The government expects infrastructure investment of close to 10% of gross domestic product in the 12th Five Year Plan starting April 2012, with underlying assumptions of 9% GDP growth and faster award of projects in the development of ports and roads.
The projected investment in the next Plan is considerably higher than the new estimate of 7.55% of GDP in the ongoing Plan period. Thanks to massive private investments in telecommunication and oil & gas pipelines, the target for the current Plan will be nearly achieved. This is despite some slippages in investments in roads and ports in the initial years of the Plan. Here too, a fresh momentum has recently become visible.
?The economy will enter the 11th Plan in a much stronger position as far as infrastructure is concerned than existed at the start of the 11th Plan. The projections imply that investment in the infrastructure sector during the Twelfth Plan would be of the order of a staggering Rs 40,99,240 crore or $1,024.81 billion. At least 50% of this should come from the private sector,? states ?Investment in Infrastructure,? a Planning Commission report.
?I?m happy with the rate of investment in infrastructure, but we would like to grow faster. If you look at the overall investment in infrastructure, there is not much gap between the achievement and the target. However, sector-wise, there are sectors that need to pick up. These areas are ports, roads and railways. There has been a problem in attracting investment in railways,? Commission member BK Chaturvedi had told FE in a recent interview.
In the first three years of the current Plan, the government was almost on target with the private sector investing significantly in telecom and oil & gas, while there was not enough interest in roads, ports and railways.
This led to the government increasing the projection for telecom by over 30%. Targets for ports, roads and railways, on the other hand, have been reduced by 1-53%. Public investment in infrastructure is expected to increase from around Rs 13 lakh crore during the current Plan to over Rs 20 lakh crore in the next. In the current Plan, private firms are likely to contribute 36% of the total infrastructure investment, with the Centre and states chipping in with the rest.
In the terminal year of the Twelfth Plan, infrastructure investment will be 10.7% of GDP, but that will happen only if the economy ?grows at a rate above 9%,? the report notes. On the current Plan, the paper states that at least 15% growth is expected in ports, roads, and oil & gas sectors from 2009-10 onwards, while the power sector is likely to grow at least 10%. The investment expectation for power sector was reduced marginally by 1%, while that for airports was enhanced 17%. For oil & gas pipelines, the government expects a six-times increase in investment.
Investments in India?s telecom sector ? expanding at the fastest pace in the world ? has been Rs 1.48 lakh crore in the first three years of the current Plan, which is 42% of the projection for the five years to March 2012.
The majority of the outlay was made by the private sector. The key reasons behind the telecom investments are the auction of wireless spectrum, rise in competition and the rise in foreign direct investment limit from 49% to 74%.
Oil & gas pipelines have seen investments of Rs 65,124 crore, which is 51% of the total projected for the Plan period. Analysts feel that the proactive government attitude towards awarding new oil fields and facilitating easy loans to the sector have mainly contributed to the development. The Reserve Bank of India had recently added oil & gas pipelines to the definition of infrastructure, which allowed banks to give loans within their infrastructure exposure limit.
Power too met expectations with the sector attracting 53% of projected investments in the first three years. The major incentive for power project developers is the flexibility to sell part of the project capacity at market-determined price, which is hovering around Rs 15-13 a unit. Also, Central Electricity Regulatory Commission recently increased the return on equity on power projects from 14% to 15.5%, which improved investor sentiments. With the projected investment of Rs 6.58 lakh crore in power, the government expects to add 62,000 MW capacity against the earlier target of 78,000 MW.
However, private investment in ports, roads and railways ? which sought private investment through public-private partnerships to expand their networks? remained jinxed. Private firms accounted for the lowest share in case of railways at 2.8%. Analysts cite unfavourable policies, frequent changes in them and problems in land acquisition as reasons for the poor private sector interest. The government had planned to increase capacity of major ports to 1,000 million tonnes (MT) by the end of the Plan, while 20 km of roads were to be built each day for the next five years and the rail network expanded with private sector participation in upgrading stations, running freight trains and freight terminals. The three sectors are far behind the goals.
Independent analysts say the government has to frame policies on these sectors more favourable to private sector to attract the required investments ? as in the case of telecom. The three sectors need Rs 5.20 lakh crore to achieve targets.
In port sector itself, the government could reduce project award time by 20% by making major port trusts independent. ?Major ports take at least 2.5 years to award a project, whose completion takes another three years. If the government decentralises the authority and corporatise these trusts, the whole process could be shortened by 15-20%,? i-maritime?s Rohit Chaturvedi told FE.
The other issue is frequent policy changes. ?Frequent changes should not take place. A revision once in a while is okay,? Gajendra Haldea, infrastructure adviser to Planning Commission deputy chairman Montek Singh Ahluwalia told FE. The government recently enhanced net worth requirements for highway project bidders, a move which has the industry up in arms.
Regarding roads and highways, Haldea said the industry should be blamed for seeking changes in government policies. ?Everything was working well two years ago. But then, the industry was not happy with it and asked for changes in the model concession agreement on highways. While making these changes, if the other party (in this case NHAI) goes overboard, what can we do about it,? Haldea wondered.