Incredible infrastructure

India's infrastructure spending will have to accelerate to at least Rs 50 trillion between fiscals 2018 and 2022 to make a visible impact on service delivery and provide a foundation for rapid and inclusive economic growth. This projection factors an average annual GDP growth of 7 per cent, infrastructure investments equal to approximately 5.5 per cent of GDP, and a pick-up in private sector investments after fiscal 2019.

Experts see the power, ports, railways, urban transport (metro rail) and urban sectors accounting for 78 per cent of the overall infrastructure spending.

That said, according to a recently published report, CRISIL Infrastructure Yearbook, a material ramp-up in government spending in the past few years has meant the share of private investments in infrastructure has fallen to a decadal low of around 25 per cent in fiscal 2018. The share, which averaged 37 per cent between fiscals 2008 and 2013, fell 600 basis points (bps) between fiscals 2013 and 2017 as a plethora of stalled projects and stressed assets dampened investor interest and risk appetite. While the highways sector has seen a revival in public-private partnerships (PPPs), and the renewables sector some buoyancy, the private investments in other infrastructure segments has remained stagnant or weak.

The downfall of private investment suggests policy paradox has actually paralysed the private players investments interests in India's infrastructure sector, barring a few. However, the government is leaving no stone unturned, and keeping the investment cycle up and running with some major policy overhaul along with huge impetus to capacity building.

Between fiscals 2008 and 2017, private investments in infrastructure was estimated to be Rs 20 trillion, or nearly a third of all infrastructure spending during the period. This had transformational impact in several sectors. And by 2012, India's PPP programme also acquired a significant scale. So much so, the World Bank's Private Participation in Infrastructure (PPI) database ranked India on top among the developing nations between fiscals 2008 and 2012. However, since then, a raft of risks manifested, exposing lacunae in the PPP architecture, leading to a spike in stalled projects and stressed debt, which muted risk appetite in the private sector.

Bright Spots
To wit, a step-up in public spending has hastened the construction of highways, while proactive policies have unclogged stalled projects. Recalibrated PPP models, including the hybrid annuity and toll-operate-transfer have helped draw some private investments. Similarly, in renewables, largely favourable policies and market conditions have led to 18 GW capacity being added in fiscal 2018 alone. Today, the private sector also has a dominant share of airport and port traffic management. Metro rail sector has seen strong traction in the last couple of years and is expected to provide sizeable opportunities for construction companies over the next three to five years. The overall cost of expansion of the operational and approved metro projects under implementation is over Rs 2.5 trillion and another Rs 2 trillion worth projects are in various stages of approval and are likely to come up for bidding in the next five years. This is expected to boost the order book of construction companies from Rs 750 to 900 billion over the next three to five years. In total, about 440 km of new metro network development has been approved and another 800 km is in the proposal stage. Given the large size of metro projects, sizeable opportunities exist for both, infrastructure developers and construction companies over the next five years.

In case of roads, earlier, a mere target of 5,000 km took years to complete. However, things have changed drastically in the last four years. The government is now fast tracking its road development programme. In FY18 alone, NHAI awarded 150 road projects of 7,397 km, a record high. HAM projects formed the bulk of the total value of awards last year at 63 per cent, followed by pure EPC contracts at 35 per cent and BOT projects the remaining. In addition, the government's Bharatmala project is creating a lot of optimism by constructing logistic parks worth Rs 2 trillion in 24 villages and is heavily investing in 44 economic corridors. Bharatmala is a project worth Rs 10 trillion; within a year, the Centre will start projects worth Rs 3 trillion under Phase-I.

Greenfield industrial cities like the Delhi-Mumbai Industrial Corridor, a USD 100 billion project was aimed at creating a trade corridor between Delhi and Mumbai, running through Delhi, Uttar Pradesh, Haryana, Rajasthan, Gujarat and Maharashtra. The DMICDC has planned eight smart cities for the Phase I of the project. Out of the eight smart cities, four of them- Dholera in Gujarat, AURIC in Maharashtra, Vikram-Udyogpuri in Madhya Pradesh and IITGNL in Uttar Pradesh- are in the implementation stage, with laying of roads and utilities still in progress.

