CII Policy Watch : Action Agenda for Infrastructure Sector

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Focus : Action Agenda for the Infrastructure Sector

July 2013, Volume 2, Issue 3

Policy

Confederation ofIndian Industry





nfrastructure development is a critical enabler for sustaining

economic growth as well as ensuring its inclusiveness. it is estimated that lack of good quality infrastructure impedes india’s GDp growth rate by 1-2 per cent per annum.

the share of private investment in the overall investment in infrastructure was about 37 per cent in the 11th plan. Going forward in the current plan period (2012 – 17), the Government is expecting USD 453 billion out of the total investment requirements of USD 970 billion (almost 50 per cent) to come from the private sector.

Realizing the need to create a greater enabling environment for the ppp framework in the infrastructure sector, the Government has recently undertaken critical policy initiatives to provide a much - required fillip to the sector. these include:

• SettingupofaCabinetCommitteeoninvestments (cci) to monitor and fast track big ticket infrastructure projects over Rs. 1000 crore.

• Draft Public Authority (Settlement ofDisputes) Bill, 2013 recently mooted by the planning commission seeks to set up an institutional mechanism that can provide assurance of speedy resolution of disputes, especially of large public contracts.

Going ahead, there are some critical sector specific issues which would need to be addressed to realize the true potential of ppp in the country. these include:

• PPPRenegotiation:Thereisanimminentneed to set up an 'independent ppp commission' with the authority and jurisdiction to renegotiate the terms of

the contract in the best interests of the country.

• SovereignClearances:TheGovernmentshould ensure that all projects are awarded to the private sector only after securing key sovereign clearances.

• EnhancingLiquidityforDevelopers:Oneofthe specific recommendations is to create Business trusts (Bt) that allow assets to be handled by professional o&M operators while the underlying ownership gets accumulated in the Bt whose units get subscribed by the investors.

• Effective Regulatory Framework:Sectoral regulatory authorities need to be developed into truly independent bodies that are free from political and bureaucratic interference.

cii has drawn up a Sustained agenda for policy advocacy this year and is currently in dialogue with all the key stakeholders to discuss the critical issues and come out with a detailed roadmap for the sector.

this policy watch issue takes an in-depth look at the sectoral issues and seeks to outline some specific recommendations that cii would pursue in its dialogue with various policy stakeholders in the Government. i hope that you will find it useful. n

Chandrajit BanerjeeDirector Generalconfederation of indian industry

MessageFromtheDirector General .... 1chandrajit Banerjee, Director General, cii

CEOSpeak ......................................................................................................................................................2

policy Barometer ...........11industry Voices ..............15Factfile ..........................16

Dr. Rajiv B Lallchairman, cii National committee on InfrastructureandExecutiveChairman,InfrastructureDevelopmentFinancecompany limited

Vinayak ChatterjeeChairman,CIINationalTaskForceoninfrastructure projects– Monitoring and AdvocacyandChairman,Feedbackinfrastructure Services pvt. ltd.

Anil Sardanachairman, cii National committee on power and Managing Director, tata power company ltd.

GV Sanjay ReddyChairman,CIINationalTaskForce onFestivalofIndiaand Vice chairman, GVK power & infrastructure ltd.

T.S VenkatesanMember, cii core Group on Roads & HighwaysandChiefExecutive-Roads,l&t infrastructure Development projects ltd.

Rajiv Agarwalchairman, cii core Group on ports andManagingDirector&CEO, EssarPortsLtd.

Amit KapurMember, cii National committee on infrastructure and partner, J Sagar associates, advocates & Solicitors

this IssueInside

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CEOSpeak

Of late, infrastructure projects have taken a back seat. What do you think are the critical factors affecting the implementation of projects and how long do you think it will take to reinvigorate the growth momentum?

after a period of policy paralysis, the Government has started making an effort on the policy front to bring back investors' confidence. Setting up the cabinet committee on investments (cci) to monitor on-time completion of large projects was an important signal. it showed the intention of the Government in clearing some of the bottlenecks affecting these projects, many of which were caused by lack of inter-ministerial coordination.

