(GIST OF YOJANA) Infrastructure Development
(GIST OF YOJANA) Infrastructure Development
[January-2021]
Infrastructure Development
Introduction:
- The recently announced National Infrastructure Pipeline (NIP) by the Ministry of Finance envisages an investment of Rs 111 lakh crore in infrastructure in the six fiscal years until 2020-25, compared to the investment of Rs 57 lakh crore in the preceding seven fiscal years.
- Over the past Seventy-five years, we have also actively brought in Public Private Partnerships (PPPs), not just for financial additivity, but for increased stake holding to deliver higher quality customer-oriented infrastructure. PPPs have two critical players: the public side, called the Authority and the private side, called the Concessionaire. The share of private investment out of the Rs 57 lakh crore was 27%. Our expectations at the turn of the millennium were an optimistic 40%. For the future, the NIP expects a more realistic 21%.
- For the purpose of this paper, we will look at all infrastructure as meaning those economic activities that support a whole host of many other activities that improve quality of life and economic development, while at the same time embracing social inclusion and sustainability with nature. Further, the challenges are even more when such economic activities are capital-intensive.
- At a generally accepted level, infrastructure sectors arc those that address energy, communication, transportation, housing, water, and sanitation. Many of these have also to be developed in a manner that they synergise while serving a context like urban, rural, industrial, export import.
Project Structuring:
- To enable greater focus, and to facilitate PPPs, we had to ‘unbundle’ activities, either vertically or horizontally or both, and in some cases, even ‘bundle.’ The power sector is a good example. Electricity Boards were vertically unbundled into Generation, Transmission and Distribution Companies.
- Distribution Companies further got horizontally unbundled, on a regional basis. Roads got ‘bundled’ with other activities to increase scope for revenue generation like food courts, petrol pumps and even real estate development, the last one being at Yamuna Expressway.
- Project Evaluation: Financial, Economic and Risks
- Projects have moved from being evaluated just financially-often without a revenue model, to economic evaluation with externalities (also called social cost benefit analysis) to evaluations that include identification of risks and risk mitigation/management plans. The road sector is a good example, where initially only budgetary support was sought, and there was no
- revenue model. Then financial models became more important, along with social cost benefit analysis, and then a risk management plan.
Sourcing of Funds:
- Starting from just budgetary support, to private funding, to revenue models, to partial government support through viability grants, various sources of funding have come to play. Equity by promoters, third party equity, bank financing, insurance and pension funds, multilateral agency funding, foreign direct investments - varied forms of financing have emerged. With this, due diligence practices have become more rigorous, making project evaluations more meaningful.
- Tendering and Bidding Process Over the years, the documentation and processes have gotten more structured. The documentation brings multiple stakeholders together, and with a focus on anticipating issues. The bidding process is also more consultative, and manages expectations. The currently ongoing privatisation of certain Passenger Train Operations is an example of openness, transparency and responsiveness. Professional transaction advisors have come in (also by a transparent selection process), to help manage the transaction process. Bid criteria have evolved over time to get better alignment between the promoter and project expectation, as well better risk allocation, transparency and monitorability.
Agreements:
- This is a critical area, which binds (and regulates) the relationship between the authority and concessionaire. Over a period of time, agreements have gotten sharper on competition, scope increase, other revenue sources, tariff setting, ownership and change in ownership, common use versus captive use, targeting the poor and dealing with consequent financial non-viability, and conditions for step in, termination or transfer.
- This has resulted in the recognition and need for more careful thought on outcome specifications, time frames, review triggers, termination conditions, and internal consistency.
Project Management:
- While greater professionalism and technologies have come in, vulnerability to land acquisition and environmental clearances have affected this. Construction management has evolved as a discipline, with professionals being trained at the postgraduate level.
- Its importance is critical in India, since a lot of construction has to happen under ‘brown field’ conditions, with having to continue serving ongoing users.
Post-Project Issues:
- Facilitating the concessionaire to face operating challenges has increased over time. Post-project ownership is an important issue, where the original goals of competition or conflict of interest need to be considered, while at the same time providing a healthy platform for buy and sell of concessions.
- Regulation and Dispute Resolution This space has changed quite significantly over the years. Many regulatory institutions have been set up—The Telecom Regulatory Authority of India, the Central and State Electricity Regulatory Commissions, Tariff Authority for Major Ports, and Airport Economic Regulatory Authority. There is also an Appellate for each regulator, so that appeals against any regulator’s act can be heard and resolve. And then there is the judiciary. However, not all aspects and sectors are covered.
Conclusion:
- Apart from being responsible for envisioning infrastructure, Government will continue to be the major financier and executor (through contracts) of projects. PPPs and ability to think of
- commercialising infrastructure have provided a new platform for developing infrastructure.
- The idea of balanced risk allocation (allocate risks to the party which can bear it best) has gained traction. Concession Agreements have yet to mature by providing trigger-based review mechanisms.
- Conflicts of interest have been recognised: policy maker versus regulator, regulator versus operator, policy maker versus operator, level playing field with a strong incumbent, though need to be addressed. Telecom is a sector where, over the years, these conflicts have been addressed through structural reforms, with much value being derived for the fast development of the sector. On the other hand, Railways have not yet addressed this, leading to slower development of the sector.
- A potential conflict of interest arising is where an ‘authority’ has been allowed to bid for new ‘PPP’ projects, the specific instance being the Airports Authority of India (AAI) bidding for airports. AAI is not only an ‘authority’ in airports, but also an operator, and a monopoly service provider of air traffic control.
- The project structuring, risk allocation, CA, and regulatory outlook are still vulnerable to crony capitalism. Transparency, mature media attention and regulatory oversight can address this. Regulatory infrastructure has come a long way, both through instruments and institutions. However, further progress is required to cover more domains, strengthen staffing, independence and processes.
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Courtesy: Yojana