Under the Sagarmala programme, the government has already awarded more than Rs 1.80 trillion in the port sector. Also, it has commenced railway works and road connectivity projects. Of the Rs 4 trillion, projects worth Rs 300-400 billion are in the tendering process. For Sagarmala, 70 per cent of detailed project reports (DPRs) are ready and by March-end, Rs 3.5 trillion projects will be up for bidding. In case of logistics, the government is developing a national logistics plan for the country, which is a long-term plan for the integrated development of logistics. Under the Smart City Mission, around 1,333 projects worth Rs 506.26 billion have been completed or are under implementation or at the tendering stage. Overall projects worth Rs 2.03 trillion have been identified for all 100 smart cities across the country.

Since 2014, the federal government has launched several big-ticket infrastructure projects and the above mentioned numbers depict how India has leapfrog from small-scale projects to mega-scale wonders. This will certainly lead leading engineering and construction companies to engage well-trained and experienced project managers to deliver projects within the stipulated budget and timelines.

Roads and Highways

 

The length of India's highways network has increased significantly to 115,435 km in fiscal 2018. It has improved hinterland connectivity across the country and brought unprecedented level of connectivity to various parts of the country. The PPP mode of development has contributed considerably to this development. Demand for private sector funding in the highways sector led to the introduction of PPP in the 1990s. However, given the challenges that developers have faced in the past because of various risks associated with the sector, new initiatives are needed to revive PPP in the sector.

Sector performance and trends:

• National highways have improved hinterland connectivity, covering 115,435 km. This network caters to 40 per cent of the total road traffic in the country.
• The budget outlay for the first phase of Bharatmala for further upgradation or development of 34,800 km of highways is pegged at Rs 5.35 trillion. Projects in this phase are expected to be awarded by fiscal 2022.
• The government has already awarded 6,461 km under Phase-I of Bharatmala, since the initiation of this programme from October 24, 2017, which will require an estimated investment of Rs 1.44 trillion.

Planned versus achieved targets

• Budgetary allocation for the roads sector was increased to Rs 710 billion for fiscal 2019 from Rs 650 billion in fiscal 2018.

• Mega projects such as Bharatmala, Setu Bharatam, Char Dham connectivity, economic corridors and toll-operate-transfer (TOT) will be the biggest investment drivers in the sector. Over the next 5-6 years, Rs 7 trillion is envisaged to be invested under these programmes.

• The Ministry of Road Transport and Highways (MoRTH) constructed a record 9,829 km of highways in fiscal 2018 with a per day construction rate of 27 km. The rate of construction is increasing steadily, bringing it close to the target of 45 km per day.

• MoRTH achieved the highest-ever award of 51,073 km of national highway projects and the highest-ever construction length of 28,531 km over a four-year period from fiscals 2015 to 2018.

Trends in private sector participation

• Momentum of awarding projects gained pace with the introduction of the Hybrid Annuity Model (HAM) in fiscal 2016, involving pre-determined revenue and risk distribution between the government and private players. About 50 per cent of all projects awarded in fiscal 2018 by the NHAI were awarded through HAM mode. In value terms, the HAM projects awarded multiplied from Rs 70 billion in fiscal 2016 to a whopping Rs 765 billion in fiscal 2018.
• The engineering, procurement and construction (EPC) and HAM modes account for 90 per cent of the projects awarded. This is in line with the government's decision to execute future projects through HAM, EPC and BOT in a ratio of 60:30:10.
• Asset recycling process, through the TOT model, has been identified as a mean to finance new projects in the highways sector. 75 operational stretches have been identified for bidding under TOT, aggregating to a length of 4,500 km.
• NHAI has successfully bid out the first bundle under the TOT model, comprising nine stretches. A consortium of MAIF Investments India and Ashoka Buildcon was awarded the project at 50 per cent mark-up on NHAI's initial estimated concession value of Rs 62.58 billion.
• The second TOT bundle is in the process of bidding with the request for proposal issued on August 6, 2018. NHAI expects to receive Rs 53.62 billion by awarding this bundle.