the Government needs to restore investor confidence and improve sentiment to bring back private investment and capital asset creation. while the private sector has played an important role in building infrastructure, the Government’s inability to meet its obligations in certain areas has affected theconfidenceofinvestors.Forexample,inthe power sector, coal india was to provide the fuel but it is not available in sufficient quantities. another example is the road sector where aggregation of land has not happened at the pace it should have. there have also been issues related to obtaining

at plant load factors that are sufficient to service debt. coal india needs to be closely monitored and held accountable for efficiency improvements. also, the lack of availability of gas, especially from the KG basin has affected the 20,000 Mw of gas based power plants in the country, which are either stranded or running at very low plant load factors. we need to find a solution which perhaps creates a blend of KG basin and imported gas. in the telecom sector, decisions on issues such as spectrum pricing, ‘refarming’ of spectrum etc. need to be handled expeditiously.

these issues will hopefully see some resolution over the next few months. in general, there needs to be a rebound in greenfield asset creation across infrastructure sectors which brings back investors.

With equity being a constraint and about 70 per cent of funding expected through debt, what needs to be done to encourage investment in the infrastructure sector and encourage banks and financial institutions to step up lending activities?

it is not really an issue of financing being unavailable. the important hurdle to cross is bringing back confidence in all stakeholders. while the investment requirements are huge, the bottlenecks in the system are making it difficult for the infrastructure sector to attract adequate capital and funding which is required to meet the investment requirements.

in addition to resolving the sector specific issues already mentioned, there are issues related to land acquisition and environment clearances across sectors which need a balanced solution. For greenfield projects,the Government should ensure all requisite clearances are obtained before the projects are bid out.

it is only after overcoming these bottlenecks that the infrastructure sector will attract the level of investment it requires. n

Imperative to Remove Bottlenecks to Accelerate Growth in Infrastructure

Dr. Rajiv B Lallchairman

cii National committee on infrastructure and ExecutiveChairman,InfrastructureDevelopment

FinanceCompanyLimited

clearances, in particular environmental clearances.

if we are to get anywhere near the one trillion dollars of infrastructure investment over the 12thFiveYearPlan,halfofwhichis supposed to come from the private sector, it will require bold measures to remove the pressing bottlenecks across major infrastructure sectors, which are hampering the overall investment climate.

With lenders tightening the noose on financing infrastructure, what are your expectations in the near term?

Due to the impressive growth of the infrastructure sector during the 11th plan

period, lenders have a large exposure to the sector. the recent slowdown has expectedly resulted in their holding back further funding, especially to greenfield projects.

Resolving issues affecting the power sector continues to be of immediate importance to restore confidence. power plants coming onstream do not have enough fuel to operate

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CEOSpeak

With the 12th Five Year Plan already commenced, action on new projects and monitoring of existing ones is yet to keep pace. Do you think a sustained change is needed across planning, bidding and execution of infrastructure projects?

yes, action on new projects is yet to take off. the first point is really that the 12th plan will see the existence and impact of the cabinet committee on infrastructure (cci) which was absent during the 11th and 10th plan. So, hopefully, the cci mechanism should be able to cut through a lot of policy logjams, for which there was no effective mechanism earlier. this becomes even more pertinent in the wake of the fact that 215 infrastructure projects worth Rs 7 lakh crore are stuck and for another 126 projects, bank loans have been sanctioned but they are yet to take off.

the other point i want to make is that, historically, the relationship on infrastructure development with the private sector has been on two broad parameters – Build Operate Transfer (BOT) and Engineering,Procurement & Construction (EPC). Fromcii’s side, we have also been pushing for the middle ground, which is called annuity. this is because the fact remains that despite good response to its bids in some sectors like roads and highways on the Botmodel, many projects are facing difficulties owing to issues related to financial closure. in many cases, financial closure problems arose out of the issues related to land acquisition and environment clearance.

With inevitable increase in the number of PPP projects for renegotiation, don’t you think an institutional framework needs to be created to address concession related resetting issues?

the industry in our sector – which is the infrastructure sector – has been stridently asking for a ppp Renegotiation commission because of an increasing number of cases coming up for dispute resolution and

reluctance of the banking system to provide loans for the infrastructure sector. all these need to be handled together. policy and regulatory reforms in the sector have a long term impact on investors’ sentiment. the Government has announced such positive measures but more measures such as these need to be fast-tracked and monitored regularly. the popular perception is that the worst is behind us, but there is still apprehension that there may not be radical positive shifts before the next general elections. therefore, the widely held belief is that the infrastructure sector is going to see its next upcycle from 2015 onwards.

