Infrastructure Bottlenecks in India
An opportunity in Disguise!
“The economic boom that India is currently enjoying is built on the shaky foundations. GDP would run more than 2 % higher if India had decent roads, railways and power according to industry estimates” - McKenzie India - 2001
Current Scenario and XIth five year plan by Indian Government
As India continues to grow at more than 8%, a balanced increase in the gross capital formation (GCF) in infrastructure as a proportion of the GDP emerges as the most important key in sustaining high economic growth. Though recently there have been investments in the infrastructure sector, the GCF as a proportion of GDP continues to be lower at around 5%. As far as the physical infrastructure is concerned, there exists a huge deficiency. Inadequate infrastructure is identified as one of the biggest constraints of doing business in India.
GCFI aimed to be increased to 9% of GDP by end of XI Plan. Based on case studies of fast-growing Asian economies, the gross capital formation in infrastructure (GCFI) in India should rise to 11% of GDP for sustaining GDP growth at 9%. However, given that the current investment rate is only at around 5%, a steep jump in investment rate may not be feasible over the next five years. Therefore, the Planning Commission of India estimates build in a gradual increase in infrastructure investment-to-GDP ratio to increase to 9% by the end of the Eleventh Five-Year Plan. The Planning Commission document states that investment in the Asian economies has been higher than required, and, hence, the projected investment in infrastructure can also help sustain GDP growth of 9% over the Eleventh Plan period.
The projected investment in infrastructure in the Eleventh Plan is 2.3 times the amount in the Tenth Plan. Power and road sectors form the bulk of the investment. The largest inflection in investments is expected to be in ports, airports, railways, and water supply and sanitation over the next five years. Framework is being put in place to enhance participation of the private sector in various segments of infrastructure. Private participation is crucial to meet the investment goal in infrastructure because there are limitations to budgetary support from the Indian government. The Planning Commission estimates private sector share in the total investments to increase from 17% in the Tenth Plan to 30% in the Eleventh Plan. It is expected to witness a strong private participation in roads, power, ports and airport sectors.
One of the key features of infrastructure investment in the Eleventh Plan is the expected rise in private participation. According to the plan, the share of private participation is expected to be almost 30% compared with 17% in the Tenth Plan. This implies an investment of 4 times by the private sector over the last plan. Roads, ports, airports and the power sectors, where the PPP model is well documented, are likely to witness a strong participation from private companies .Almost all sectors, except for railways, irrigation, and water supply and sanitation, are expected to witness strong private participation
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Steps are being undertaken to increase private participation
Government support, an establishment of stable and efficient regulatory framework and credible mechanism for dispute resolutions are essential to attract private participation in infrastructure. The government is taking steps across sectors to facilitate private investment. For e.g., the model concession agreement (MCA) is being put in place in sectors like roads and ports. The MCA framework addresses issues that are crucial for limited recourse financing, force majeure and termination. Furthermore, there are provisions such as increase and decrease in the concession period that help reduce traffic risk and improve viability of a project. For large infrastructure projects like electricity generation and transmission, projects are being awarded to the private sector through the special purpose vehicle (SPV) route. Here, the SPV or shell company is responsible for obtaining mandatory clearances and approvals before the projects are bid. The SPV addresses issues such as land acquisitions, availability of the right of way, environmental clearances, fuel linkages and power purchase agreements. These issues help reduce execution risk and potential delays once the project is available for bidding. Private sector investment is now established in roads, ports, electricity generation, telecom and airports.
Major Areas of Focus
I. Roads: Investment to increase 2.15 times
The Indian road system has been the first area within infrastructure to gain serious attention from the government. The sector has gained political consensus across the board as against the stiff opposition seen in other areas, such as airports and power. The Planning Commission of India has estimated an investment of INR 3,668 billion under the Eleventh Plan versus the INR 1,448 billion spent under the Tenth Plan.
II. Ports : Indian ports are operating close to 100% capacity
India has around 12 major ports and 187 minor ports, with the major ports handling around 73% of the traffic. In FY07, ports in India handled 650 million tonnes of traffic, which witnessed a CAGR of 10% over the past three years. All of the major ports in India are currently operating at close to 100% capacity and congestion at ports has worsened over years. Six out of the twelve major ports had capacity utilization of greater than 100%. Overall capacity utilization of Indian ports had increased from 86% in FY03 to 92% in FY07. By FY12, the traffic in Indian port is projected to cross 1,000 metric tonnes. The Ministry of Shipping intends to add capacity ahead of the requirement. It intends to increase capacity to 1,300 metric tonnes by FY12, 30% higher than the required capacity
III. Power Generation: High demand deficit and high demand forecast…
The power situation in India remains grim, with a deficit of 9.6% and peak demand deficit of 14%. Demand growth is expected to accelerate over the next few years as the economy grows at around 8-9%, and the manufacturing sector grows at an even faster pace. In comparison with other leading developed and emerging economies, power consumption in India still lags behind these other economies by a large margin. According to the Ministry of Power, in order to support GDP growth of around 10% per annum, the rate of growth of power supply needs to be over 15% annually. In view of rising power consumption, the Ministry of Power has projected demand requirement of 157,000 MW under the 11th Five-Year Plan.
