Revitalising the infrastructure sector is crucial to the overall investment climate to bring the Indian economy back on high growth trajectory, says Sandeep Upadhyay, MD & CEO, Centrum Infrastructure Advisory Ltd.
The infrastructure sector, with transportation at the forefront, is a key enabler, acting as no less than a spinal cord for any economy and India is no exception. The infrastructure sector can be referred to as a set of basic services, facilities and physical installations required for smooth functioning of quality life in a country. Revitalising the infrastructure sector remains crucial to improving the overall investment climate and bringing the Indian economy back in the high growth trajectory. The country needs close to Rs 43 trillion to be spent on infrastructure development over the next five years, with 70 per cent of the investment needed across the power, roads and urban infrastructure segments. India was ranked 24th out of 138 countries for its quality of transportation in the World Economic Forum's Global Competitiveness Report 2016-17; however, the need for massive upgradation has been repeatedly highlighted over the last decade.
To achieve significant improvement in productivity and efficiency, it is imperative that future planning of India's transport network is aimed at the development of multimodal transport ù both within the country and for export-import trade. The transportation sector can be categorised primarily into roads and highways, ports, airports and railways. The growth in these segments, and the issues that need to be tackled alongside to ensure a seamless infrastructure roadmap are discussed hereunder.
India currently has the second largest road network in the world. Over the past 70 years since Independence, the total length of surface roads has increased from 0.4 million km to around 4.8 million km and the sector still holds a massive scope for capacity augmentation. The country's roads and bridges infrastructure, valued at $6.9 billion in 2009, is expected to touch $19.2 billion by 2017. The financial outlay for road transport and highways grew at a compounded annual growth rate (CAGR) of 12.5 per cent between financial year (FY) 2010 and 2016. For FY2016-17, the budgetary support for road transport and highways has been increased to Rs 97,000 crore.
While the build-operate-transfer (BOT) model was the flavour of the market for the sector for almost a decade since 2004, it started to lose steam over the past three years or so due to some reckless bidding, increased borrowing costs, subdued traffic growth and stressed balance sheets apart from failure on the part of authorities to award timely clearances and approvals, and thus resolve pending disputes. The Memorandum Concession Agreement (MCA) by the National Highways Authority of India (NHAI) for highways has remained to be one of the most evolved agreements on a public-private partnership (PPP) basis. Certain changes like premium deferment, one-time infusion in stalled projects and extension of concession period for BOT projects have been approved lately to facilitate streamlined development and operation of highways.
Of course, it is not difficult to comprehend that the BOT model (in its earlier avatar) has lost its sheen, paving the way for the authorities to explore other innovative models to roll out the massive road development programme. The well thought through Hybrid Annuity Model has been developed and adopted for implementation of highway projects which seems to gradually reviving interest back in the sector with more than 35 projects already awarded in the current financial year. Further, the government's plan to monetise significant number of projects on a Toll-Operate-Transfer (TOT) model is expected to boost private sector participation, and I believe the Indian roads sector is well poised to witness increasing participation from the global pension and sovereign funds. The pipeline of projects for NHAI looks solid and they seem to be on course to bid out ~30,000 km of projects in the next two-three years. Going forward in the next decade or so, I can foresee the focus for the Authority shifting from the linear development (two-laning) to the horizontal expansion (upgradation to four-six laning) and building expressways.
India has the fourth largest railway network in the world, covering 29 states and 3 Union Territories including 8,500 stations. It runs nearly 21,000 trains carrying 23 million passengers and 3 million tonnes of freight per day. Indian Railways (IR) has come a long way from the time it was nationalised in 1951. The Government of India has unveiled plans to invest ~ Rs 8.5 trillion in its railway network over the next five years. In India, there are an equal number of challenges and opportunities. The rail transport system is supposed to be six times more energy efficient than road and four times more economical. The social costs in terms of environment damage or degradation are significantly lower in rail. Rail construction costs are approximately six times lower than road for catering to comparable levels of traffic. Historically, the Indian Railways has played a leading role in carrying passengers and cargo across India's vast territory. However, today the country's high-density rail corridors face severe capacity constraints. There is a definite need for capacity enhancement, upgradation, and creation of new passenger and freight corridors. Other issues plaguing rail transport are the differential speeds of trains, inadequate connectivity to ports and mines, inability to carry longer and heavier trains, lower throughput and longer turnaround period.
The Dedicated Freight Corridors along the eastern and western parts of India are expected to result in an increased share of the railway network to 87 per cent in 2021-22 from the 84 per cent projected in 2016-17. Steps taken to revamp the sector include announcing of the Diamond Quadrilateral network of high speed rail to connect major metro cities, introduction of bullet trains and monetisation of real estate on tracks by leasing land parcels out for horticulture.
