourse lending: Recommendation to bank strengthen the project appraisal processes by knowing : 1. project sponsor have a adequate financial stake 2.The capital cost are reasonable. 3.The revenue Potential of Project is on realistic basis. External Commercial Borrowing : 1. project can be re finance up to 25%of project cost but don’t have NPA. 2. Ports & international airport 50% of project cost, with no time limit. Tax free bond : TO Boost infrastructure Government issued tax free bond upto 30000 cr. to 60,000 cr. During period 2012to 2014. The Committee recommends that the limit for issuance of such bonds during the financial year 2014-15 be increased to Rs.1,00,000 crore.
- 17. Sectorial Recommendations for Reviving Investment
- 18. Power • Open Access and competition • Revisiting the tariff structure • Public Private Participation (PPP) in distribution • Debt relief for stranded projects. COAL SUPPLY • Operationalise PPP in Coal Mining • Turn-key implementation of critical railway lines HIGHWAYS • Manage aggressive bidding • Expedite roll-out of PPP projects • Operationalise the Expressway programme
- 20. RAILWAYS • Restructuring of the Railway Board • Private investment through PPP • Financing of viable projects by IRFC URBAN INFRASTRUCTURE • AdditionalVGF under JNNURM • Attract more private investment in MRTS • Private investment in water supply IRRIGATION • Private participation in irrigation
- 21. PORTS • Expedite award of projects • Deregulation of tariffs • Reduction in dwell time • Private participation in inland waterways AIRPORTS • Expedite award of Greenfield airports • Management and Operation of metro airports • Management and operation of non-metro Airports • Tariff Regulation STORAGE • Creation of modern storage
- 22. Conclusion Devise a time bound action plan to address recommendations Improvement in roll-out PPP projects Monthly monitoring of the implementation of recommendations to avoid delays
Editor's Notes
- POWER Open Access and competition - SERCs should only fix the wheeling charge and open access surcharge in accordance with the Tariff Policy notified by the Central Government. - 75 per cent of the Centre's discretionary allocation comprising 15 per cent of CPSUs' available for direct sale by CPSUs to open access consumers. – Introduction of competition in the market – reduce the monopoly in the market. – open access in place, generating companies will be able to produce more electricity at market prices and sell directly to bulk consumers at mutually negotiated prices. Revisiting the tariff structure - consumer tariffs be rationalised and graded according to capacity to pay. The smaller households may be charged a lower tariff , high income households, commercial consumers and industries should be gradually moved to market-based pricing where these consumers may be enabled to choose from among competing supplies of electricity. Public Private Participation (PPP) in distribution – framework should be adopted by the States for cities and larger towns in the first instance. The Central Government may provide Viability Gap Funding and other support for this purpose. Debt relief for stranded projects - Large volumes of private investment are under stress because of short supply of coal and gas. - Due to this production reduces and the normal loss increase like fixed cost, like salary etc. large number of power projects are likely to become non-performing assets (NPAs), if some relief is not provided by way of restructuring or rescheduling of their loans. COAL SUPPLY Operationalise PPP in Coal Mining - With the addition of ~65 GW of incremental coal based capacity in Twelfth Plan, a short fall of 100-120 MTPA of coal is expected. It is also unsustainable from the perspective of managing the current account deficit. The Government had constituted an Inter- Ministerial Group (IMG) for finalising a Model Concession Agreement (MCA) for enabling PPP in coal mining. MCA after extensive consultations with experts and stakeholders. Under this model, the coal mine as well the coal will remain in the ownership of the public sector, while the private partner will receive a mining charge on the coal mined. The sale of such coal will be undertaken by the public entity which grants the PPP concession Agreement. Existing mines of CIL, which are yet to be explored, may also be transferred to the new company. Turn-key implementation of critical railway Line - Ib Valley in Odisha, North Karanpura in Jharkhand and Mand-Raigarh in Chhattisgarhenvisage major coal production during the Twelfth Plan and beyond. Accordingly, three critical railway line projects namely Tori- Shivpuri-Kathautia in Jharkhand, Bhupdeopur- Korba-Dharamjai in Chhattisgarh and Barpali- Jharsuguda in Odisha have been taken up for implantation. HIGHWAYS Manage aggressive bidding - The international best practice is to prequalify and shortlist 3 to 5 bidders for the final stage of bidding. This is necessary because the final round of bidding for PPP/EPC (turnkey) projects requires significant investment in time and resources for submission of competitive bids. In USA, a Federal law prescribes a ceiling of 5 shortlisted bidders for the final round of bidding in such projects. - practice of shortlisting of bidders which was initially adopted in the PPP model framework, but was later put in abeyance, may be restored, especially for the highway sector. Expedite roll-out of PPP projects - During the year 2013-14, NHAI has awarded just 1215 km consisting of two PPP projects against a target of 9,000 km. In the previous year also, only 1,116 km were awarded against a target of 9,500 km. The Committee recommends that NHAI should draw up a month-wise plan to award 5,000 km in 2014-15 and 10,000 km in 2015-16. This will be possible only if NHAI is able to undertake a sustained roll-out of projects which are financially viable and bankable, given the expected toll revenues. Operationalise the Expressway programme – promote expressway infrastructure more and more. Revision of Total Project Cost - the weighted average inflation in key commodities (bitumen, steel, labour) used in highway construction has been much higher than the WPI. The Committee recommends that keeping in view the principle of cost neutralization as embodied in the MCA, the TPC may be revised based on a formula that captures inflation of key cost drivers of road construction.