Sector outlook
As part of the Bharatmala Pariyojana initiative, MoRTH aims to implement projects that will improve connectivity of key production and consumption centres across the country. These involve:

• Constructing ring roads worth Rs 362.90 billion across 28 major cities including Delhi, Lucknow, Bengaluru, Ranchi, and Udaipur. Detailed project reports (DPRs) are in progress for projects worth Rs 211 billion. DPRs for projects worth Rs 47 billion will be awarded soon.
• Development of greenfield corridors across the construction of the Delhi-Mumbai Expressway is expected to start in December this year, with a completion period of three years. The cost of the project is estimated at Rs 1 trillion.
• NHAI has significantly streamlined the arbitration process by introducing the Society for Affordable Redressal of Disputes (SAROD). In addition, as per its latest standard operating procedures, NHAI is completing its arbitration processes in a time-bound manner. In fiscal 2017, NHAI was able to settle claims amounting to Rs 8.63 billion.
• The central bodies regulating and implementing road projects realise the need for private sector investment. To remove the roadblocks in attracting private sector investment, the government has undertaken reforms in the past and continues to propose suitable policy changes. Measures to strengthen internal processes such as land acquisition and arbitration make the sector investor-friendly. Interestingly, the introduction of PPP models such as TOT and formation of infrastructure funds such as InvIT have piqued the interest of a new class of investors.

Railways

The Indian Railways has addressed the issue of chronic absence of investments, by announcing a plan to pump in Rs 8.56 trillion in the sector between fiscals 2016 and 2020. Of this investment, 15 per cent is envisaged to be funded through the PPP mode. Earlier, the private sector participation was limited to wagon manufacturing, civil construction, raw material supplies and catering. However, the latest reforms and policy changes have cast the net of private sector participation in the railway sector much wider. In addition, there are various projects such as DFC, station redevelopment and private freight terminals, which have increased the opportunity for private players to enter the sector.

Sector performance and trends

• The gross revenue receipt of the Indian Railways was Rs 1.65 trillion in fiscal 2017. It grew at a CAGR of 15 per cent between fiscals 2012 and 2015 but slumped to 1.5 per cent between fiscals 2015 and 2017.

• The operating ratio of the railways, a consistent weak-spot, reached alarming levels of 111 per cent for April-July of fiscal 2019, from 96.50 per cent in fiscal 2017. The huge jump in operating ratio will pose difficulties for the railways to carry out its operations and certainly restrict any investments in capacity augmentation or modernisation through internal accrual.

• The freight segment contributed a major share of 64 per cent to the railways' earnings, vis-a-vis, 26 per cent share of passenger earnings in fiscal 2017. The remaining came from non-fare revenue and indirect earnings (wharfage, demurrage).

Investment plan

• Investment in railway infrastructure is estimated to grow rapidly from Rs 3.8 trillion (fiscals 2013 to 2017) to Rs 8 trillion (fiscals 2018 to 2022).
• Total capital and development expenditure rose more than doubled from Rs 540 billion in fiscal 2015 to Rs 1.31 trillion in fiscal 2018.
• An outlay of Rs 8.56 trillion is envisaged in the current plan (fiscals 2016 to 2020). Contribution of gross budgetary support from the Centre is 30 per cent, while that from extra budgetary resources is 58 per cent.
• The Ministry of Railways has secured Rs 1.5 trillion from the Life Insurance Corporation of India (LIC) through extra budgetary resources- institutional finance route for funding railway projects. These funds are being utilised for financing various capacity augmentation and decongestion projects.
• In addition, significant investment is planned for railway modernisation. The Ministry of Railways is planning to spend up to Rs 20 trillion, out of which Rs 10 trillion will be utilised in converting trunk routes into high speed corridors.