While some of these projects are aspirational, I would tend to believe such initiatives would go a long way in putting on the global map the showcasing of advanced Indian transportation infrastructure. Going forward, the focus should be on addressing issues around increasing capacity, improving productivity, widening network and making safety and technological improvements. The network of DFC should be speedily completed.
India has an extensive coastline of about 7,500 km and 14,500 km of navigable waterways with 13 major ports and around 180 minor ports. However, only one-third of the minor ports are operational. About 95 per cent by volume and 72 per cent by value of the country's international trade is handled through the country's ports. The ports sector in India remains highly underserved with a huge unexplored potential.
There is a need to develop coastal shipping as it has the potential to strengthen the cargo transportation within the country. It's fast, efficient, environmental-friendly and cost competitive. Further, the cost of transportation via coastal mode is a fraction of road and railway costs. Transportation by waterways costs 25 paisa per km and by railways cost Rs 1.50 and by road Rs 2.50, respectively, according to Shipping Ministry statistics in 2015-16. Still, roads and railways are the preferred modes of evacuation.
Coastal shipping accounts for 7 per cent of the country's total domestic freight, primarily because of the high turnaround time. The total cargo moved by inland waterways was just 0.1 per cent of the total inland traffic in India, compared to the 21 per cent figure for the United States. Hence, the critical success factor to pick up the coastal shipping sector is port connectivity and modernisation to ensure that the cargo from the hinterland moves quickly to the nearby port and gets loaded to a vessel on the day of arrival itself.
With rising demand for port infrastructure due to growing imports (crude, coal) and containerisation, public ports (major ports) will fall short of meeting demand. This provides private ports with an opportunity to serve the spill-off demand from Major ports and increase their capacities in line with forecasted new demand. There is a need to create three-four mega ports in the next 10 years or so.
Given the positive outlook for cargo traffic, and the resulting increase in number of vessels visiting ports, demand for ship repair services will go up. This will provide opportunities to build new dry docks and set up ancillary repair facilities. With the roll out of GST, long-term benefits are expected to positively impact the logistics sector and port connectivity, and maritime-based infrastructure will play a crucial role in further capitalising the benefits.
India is currently the ninth largest civil aviation market in the world. India's civil aviation sector has been reporting sustained growth due to factors such as de-regularisation of the aviation sector leading to the participation of private sector airlines, sustained efforts to increase capacity at metro and non-metro airports, the launch of low cost carriers (LCCs), liberalised FDI policy and the rise in tourism and business travellers.
Aligned to the aspirational target of becoming the largest aviation market by 2030, the government has recently unveiled the much-anticipated Regional Connectivity Scheme (RCS), to be implemented from the second quarter of 2016-17, which aims to revive the unserved or underserved airports and routes. While the policy seems to be high on intent the chinks in the rollout plan to create or upgrade airport infrastructure facilities may still need to be ironed out.
Given the encouraging civil aviation policy as a step towards boosting air transport, the onus is on the government now to develop appropriate infrastructure to facilitate the anticipated growth in traffic movement. Though the policy provides impetus to airline service providers, the commercial viability aspect of airport development still remains a challenge. While the private sector participation is inevitable, it is important to time the involvement carefully along with the risk-return adjustment to their scope of work.
While efficient risk sharing between the public and private sectors would remain the key for structuring aspirational transportation projects, passing the buck as of now to the private sector disguised under the PPP model as a strategy may need serious rethinking. It is imperative that the government times the private sector involvement strategically to unlock commercial value at a later stage once these assets have an operational track record.
In the context of the current situation, the government may have to step up in terms of incurring the capital expenditure on creating or upgrading transportation facilities which could be later on monetised by bringing in private companies. Some of the other avenues that need significant improvement are identifying long-term financing sources, improving dispute resolution, addressing issues around land acquisition - including timely approvals and improving enforcement of contracts.
Rail and roads dominate the transport system in India, carrying about 90 per cent of the total freight traffic in the country. Unfortunately the rail-road mix in freight movement has developed rather sub-optimally over the years as railways consistently lost out to roads. The divide between the two modes became even more pronounced as roads expanded rapidly on the back of focused policy and investments, particularly during the last decade or so.
While viability of constructing new ports should be constantly explored, which may also provide a fillip to the attractiveness of coastal shipping, roads will continue to steal the limelight as far as brownfield expansion is concerned. However, roads should not be looked at in isolation but as a part of an integrated multimodal system of transport. The planning and development of the primary road network must tie up with planning of railways' dedicated freight corridors and other segments of the rail network, connectivity with the ports, airports, SEZs, logistics hubs, major tourist centres and linkage with neighbouring countries.
About The Author
Sandeep Upadhyay is MD and CEO, Centrum Infrastructure Advisory Ltd.