By Vivek Sharma
The Centre announced its infrastructure vision for India in FY2020 through the National Infrastructure Pipeline (NIP), envisaging an investment of Rs 111 trn over a five-year period. The annual investment of ~Rs 22 trn on average through FY2025 would be a step-up of ~2.5 times vis-à-vis the historical level. This was followed by a National Monetisation Pipeline (NMP), co-terminus with the NIP period of FY2020-25.
This indicates the government’s focus on infrastructure remains sharp as ever. Together, NIP and NMP provided a comprehensive view to investors and developers of greenfield as well as brownfield investment avenues in the infrastructure sector. Indeed, despite the impact of Covid-19 over the past two years, some infrastructure subsectors, such as highways and clean energy, remain resilient. A brief, sector-wise overview may be in order here.
Roads and highways
The length of national highways constructed last fiscal stood at ~13,300 km (36.4 km per day), up ~30% on-year. This fiscal, as of the second quarter, the National Highways Authority of India (NHAI) had awarded projects for highway stretches of about 1,930 km, up ~8% on-year compared with ~1,400 km in the corresponding period a year ago. To finance these initiatives, the NHAI has ventured into monetising its operational asset pool with the launch of its first infrastructure investment trust, raising over Rs 5,000 crore.
On the flip side, as many as 888 road projects under the ministry, spanning ~27,665 km and involving a total outlay of ~Rs 3,15,370 crore, were delayed last fiscal. To be sure, the government has undertaken measures to boost public private partnership (PPP) via the hybrid annuity model (HAM) route. Last fiscal, the NHAI’s HAM project e-auctions saw increased competition following relaxation of bidder eligibility criteria. Smaller regional players cornered 33% of the HAM projects awarded. While their bids were not aggressive, financial closures and project execution will be key monitorables in the future.
The sector was affected adversely during the pandemic year and is on course to recovery now, with domestic passenger traffic reaching ~80% of the pre-pandemic level in November. The twin focus on asset monetisation and privatisation should serve the sector well, with additional/freed-up funds being ploughed back to fuel the next phase of growth. Additional steps such as making changes to the National Civil Aviation Policy (NCAP) and introducing NCAP 2.0 for boosting post-Covid recovery, and bringing aviation turbine fuel under the goods and services tax, to provide much-needed relief to airlines, could be helpful policy moves.
The railways is looking anew at efforts to attract private sector participation, which have met with only partial success so far. For instance, the railways had called for bids for the operation of private trains in 12 clusters. While the request for quotations stage saw good participation, bids were received for only three clusters in the request for proposal stage, with only two firms submitting bids. The railways has since scrapped this bid process for private train operations.
The railways is reviewing its PPP strategies/policies and is expected to revamp these. Measures such as revamp of existing PPP policies, establishment of an independent regulator to facilitate rationalisation of freight tariffs, and promotion of PPPs and enabling of private investment in rolling stock by streamlining the Research Design and Standards Organisation approval process could be helpful in this context.
The sector has revived after a brief hiatus. Post the Covid-19 led slump, capacity additions surged in the first 8 months (rising ~3x on-year to 7.3 GW) of this fiscal, led by a strong project pipeline (solar ~30 GW and wind ~9 GW). Tariffs discovered in recent tenders have remained competitive owing to aggressive bidding by IPPs as well as by creditworthy central counterparties.
Going forward, investments are expected to continue with a strong thrust on RE sector as well as support for technologies such as storage. Overall, despatchable RE through hybrid/round-the-clock tenders, timely payments from discoms, sanctity of contracts, thrust to domestic solar manufacturing through the production-linked incentive (PLI) scheme will be key monitorables for sustainable growth.
The weak link here — and for the power sector in general — is the power distribution sector. Discom financial health remains weak owing to high techno-commercial losses (21% as of FY20) and revenue gap (25 paise/unit in FY20). The government’s recently announced revamped distribution scheme (planned outlay of Rs 3 trn) with clear focus areas and stringent implementation guidelines is expected to impact the sector positively. However, if there is another unsuccessful round of support, states may need to explore different PPP models or outright privatisation may become imperative.
The sectoral variations apart, some issues impact private sector participation across sectors. The recent move by Punjab to renegotiate contracts, for instance, violates basic principles of contract sanctity. It is essential to undertake measures to protect contract sanctity, have due process and forums for quick arbitration of any contractual issues, and ensure developers have adequate and reasonably priced access to infra financing.
The Centre’s move to institutionalise specialised infrastructure finance entities via the National Bank for Financing Infrastructure and Development Bill, 2021, is commendable. The execution of this new development financial institution will bear watching, along with revamping of PPPs to spur private investment in the sector.
The writer is Senior Director, CRISIL Infrastructure Advisory