Potential opportunities

Private investment is invited in projects of greater economic significance, such as the elevated rail corridor in Mumbai, sections of the dedicated freight corridors (DFCs), freight terminals, station redevelopment and other rail modernising projects. With an aim to increase rail freight share, to create additional freight capacity and to reduce transportation cost, DFCs have been planned as eastern and western corridors. The completed physical progress as of January 2018 was 40.3 per cent. Private investment is expected in corridor development and structuring other logistical amenities. Sections of Western DFC (432 km) and Eastern DFC (343 km) will be operational soon.

Multi-modal logistics parks
Private players can invest in developing multimodal logistics parks and integrated logistic parks along the eastern and western corridors passing through various states. The Container Corporation of India (Concor) and the Ministry of Railways are spearheading this initiative together. Access charges at rail terminals constructed will be levied on logistics providers and users of terminal facilities. To build terminal capacity, Concor and the Ministry of Railways had planned to set up 100 private sidings or freight terminals between fiscals 2016 and 2018, to provide end-to-end logistics services, by developing common user facilities with handling and value-added services at select rail terminals. Currently, 90 projects have been commissioned against the target of 100. Private investors have shown significant interest.

Station redevelopment projects
The Indian Railways has identified 400 stations across 100 cities, covering 2,700 acres of land. Mode of development has been deliberated and the ministry is now redeveloping stations through the Indian Railway Station Development Corporation, under engineering, procurement and construction mode. The Habibganj station, allotted to the Bansal Group, is expected to commission by December 2018. 10 stations have been allotted to NBCC India.

Last-mile connectivity projects
Partnerships with logistics service providers and container train operators are envisaged to transform the logistics landscape. The aim is to provide integrated transport solutions for select commodities. For example, Indian Port Rail Corporation, a joint venture between the Ministry of Railways and Indian Ports Association, will build the Indore-Manmad rail corridor for container movement from Indore to the Jawaharlal Nehru Port Trust.

Sector outlook
Network augmentation: In high density areas, route congestion is a major issue faced by passengers and freight trains, leading to detention and low average speed. Projects for doubling of existing tracks in high density corridors, development of DFCs and port or coastal connectivity projects are expected to create additional capacities, and reduce delays and associated costs.

Higher non-fare based revenue targets: This initiative is imperative to reduce dependence on traditional fare-based revenue. Initiatives such as train branding, railway display network and on-board entertainment are expected to fetch additional revenue. The target for fiscal 2019 from these sources is Rs 12 billion.

Greater share of high-capacity wagons: The augmenting carrying capacity of existing lines and improving railway freight revenue are aims of the Mission 25 Tonne.

However, the realisation of this initiative will require upgrading of the existing rail tracks to bear 25 tonne axle-load wagons.

100 per cent rail electrification plan: Railways is pushing for complete electrification, which is likely to save at least Rs 110 billion annually on fuel expenses. This will help in improving railways' operating ratio and enable electric locomotives to run in any part of the country. In fiscal 2018, the railways electrified 4,000 km of route and in this fiscal, it targets to electrify 6,000 km.

The Indian Railways appears to have realised the challenges in the way of private sector participation and has taken steps to mitigate them by proposing reforms and policy change. However, there is a sluggish implementation of these reforms. This has subsequently discouraged private sector funding. The railways has also been slow to respond to the market changes. It needs to reduce unnecessary costs to the freight business and focus on increasing its freight market share. To achieve this, the sector will need to revive the PPP track for executing more focussed projects such as DFC.

Airports


With airports- private and public- reaching saturation levels, there is an urgent need to augment capacity at existing airports or develop new airports near existing ones. It is important that there exists a strong enabling environment for private investment to flow into the sector. CRISIL estimates that by 2026, 90 per cent of the investment requirement will need to be met by the private sector.