What do you think needs to be done on a priority basis to speed up pace of infrastructure development in the country?

there is certainly a need to change the way we approach infrastructure development in the country. Some of the key interventions are enumerated here under–

• AfarmorevibrantCCIthatshouldmeetweekly.

• Facilitate creating a long-term debtmarket.

• Enacting a new architecture to makeregulatory authorities truly independent.

• Creatingcapacityamongthebureaucracyat the centre and States to conceptualize and develop more ppp projects. n

Public Private Partnerships in India: Changing Paradigm

Vinayak ChatterjeeChairman,CIINationalTaskForceon

infrastructure projects– Monitoring and advocacy andChairman,FeedbackInfrastructure

Services pvt. ltd.

renegotiation on account of changes in circumstances that were earlier not foreseen. this becomes important because it would be impractical to assume that ppp documentation is ‘cast in stone’ and unforeseen developments across 20 – 60 years will not require to be addressed in public interest, even as international data on ppp reveals that around 41 per cent projectsunderwentrenegotiation.Further,atpresent, there is no institutional mechanism to reset terms in a transparent and unbiased manner. cii, therefore requests setting up of an ’independent ppp commission’ with authority and jurisdiction to renegotiate terms of contract in the best interests of the country.

Do you think that investor sentiment will improve on the back of recent policy announcements or will it continue to take a hit?

investor sentiment at present is affected due to various reasons. these include over-leveraged private sector balance sheets, insufficient order book to feed all the infrastructure companies which has grown over the years, policy logjams, contract management issues and the increasing

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What are the three key issues currently impeding growth in the power sector?

the power sector is facing several challenges today. the key amongst them is shortage of fuel. Despite huge coal reserves in india, the domestic power sector is facing coal shortages and has resorted to imports to meet its requirements. this shortage may result in increasing non-utilisation of assets that are already built and also distract new capacity additions thereby resulting in targets not being met. at the same time, recent policy changes in indonesia and australia have significantly escalated the price of imported coal. Since independent power producers (ipps) import coal from indonesia and australia, the sudden spike in price has caused imported coal-based power projects to become economically unviable. however, in this respect, the recent decision taken by the cabinet committee onEconomicAffairs(CCEA)toallowpowercompanies to pass on the cost of imported coal to electricity consumers is indeed a welcome development and will benefit the 78,000-Mw of capacity that is envisaged in the current plan period. while this may lead to a very marginal increase (15-17 paise) in the per unit cost of power, this move will ensure availability of power and will also prevent the creation of stranded capacity which currently is estimated at about 20,000 Mw. this move is clearly a step in the right direction and reiterates the Government’s commitment to address the issues impacting the power sector. it is also hoped that the processes to get this aspect approved from State Electricity RegulatoryCommission (SERC) will be simple andtransparent. another major challenge to the sector is the shortage of natural gas in india. this shortage has stranded gas-based power projects with a combined capacity of around 18,903.5 Mw, accounting for 9.13 per cent of the total generation capacity.

Inthisregardaswell,CCEA’srecentdecisionto hike the gas prices in accordance with

of 400 Gw, comprising one of the largest customer bases in the world. however, high financial losses and the debt burdens of the distribution companies are hampering not just electricity distribution but is almost becoming a question mark for the addition of generation capacity in india.

in addition to fuel, distribution reforms, the third key impediment to growth is the commitment of States to support the developers in obtaining clearances, land free of encumbrances, etc. without the engagement of the States it is seen that developers have to experience a long wait before their investment can be deployed on ground.

In your view, how is the sector likely to evolve over the next few years? What is likely to be the roadmap for renewable energy based generation in the country?

Energy is the engine that drives the paceof the economy and it is in the interest of the country’s economic development that the sector is given its due importance. the sector has witnessed steady growth through private sector participation. there is a need for concerted effort from all the stakeholders towards mitigation of some of the key obstacles hindering the growth of the sector. also, the Government would do well to divest out of power generation and

Need for Integrated Planning to Address Challenges

Anil Sardanachairman

cii National committee on power and Managing Director, tata power company ltd.

the formula proposed by the Rangarajan committee report is expected to incentivize exploration and hopefully lead to increased domestic gas production. there is also a need to evolve a robust energy security policy for the country so that guidance is given to all State Regulatory commissions to plan bulk supply procurement in line with the basket of fuels that meet indian's energy security needs.