Capacity additions in the sector have lagged substantially from planned targets in the past Five-Year plans. For instance, under the Tenth Plan, a total of 21,180 megawatts was added against the original plan of 41,110 megawatts. However, implementation is expected to be far superior during the Eleventh Plan period as the plan document envisages capacity addition of around 78,000 MW and around 58,000 megawatts is already under construction.
FIGURE 4: Capacity under construction
IV. Transmission: Investments in transmission need to keep pace with generation
It is estimated that the will need 37,150 megawatts of inter-regional transmission capacity by 2012 to fulfill its power requirements. Underinvestment in the segment has resulted in flawed T&D networks, resulting in power shortages, in our view. Investments in transmission fell short of the target set in the Tenth Plan. The Planning Commission of India expects investments worth INR1,292 billion for transmission in the Eleventh Plan against a target plan estimate investment of INR457 billion in the Tenth Plan, an increase of 183%.
The Indian government has now opened up the transmission sector for 100% participation by the private sector, which can take up projects on a BOT basis. As per the Eleventh Plan, 14 transmission projects are to be constructed by the private sector, which would constitute 23% of the investment in transmission.
V. Airports: Acceleration in traffic growth
Air traffic in India has witnessed substantial growth in the recent past. The growth rate in passenger traffic is on the rise. In FY07 Indian airports handled 71 million domestic passengers, which grew by 40% compared with 10-25% over the earlier three years. International passenger traffic also is growing at a steady pace of 15%. The Center of Asia Pacific Aviation expects domestic traffic to grow at 25-30% and international traffic at 15% until FY10.
The Indian government has stated that the total funds requirement for the modernization program of airports is INR408 billion by 2011, out of which around INR300 billion will be invested by private players. However, according to the recent Planning Commission consultation paper, the total investment in the Eleventh Plan is expected to be around INR348 billion (a 15% cut from the initial estimate of INR408 billion) against INR68 billion spent in the Eleventh Plan.
VI. Railways
The Indian Railways currently handles 40% of freight and 20% of passenger traffic. Growth rates in both passenger and freight traffic has seen accelerating in the recent past. Annual passenger traffic growth, which was at 2% between fiscal years 1991-2004 has increased to 8% between FY05-FY07. During the same period, annual freight traffic growth increased from 4% to 9%. Historically, the elasticity of the rail traffic to GDP has been between 0.6-0.75. However, in the Tenth Plan, growth in freight traffic was in line GDP growth. According to the Ministry of Railways, freight traffic growth is expected to be around 8%-9% in the Eleventh Plan. It also estimates that passenger growth will be around 6% per year over the Eleventh plan. Key thrust areas of the Eleventh Plan will be Freight business, Passenger business and Capacity enhancement
VII. Oil & gas
Capex in the oil and gas space is likely to increase significantly over the next five years compared with the previous five-year period. These investments would be driven by upstream development, refining, petrochemicals and downstream projects. As per the plan documents, the overall outlay for public sector units (PSUs) in the Eleventh Plan is INR2,690 billion versus INR1,219 billion capital expenditure in the Tenth Plan. Investments in upstream projects by national oil companies (ONGC, OIL and OVL) are likely to be around INR1,591 billion. This is almost twice the investment in the Tenth Plan. In refining and marketing, investments are likely to increase 3.3 times in the Eleventh Plan to INR876 billion.
VIII. Urban water supply and sanitation
India is now the second largest urban system in the world after China. According to the Ministry of Urban Development, the proportion of the urban population is expected to increase from 30% currently to 40% by 2030. The government estimates that 91% of its urban population has access to drinking water, but only 58% have availability within their premises. The coverage of sewerage and sanitation is at a mere 63%. It is estimated that the sewage generation in Class I cities and Class II towns is 33,212 million liters per day, and the current treatment capacity is only 6,190. Currently, only a tenth of the sewage generated is treated before discharge.
The Eleventh Plan aims at covering 100% of the urban population for drinking water, sanitation and waste management. There is a substantial increase in the estimates because the total funds requirement for the Eleventh Plan is INR 1,276 billion, which is 6.3 times the allocation in the Tenth Plan. Almost 55% of this outlay is scheduled to be met through the Jawaharlal Nehru Urban Renewal Mission (JNNURM) and the Urban Infrastructure Development Scheme for Small and Medium Towns (UIDSSMT). JNNURM is the flagship program of the Central government covering 63 cities. UIDSSMT, under the Ministry of Urban Development, caters to 5,098 small and medium towns.
Conclusion
The link between infrastructure and economic development is not a once and for all affair. It is a continuous process; and progress in development has to be preceded, accompanied, and followed by progress in infrastructure.
I believe that India is on the right track and that the public and private sectors, working in partnership and in collaboration with development agencies, will be able to bring about significant and sustainable improvements in India’s infrastructure, which will also help the overall process of growth.