Sector performance and growth trend

• The international passenger traffic in India took off at 8 per cent compound annual growth rate (CAGR) between fiscals 2009 and 2018 to reach 65.5 million passengers. The domestic passenger traffic at Indian airports grew at 13.6 per cent CAGR in the period to reach 243.3 million passengers.
• The international air cargo traffic grew at 5.5 per cent CAGR between fiscals 2009 and 2018 to reach 1.73 million tonne. In the period, the domestic air cargo traffic expanded at 8.2 per cent CAGR to reach nearly 0.7 million tonne.
• The air freight capacity of the country's airports in fiscal 2017 was 4.63 million tonne, with overall utilisation roughly 71 per cent.
• CRISIL expects air cargo traffic to be driven majorly by the growing e-commerce sector and improving air connectivity to smaller airports.
• SpiceJet is slated to become the first scheduled domestic airline to begin dedicated air cargo services in the country. The venture, to be named SpiceXpress, would induct four freight planes in its fleet this fiscal.
• Across the six metropolitan city airports, passenger traffic grew by 14 per cent on-year in fiscal 2018 to nearly 200 million, with the highest passenger traffic handled at Delhi. Kolkata registered the highest traffic growth at 25.7 per cent.

Capacity utilisation trends
Capacity utilisation across the six key airports increased significantly. Nearly all had above 100 per cent capacity utilisation in fiscal 2018, signalling the dire need to augment capacity at these airports.

Private sector participation

• The Airports Authority of India (AAI) manages 125 airports, including 18 international airports, seven customs airports, 78 domestic airports and 26 civil enclaves at defence airfields. However, five airports, namely, Delhi, Mumbai, Hyderabad, Bengaluru and Kochi, are privately operated. They cater to more than 50 per cent of the country's passenger traffic.
• Revenues of these PPP airports have increased more than 10 per cent on-year owing to robust growth in the domestic market as well as improved operational efficiency.
• Mumbai and Delhi airports have topped the best airports ranking in 2017 and best passenger service award in 2018 at the Airport Service Quality awards.
• Construction of the Navi Mumbai International Airport, again a PPP airport, commenced in February 2018. Other airports, including Nagpur, Pune, Jewar (near Noida), and Bhogapuram (near Visakhapatnam), are in various stages of development through the private mode.

UDAN scheme

• The 2018 budget gave an impetus to the Ude Desh Ka Aam Nagrik (UDAN) scheme, with a fivefold increase in outlay (Rs 10 billion) as compared to last year.
• Till date, two rounds of bidding have been conducted under the scheme, with 128 routes bid out in the first round and 325 in the second round.
• Overall, the scheme has had moderate success. As of May 2018, 70 out of 453 routes or roughly 15 per cent of the routes, were operational.
• One of the most prominent successes of the UDAN scheme is Hubballi airport in central Karnataka, where passenger traffic crossed 45,000 in July 2018 from a pre-UDAN level of 3,600 per month.
• Recently, the Ministry of Civil Aviation released a draft policy for international air connectivity under UDAN for air connectivity between selected international destinations and Indian states. Under the draft scheme, eight routes were identified, six from Guwahati and two from Vijayawada.
• The ministry is also planning to undertake a third round of bidding under UDAN with a focus on connecting the tourist destinations to the country's major airports.
• Apart from this, the government has identified eight international routes for extending its subsidised UDAN scheme to the neighbouring countries and ensuring affordable flying for the masses.

Outlook  

• The NextGen Airports for Bharat (NABH) Nirman initiative, announced in the 2018 budget, aims to expand airport capacity by more than five times to handle a billion trips a year in the next 10-15 years.
• Recently, the government announced the development of 100 airports, at a whopping estimated cost of Rs 4.2 trillion in the next 10 years, to meet the NABH Nirman initiative's objective.
• According to the Economic Survey 2017-18, in-principle approval has been granted to develop 18 greenfield airports. These include Mopa (Goa); Navi Mumbai, Pune, Shirdi and Sindhudurg (Maharashtra); Bijapur, Gulbarga, Hassan, and Shimoga (Karnataka); Kannur (Kerala); and Bhogapuram airport (Andhra Pradesh).
• Apart from this, the AAI will invest Rs 180 billion over the next four years to upgrade airports. Rs 150 billion of the investment will be made this fiscal to expand existing terminal buildings and construct new ones.
• As much as Rs 3-3.5 trillion needs to be invested by 2030 to achieve the target set by the government for the sector. However, with its limited resources, the government cannot make such a huge investment. Hence, increased investment from both the government and private players to achieve the sector's holistic development is the need of the hour. Private players can invest in commercially attractive airports and the government can divert funds towards the development of Tier II and Tier III non-profitable airports.