Besides fuel, the slow pace of distribution reforms is another key concern. power distribution still remains a segment that needs significant reform-intervention and a combination of tariff increases, competition and open access and enforcement of the ‘obligation to service’ going forward.the distribution segment caters to 200 million consumers with a connected load

CEOSpeak

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distribution businesses and be the catalyst to promote investments. it should act as the custodian of customer's voice and demand performance from private utilities. one would want to see the power sector cater to customer needs in terms of quantitative and qualitative aspects, benchmarked with best of class utilities anywhere in the globe. Fortunately, this exists in pockets and isrequired to be replicated elsewhere in india , through a strong will of the Government.

in line with the low carbon growth strategy, the Government of india is pursuing aggressive targets of generating energy from renewable sources. this has been reflected in the 12thFiveYearplan(2012-17)that envisaged, renewable capacity addition of 18,500 Mw out of which 3800 Mw will be from solar capacity sources. this presents significant opportunities for the players in the energy sector. in our opinion the real boost for the renewable energy sector would come by strengthening the Renewable purchase obligations (Rpo) mechanism. Since the renewable resources are not evenly distributed in the country, the Rpo encourages setting up of large generation capacities at resource rich locations, and through a process of certification, it can be traded on Central Electricity RegulatoryCommission (CERC) approved powerexchanges, to obligated entities or voluntary buyers. also, the Government should be agnostic to which solar technology is used (cSt or pV) and leave it to developers and market forces to determine the choice of technology.

tata power is also one of the major investors in generation of power using renewable energy sources. the company has a total installed generation capacity of 852 Mw in the clean and renewable energy sector.

What are the key policy initiatives that need to be undertaken on an urgent basis to put the sector on a strong growth trajectory?

the power sector has gone through a lot of turbulence in the last year. there were clear indications of the sector struggling with a number of factors like fuel supply shortage, unprecedented hike of coal prices in the international coal markets and the dismal financial health of the distribution sector.

the worst blackout in the country’s history, which occurred in the month of July, was a good wake up call and highlighted the need for integrated planning.

Despite grappling with challenges, the level of determination exhibited by the private sector to contribute to the growth of the sector needs appreciation. the private sector added around a 15000-20000 Mw of new capacity in the past year. tata power itself has fully commissioned the country's first 4000 Mw Ultra Mega power project (UMpp) at Mundra which meets about two per cent of the country's energy needs.

this one year also saw a change of guard at the Ministry of power and we have seen hectic activity in the past few months. the recently announced Budget by the central Government for the financial year 2013-14 approved a scheme for the financial restructuring of discoms to restore the health of the power sector. the State Governments have been asked to prepare the financial restructuring plans which can be utilized at the earliest to the best advantage to the discoms. it is hoped that the discoms, which happen to be the weakest link in the entire value chain, will be restructured to strengthen the framework of the sector. Steps taken on fuel price pooling which is a short term solution only, would provide some respite to new capacity, which otherwise has the risk of being stranded. AlsotheCERC'sorderinApril2013,whichcalled for a variable 'compensatory tariff' till

the fuel situation stabilizes for an imported coal based plant, is a progressive step for the sector. this decision of the regulator was welcomed by the industry as many imported coal based projects were either stalled or were running losses due to high imported fuelcosts.Alsoasmentionedearlier,CCEA’sdecision to allow power companies to pass on the cost of imported coal to electricity consumers is also a positive development and will benefit the 78,000-Mw of capacity that is envisaged in the current plan period. a similar policy framework is needed to address various issues plaguing the sector for quick resolution, which will spur investments multifold.

