Core sector target hinges on policy

Planning Commission deputy chairman Montek Singh Ahluwalia on Monday expressed the hope that India would meet the $500-billion target for infrastructure investment in the 11th Plan (2007-12), but analysts warn that unless some crucial policy changes happen, that could still turn an elusive goal.

Most importantly, the banking sector?s exposure limit to the power sector needs to be relaxed. The sector finds a 40% gap in fund availability. Also, the port sector, which has not done well in PPP (public private partnership) investments this fiscal, has to be given a push. To meet the revised target to increase the capacity of major ports to 860 million tonnes by the end of the 11th Plan, an estimated investment of Rs 14,000 crore is needed in the PPP sector. For this to materialise, the regulatory and documentation issues specific to the port sector has to be addressed on top priority.

Montek?s optimism was partly due to the better-than-expected growth in the telecom sector although a number of constraints still persist in key sectors such as ports, power and roads. The Plan panel is organising a conference–Building Infrastructure: Challenges & Opportunities?in the Capital on Tuesday to discuss these issues.

A key constraint is the exposure norms on bank lending to the infrastructure sector. The government is increasingly banking on private players to add capacity in the power sector. However, private developers find it tough to raise project loans from banks due to stringent company and group exposure norms mandated by the Reserve Bank. The government could miserably fail in meeting its current Plan capacity addition target unless RBI relaxes lending norms for the power sector.

The full meeting of the Plan panel, chaired by Prime Minister Manmohan Singh, will have to address this problem while formulating a strategy to expedite capacity addition at Tuesday?s meeting. Banks are required to comply with RBI?s prudential norms that limit their exposure to a company and a group company to 20% and 35% of their individual net worth, respectively.

Power project developers have been lobbying with the finance ministry for a relaxation in these exposure limits. RBI has also brought non-banking financial companies like Power Finance Corporation (PFC) under the exposure limit norms.

Banks exposure to the power sector stood at Rs 1,14,402 crore as in December 2009, compared to Rs 91,928 crore in March 2009. Their funding of the telecom sector increased to Rs 39,446 crore as in December 2009, compared to Rs 38,281 crore in March 2009.

ICICI Bank MD & CEO Chanda Kochhar told FE last week that many banks have reached their exposure limits for the sector, and therefore, could not be in a position to lend more. Ahluwalia said capacity addition in the power sector will be below the target in the Eleventh Plan but the private sector?s performance will be above expectations.

“We think 62,000 mega watt is definitely lower than the target of 78,000 MW, but it is almost three time of what was actually created (21,000 MW) in the Tenth Five-Year Plan (2002-07),” he said.?The capacity expansion in private sector would be 120% of the target whereas it would below the target in the public sector,? he said.

?Term lending institutions are constrained by prudential norms and are subject to sector and group exposure limits. With developers already taking significant debt to fund their existing projects, these norms would inhibit the ability of developers to borrow in the long term and may present the biggest stumbling block in the sector achieving its capacity addition targets. Alternatively, the promoters of such projects may be forced to raise ECBs, which may be hindered due to question marks on availability of foreign funds,? according to a recent report on the Indian power sector by consultancy firm Ernst & Young.

One area that is not doing well is the port sector, Ahluwalia said. The performance of the port capacity addition programme has been lacklustre as the government has not been able to award projects at the desirable pace.

Under the National Maritime Development Programme, the shipping ministry was to enhance the capacity of major ports to 1,000 million tonnes (mt) and that of minor ports to 500 mt.

?At the end of March 2009, the total capacity of major ports stood at 573 mt and minor ports had the strength to handle 250 mt of cargo. Based on the current pace of development, we expect the capacity of major ports to increase to 860 mt by March 31, 2012, whereas the capacity of minor ports will be 400 mt by then,? shipping secretary K Mohandas has told FE in a recent interview.

In the current year till January, the ministry has awarded 10 projects. However, most of these projects pertain to 2008-09, which were carried forward to this fiscal. In order to perk up the port sector, the ministry has now planned to award “21 new projects in 2010-11, which will need total investment of Rs 14,000 crore,” he said.