With the Indian government's thrust on PPPs in the infrastructure sector, multiple models have been formulated to channel private sector investments into various projects. These models, with suitable legal and regulatory frameworks, have been used in actual infrastructure projects across sectors with varying degrees of success. Given that infrastructure projects are inherently capital-intensive and susceptible to cost overruns, the positioning of private sector players as stakeholders through PPPs has incentivised robust project management practices.
Learnings from operational PPP models led to the development of newer models, which addressed challenges and evolved with time. While past PPP initiatives in the airports sector have been successful in attracting private investment, both government regulators and private investors faced a number of challenges. Given the pace of traffic growth across several airports in India, capacity augmentation of existing airports and development of newer airports have become increasingly important. Against this backdrop, it is essential to have a rigorous PPP framework for the airport sector be put in place to enable the development of required infrastructure for both greenfield and brownfield airports.

Ports and Shipping

 

Attracting private investments in the ports sector has become paramount for the government, considering its focus on port-led development, and implementation of ambitious projects like Sagarmala. However, reported cases of PPP terminal operators at major ports going into litigation with port authorities have increased over the years. Apart from this, failure of the current PPP model to remain flexible with respect to changes in the regulatory environment and international market dynamics has reduced the number of investors in the sector. Thus, there is a need for reconsideration of the PPP scenario in the ports sector in India.

Implementation of Sagarmala Programme
The Sagarmala programme is based on the four key pillars for port-led development and comprises 577 projects across 19 states. Out of the 577 projects, more than 70 per cent of the projects are in various stages of implementation.

Port modernisation

• Projects have been identified to increase the capacity to 3,500+ million metric tonne per annum (MMTPA) to cater to the projected traffic of 2,500 MMTPA by 2025.
• 116 initiatives have been identified across 12 major ports to unlock 100 MTPA capacity, out of which 96 initiatives have been implemented unlocking 80 MTPA.
• RFID-based gate-automation system has been implemented at all major ports.
• Direct port delivery system has been adopted to facilitate faster clearance.

Port connectivity
According to CRISIL report, more than 50 per cent of rail connectivity projects under Sagarmala are under implementation through various agencies such as Indian Port Rail Corporation, which is a joint venture between major ports and Rail Vikas Nigam.

• 112 road projects with a length of 8,584 km, which will enhance last-mile connectivity, have been identified.
• More than 20 per cent of the projects are in various stages of implementation.
• 15 multi-modal logistics park projects have been identified, out of which 10 are under implementation.

Port-led industrialisation

• 57 industrialisation projects have been identified, out of which 18 are under implementation.
• Port-linked special economic zone is under implementation at JNPT, which is expected to attract investment of Rs 120 billion. However, progress on other coastal economic zones have been slow.

Coastal community development
26 fishing harbour projects totalling Rs 40 billion have been identified, out of which only seven are under implementation.

Key initiatives
Over the last few years, the government has taken a number of initiatives to attract private investments into the ports sector- permitting 100 per cent FDI under the automatic route, allowing income tax incentives under the Income Tax Act, 1961, formation of joint ventures between major ports and foreign ports, non-major ports and private companies, and standardisation of bidding documents such as request for qualification, request for proposal and concession agreement. Apart from that, some of the recent developments include proposed revisions by the government in terms of the model concession agreement and the replacement of the Major Port Trusts Act, 1963, with the Major Port Authorities Bill, 2016.

Major Port Authorities Bill, 2016
In order to increase the autonomy of major port boards, the Union Cabinet has approved the Major Port Authorities Bill, 2016 which allows ports to fix tariff based on the market conditions, winding down TAMP. The bill is more compact compared with the Major Ports Trusts Act, 1963, as the number of sections has been reduced from