What are the potential opportunities for the Indian power sector in the global markets, especially in Africa, in the renewable energy and coal based power generation segments?

the indian power sector has a good chance in the global markets. the emerging markets, including africa, have good potential for power and infrastructure development and with the right opportunity can be a value creator for indian companies. case in point are most big global energy companies that have also pursued growth by going international. also, the type of challenges, especially in africa, are similar to that of india. indian private players can easily contribute to the development of africa's distribution sector, which would give a fillip to generation activities, including renewables. n

CEOSpeak

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CEOSpeak

What is the current status of the airports sector? Do you think the sector will achieve the set targets?

the airports sector is unique both in terms of progress made and the opportunity available. though there is still a lot to be achieved, there have been some breakthroughs in the right direction in the recent past: a wave of privatization of major airports came in the last decade. this has resulted in a change in outlook for the airports, from being seen merely as transit points to being seen as destinations in themselves. in the last five years, the total non-aeronautical revenue generated across all airports in the country has grown by more than 340 per cent and 91 per cent of this has been driven by the four metro public private partnership (ppp) airports at Mumbai, Delhi, Bangalore and Hyderabad. Even the airports modernisedand constructed by the airports authority of india (aai) are being developed as a hub of activities rather than being just functional. india requires $30 billion in airport infrastructure investments by 2020, most of which has to come from the private sector, but the long gestation period of the projects, high capital intensity, paucity of high risk capital and involvement of multiple stakeholders pose significant risk to the

but is closely intertwined with the growth of india’s economy - e.g. every $100 spent in the aviation sector contributes $325 for the economy and every 100 additional jobs created in air transport results in 610 new jobs. i thus feel that it is of utmost importance to build these airports and that it can happen in a timely and efficient manner only through innovative ppp business models.

What are the specific policy measures that the Government should take to address the key issues affecting the sector?

though good progress has been made recently in the airports sector, there is a feeling of uncertainty over the policy framework going forward. the regulator needs to take a clear stand on tariff policy, be more progressive, and open the doors for more lucrative private player participation. this would not only augur well for the private players but also make the sector more competitive and bring the best of the players to the table, improving both the pace and quality of projects, which is the need of the hour. private participation can also be aided by preferential capital funding at attractive terms. n

Innovative PPP Models Can Boost The Growth of the Aviation Sector

GV Sanjay Reddychairman

CIINationalTaskForceonFestivalofIndiaandVice chairman, GVK power & infrastructure ltd.

pace of the projects. whether the targets are achieved or not would depend on how these risks are mitigated collectively.

The AAI is planning to develop around 20 airports in tier II-III cities over the next five years. What are your views?

the per capita air trips recorded in india stands at 0.05 as against china and Brazil’s 0.3, global average of 0.5 and advanced economies’ 1.7, which shows immense potential for the development of aviation in india. this can happen only when the tier ii and iii cities are air connected and flying becomes inclusive. Development of these airports is not only good in its own respect,

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CEOSpeak

What is the current status of the roads and highways sector? Do you think the sector will witness a surge in investor participation in the light of recent policy initiatives?

the award of projects by Nhai in the last fiscal has been below expectations, with less than 20 per cent of Nhai’s work plan materializing. the situation is not expected to be vastly different this fiscal given the existing market sentiments being far from optimistic. the developer community has been exposed to the stark realities of the existing macro-economic situation in the country coupled with the delay in implementation of the Nhai plan, which has resulted in consequences like – awarded projects not taking off because of la/clearance issues, lenders’ increasing pessimistic attitude towards the roads sector, very few bids receiving interest from bidders, unavailability of equity for new investments, etc. the current status of the sector is therefore not too promising, but the situation can only get better from here, given the fact that the Government in the recent past has shown keenness towards taking corrective measures for improving investor sentiments. Recent policy initiatives like restructuring of premiums, allowing early exit of developers from operational projects, setting up of a cabinet committee on infrastructure to speed up implementation, delinking of environment and forest clearances –will definitely help in sprucing up the sector as and when they get fully implemented. also, initiatives like restructuring of premiums has not been receiving encouraging response from the various Ministries which are required to give approvals for it to become a reality.

The Government has announced the setting up of the road sector regulator in the next 4 months. What are your expectations?

From a developer’s perspective, this is awelcome move, as the roads regulator would be expected to take certain key

as well as State highway authorities falling under the ambit of the proposed regulator, and not the Nhs alone as mentioned in the Budget announcement, so that consistent implementation of initiatives can be ensured throughout the country. a regulator, among other things, would also be expected to take certain pro-user decisions which will again be a welcome move as it would ease out issues like willingness to pay toll.