- RAILWAYS Turnaround of Indian Railways - facing serious problems such as inadequate investment, diminishing efficiency, falling safety standards and declining share in freight and passenger traffic. Restructuring of the Railway Board - Railway Board on commercial lines to enable investments and growth in the railways which otherwise seems sluggish. The Committee also recommends creation of a post of Member (PPP) in railways board who would be responsible for project conceptualisation, development and processing of all PPP projects to facilitate their speedy sanction by the Government and award of concessions. Private investment through PPP - private investment which constitutes about 5 per cent of its total investment. (i) Modernisation of Railway stations, Elevated suburban corridors in Mumbai, Development of new freight corridors, Development of logistics parks, Port connectivity projects, and Manufacturing of diesel and electric engines, coaches and wagons. Financing of viable projects by IRFC - the IRFC has somehow limited its mandate to leasing of rolling stock to the Railways whereas it should serve the broader objectives for which it was created. Some of the projects that should qualify for IRFC financing include viable electrification and signalling schemes, railway lines etc. The Committee recommends that Railway Ministry should formulate viable project proposals and award them on a turnkey basis to be financed by IRFC. URBAN INFRASTRUCTURE Additional VGF under JNNURM – JNNURM emphasises the need for harnessing private investment for financing urban infrastructure projects, the Government has not yet spelt out any mechanism or scheme under which private investment can be incentivised. - The only financial incentive currently being provided for PPP projects in urban infrastructure is a capital grant of up to 20 per cent of the capital cost under the ongoing Viability Gap Funding (VGF) Scheme. VGF grants under the extant VGF Scheme should also be eligible for a matching grant of 20 per cent under the JNNURM. This would imply that the Central Government would provide up to 40 per cent of capital grant for financing PPP projects in urban infrastructure. In addition, the State Governments may be required to provide capital grants or subordinated interest-free debt of up to 20 per cent of project cost for further improving the viability and bankability of such PPP projects. Attract more private investment in MRTS - The success Second Report of the High Level Committee of PPP mode in attracting private capital has already been demonstrated in the Hyderabad and Mumbai MRTS projects though some difficulties seem to have arisen in implementation of both these projects - with adequate cross-subsidisation from real estate so that the available budgetary resources can be better leveraged for a larger MRTS programme. The Committee also recommends that a VGF grant of 20 per cent of the total project cost should be provided out of JNNURM funds (in addition to the 20 per cent presently available under the extant VGF scheme) to improve the financial viability of PPP projects in this sector. Private investment in water supply - There is a need to encourage private participation in upgrading and modernising urban water supply and sanitation. PPP approach, nor are they able to rationalise the user charges and ensure supply of quality drinking water. PPP should be made an integral part of the strategy for water supply and sanitation projects under the JNNURM. The Committee also recommends that a VGF grant of 20 per cent of the total project cost should be provided out of JNNURM funds (in addition to the 20 per cent presently available under the extant VGF scheme) to improve the financial viability of PPP projects in this sector. IRRIGATION Private participation in irrigation - The model of USA where about 98 per cent of the dams have been built by the private sector could be explored in India through some pilot projects. Since part of the water from these dams would be allocated for industrial and urban purposes, user charges could be calibrated to improve viability. The Government could also provide the requisite grants to bridge the gap in financial viability of such projects. Sprinkler and drip irrigation improve water use efficiency very significantly. Development of clusters of sprinkler/drip irrigation could be undertaken through PPP to provide a boost to growth in food production and farmers' income. The Committee, therefore, recommends the adoption of PPP mode for financing medium and micro irrigation schemes.
- PORTS Expedite award of projects - As against the target of 512 MMT, capacity addition in major ports during the Eleventh Plan was only 185 MMT. The non major ports in the state sector performed relatively better by adding 257 MMT against the target of 347 MMT. The poor performance of major ports was due to award of only 20 PPP projects against a target of 49 projects during the Eleventh Plan. Deregulation of tariffs - The existing method of fixing tariffs by TAMP is contrary to international best practice and leads to various anomalies. – Reduction in dwell time - there is a need to modernise the technology and processes to bring dwell time at par with international standards. The Committee recommends that the Government should announce a time bound action plan for reduction in dwell time. Capital dredging. - Several Indian ports suffer from low drafts which prevent entry of large modern vessels. The Committee recommends that the Ministry of Shipping should accelerate the pace of capital dredging and where the project size is large, private participation may also be explored along with the provision of VGF, where necessary. Private participation in inland waterways - private participation in the development and operation of inland waterways. The Government should finalise and adopt the regulatory and contractual framework to enable PPP projects in financing, construction and operation of inland waterways. AIRPORTS Expedite award of Greenfield airports - The Committee recommends that the three greenfield airports at Navi Mumbai, Goa and Chandigarh, which have been identified for development through PPP, may be awarded within six months. Management and Operation of metro airports - Management and operation of non-metro - airports Many of these airports would also require further investments. The Committee recommends that the development and operation of both airside and city side facilities at the 10 non-metro airports in Jaipur, Lucknow, Amritsar, Bhubaneswar, Guwhati, Coimbatore, Varanasi, Gaya, Udaipur, and Tuticorin, may be undertaken through PPP. Tariff Regulation - Airports Economic Regulatory Authority (AERA) may be advised by the Central Government to establish a regulatory framework that ensures economic and competitive costs, as distinct from 'cost plus' tariffs. For this purpose, AERA may adopt international best practices and also draw from the experience in other infrastructure sectors in India. STORAGE – Creation of modern storage - Shortage of modern storage capacity has caused a significant loss of food grains. Sole reliance on FCI as well as the absence of a viable model has hampered the creation of modern storage capacity. The Committee recommends that the programme for creating 2 MT of Silo storage through PPP may be implemented expeditiously through FCI as well as the State Governments within agreed timelines to be announced by the Government.