There has been a shift in focus to award projects on EPC basis. Do you think that this trend will continue in the near term?

ThedecisiontomovetowardsEPCmodewastaken by Nhai on two accounts – lack of high traffic corridors which will attract Bot bids, and availability of funds with Nhai to implement projects through public funding. the scenario of funds availability with Nhai could have now undergone an alteration after the recent backing out by developers of a few high profile projects. the expected premiums from these projects, anticipated tofundtheupcomingEPCprojectspipeline,

Remedial Measures Required to Boost Growth of Roads and Highways Sector

T.S. VenkatesanMember, cii core Group on Roads & highways andChiefExecutive-Roads,L&TInfrastructure

Development projects ltd.

policy decisions like restructuring of project premiums, faster dispute resolution mechanisms, authority to make small but impactful changes to the existing Model concession agreement, etc. provided the upcoming roads sector regulator is given the mandate for the all these things. the idea of a regulator would be rendered meaningless if aspects like dispute resolution, authority to make unilateral policy improvements, etc. are kept out of its purview. Moreover, as a developer, we would expect to have National

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What is the current status of the ports sector? Do you think the sector will achieve the set targets?

the ports sector has huge growth potential but the current growth rate of the sector is much below its potential. Still, we believe that the sector will be able to achieve the set targets as cargo through the ports is expected to increase significantly as the indian economy expands and the manufacturing and trade sector grows.

Recently there has been some acceleration on the bidding process but more positive actions are required by the Government to improve the investment scenario in the sector. Several projects have been delayed due to the slow bidding process and also

The Government has recently announced draft guidelines for Tariff Setting in Major Ports, 2013. What are your views?

the new draft tariff guidelines for tariff Setting in Major ports is a step in the right direction. it will provide more flexibility to port operators to fix the tariff and will lead to improvement of operational performance of the ports.

tariff fixation at the major ports should be deregulated as the sector has become highly competitive and the market can determine the competitive rate based on cost and quality of service. the role of tarrif authority for Major ports (taMp) should be of a facilitator who ensures a competitive environment and also that of an enabler

Streamlining Clearances and Bidding Process: Crucial for Promoting Trade and Economy

Rajiv Agarwalchairman

cii core Group on ports andManagingDirector&CEO,EssarPortsLtd.

may not be a reality any longer. The EPCtrend may hence continue for the short term butalargescaleshifttowardsEPCisunlikelyto happen given the financial constraints to support such a programme. Going forward, the authority needs to strike a fair balance betweenBOT(Toll),BOT(Annuity)andEPCprojects, based on availability of funds, budget allocation, viability of projects, developer sentiments and lenders’ interests in the sector.

What are the specific recommendations that CII has been suggesting to the Government to address the key issues affecting the sector?

Recommendations such as additional tax-sops, setting up of a dedicated infrastructure Ministry, setting-up a fast-track board to remove project impediments at a grass-root level have been suggested. there are a lot of other issues to be addressed and remedial measures to be taken. Mentioned below are a few of them:

a) Non availability of equity capital

b) Delay in environmental and forest clearance

c) Starting the bid process only after the necessary clearances are obtained will prevent delays in land availability and hence delays in project construction.

d) 80 per cent of the land should be in 3G stage with cheques disbursed by Nhai to the land owners.

e) Frequent change of scope due todemand of additional structures like Vehicular Under pass (VUp), pedestrian Under pass (pUp) etc by the locals.

f) take the local public into confidence by publishing the scope of work in local newspapers, seek their comments upfront to prevent subsequent changes to the scope.

g) toll rationalization - toll viability is a major issue affecting road users. at present, toll rates are linked to wholesale price index (wpi) which affects toll rates dearly. Moreover, there has been widespread opposition from locals and commuters where service level of the highway stretch is dipping. cii has recommended to the developers not to

charge toll in case of under construction highways.

h) as of now, once the concession agreement is signed, no changes in the agreement can take place - this needs to be changed as restructuring of the concession agreements is a must for the survival and the revival of the sector.

i) absence of State Support agreement - Solid , effective and implementable State Support agreement has to be made available even before the Request ForProposal(RFP)stage.

j) Delays in shifting utilities, approvals etc - this requires certain structural changes in the concession agreement to prevent executional delays.

k) opaque total project cost number in the concession agreement - this should be transparent and the breakup has to be made available to the bidders.

l) weak Dispute Resolution Mechanism - a quasi - judicial authority is a must for speedier resolution of issues. n

CEOSpeak

due to delays in obtaining environment clearance, security clearance and land acquisition.

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Streamlining Clearances and Bidding Process: Crucial for Promoting Trade and Economy the recent past has seen frequent instances

of private companies in the infrastructure space attempting to renegotiate their contracts for a wide variety of reasons. prominent among these instances is the tariff-revision sought by adani power ltd. and tata power ltd. on grounds of a sudden and unanticipated increase in fuel costs. Similarly, in the highways sector, GMR infrastructure ltd. sought to restructure the payment of premiums due under the concession agreement to the National highways authority of india.

the tatas and adanis were afforded a modicumof reliefby theCentralElectricityRegulatory commission, which viewed their demands favourably in the backdrop of ensuring the continued viability of the electricity sector. however, GMR was not so fortunate, with the proposed restructuring

responded to, both in the interest of the public and the continued successful development of infrastructure in the country.

The Concept of Renegotiation

in competitively bid out concessions, renegotiation is viewed as risky since the original basis on which the concession was competitively bid out may be altered, affecting the competitive fairness of the concession. however, renegotiation can be a positive instrument when it addresses the inherently incomplete nature of concession contracts. properly used, renegotiation can enhance welfare. in adani power ltd. v Uttar haryana Bijli Vitaran Nigam ltd. and ors., petition No: 155/Mp/2012, Date of Order : 02.04.2013, the Central ElectricityRegulatory commission noted the following ‘relevant and important findings’ with respect to renegotiation:

Renegotiating Infrastructure Concessions

Amit KapurMember

cii National committee on infrastructure and partner, J Sagar associates, advocates & Solicitors

being rejected as being a ‘renegotiation of the entire agreement’.

in the backdrop of the increasing demand for renegotiation of infrastructure concessions, it becomes important to understand the causes and triggers of renegotiation to ensure that such demands are effectively and constructively

CEOSpeak

to ensure performance regulation, dispute resolution and standardizing efficiencies and best practices by setting operational guidelines.

What are the specific recommendations which CII has been suggesting to the Government to address some of the issues mentioned above?

cii is playing a participative and constructive role in the formulation of policies conducive for the growth of the sector by presenting the views of various stakeholders to the Government. Some of the important recommendations of cii to the Government are:

• Emphasis should also be on portconnectivity projects and it should move along with port expansion plans.

• Captivejettiesarecrucialforthegrowthofthe ports sector and port based industries. the Ministry of Shipping has come up with a draft captive user policy. cii has urged the Ministry to notify the captive user policy for allotment of waterfront and land to port based industries.

• CIIhassuggestedthatacomprehensive

new architecture for port Regulation may be synthesized, including common rules of the game for major (central) and minor (State) ports.

• It has been suggested that capitalexpenditure and maintenance dredging

of the channel may be taken up as a key sovereign activity in a far more focused and professional manner than presently.

• CIIhasalsosuggestedcorporatizingthemajor ports by removing the archaic trust Structure. n

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CEOSpeak

• All long-termcontractsareincompleteand it is not always possible to imagine all possible contingencies in contracts spreading over twenty years. prices may need to be varied sharply in unpredictable ways because of major commodity price shocks and/or exchange rate crisis.

• Allowing some room for renegotiationis appropriate and socially desirable in the face of new problems, changed circumstances and additional information and experience.

• Opportunistic renegotiation should bediscouraged – renegotiation should not be used to correct mistakes in bidding or overtly risky or aggressive bids.

The Causes and Triggers of Renegotiation

Renegotiations are common in incomplete contracts. incomplete contracts result when infrastructure concessions and long-term contracts fail to provide a comprehensive and unambiguous mechanism for dealing with unforeseen events and periodic readjustments. Since human ingenuity can forecast only a limited set of possibilities, it needs to be recognised that most concessions are inevitably incomplete contracts. an ideal contract for a long-term transaction is impossible to achieve because it would require perfect foresight and limitless resources for negotiating and drafting the contract.

one of the common triggers of renegotiation

is a change in circumstances or financial equilibrium. the renegotiation kicks in when the original contract and financial impact of the contract are significantly altered and such changes are not contemplated in the contract. in infrastructure contracts, the concessionaire expects returns that offer reasonable profit. when the expected returns cannot be earned, concessionaires seekachangeincontractterms.Forexample,Reliance power transmission ltd. (through its subsidiaries) had sought a revision of the tariff for a transmission project for reasons of an increase in costs occasioned by a delay caused by force majeure.

another accepted trigger for renegotiation is hardship. hardship is the occurrence of an event outside the control of a party which fundamentally alters the equilibrium of a contract because the cost of a party’s performance has increased or because the value of the performance a party receives is diminished. Such party should not have reasonably been able to take the event into account at the time of execution of the contract. in National insurance co. ltd. v Smt. Golana and anr1, the allahabad high court held that hardship entitles the disadvantaged party to request the other party to renegotiate the original terms of contract with a view to adapting them to the changed circumstances.

Macroeconomic variations such as changes in the exchange rate are a major factor where equipment or materials are imported or when a currency is devalued or suffers from steep depreciation, the parties

may seek renegotiation to offset the effects of such fluctuations.

additionally, contracts often provide for internal triggers for renegotiation. common examples include ‘force majeure’ (the occurrence of unforeseen events outside the control of the parties that impact the performance of contractual obligations) and ‘change in law’ (change in the legal or regulatory framework impacting the transaction contemplated by the contract) whereby terms of the contract are either altered or suspended on account of these pre-stipulated events.

Conclusion: A Tool to Be Used Wisely

Renegotiation is often preferred to outright termination where the parties wish to retain their contractual relationship but, for some reason, the contract no longer accurately reflects the provision of service that is required. the hope is that the process of renegotiation will result in an agreement which more accurately reflects the position and the parties’ respective needs and ambitions.

Renegotiation can be a positive instrument when it addresses the inherently incomplete nature of concession contracts - properly used, it can enhance welfare. however, while some renegotiation is desirable, appropriate, and to be expected, high incidence or readiness for renegotiation may result in opportunistic behaviour and should, therefore, be carefully employed. there is a felt need to revisit the indian model of public-private partnerships for infrastructure development – to effectively put to use for the economy the invaluable investments of Rs.10,00,000 crores or US$ 180 billion locked into underperforming assets due to diverse problems like acute fuel shortages, delays in land acquisition and environmental clearances, unresolved disputes pending at various fora et al. of this US$ 135 billion constitutes loans given by banks which incidentally is savings by households and citizens. a fair and equitable stance on renegotiation of concessions in the event of circumstances that render such concessions financially unviable is absolutely necessary. Ultimately, a robust legal and regulatory framework is necessary to address the causes and treatment of contract renegotiation. n

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2012 (8) aDJ 714

CII Recommendations for Key Issues in the Infrastructure Sector

Area Issues Recommendations

ppp Renegotiation

• InevitableincreaseinnumberofPPPprojectscoming up for renegotiation.

• ImpracticaltoassumethatPPPdocumentationis 'cast in stone' and unforeseen developments across 20 – 60 years will not require to be addressed in public interest.

• International data on PPP reveals 41.5 percent projects underwent renegotiation.

• Noinstitutionalmechanismtotransparently,and unbiasedly reset terms.

n Set up 'independent ppp commission' with authority and jurisdiction to renegotiate terms of contract in the best interests of the country.

ppp - General • A largemiddle spaceonAnnuity-structuredPPP projects exists between EPC and BOT.Needs to be exploited for greater involvement of private sector in current public expenditure driven-projects.

• Award of PPP projects without ‘sovereignclearance’ single biggest factor for delays.

n Consider setting up a National Infra Annuity Fundoutside consolidated Fund of India with mirroredentities at state level.

n issue Government order that no statal entities to 'award' projects to private sector without FIRSTsecuring key sovereign clearances.

construction • Steadydeclineincreditflowtoconstructionsector; though construction accounts for over 8 per cent of GDp, it commands only 3 per cent share of total bank credit to industry. Urgent need to raise the share of institutional lending.

n take forward suggestions from the working Group on construction (planning commission) with respect to:

(i) Setting up a Mortgage Refinance company which would be a financial institution owned by the banks with the sole purpose of supporting banks to do construction mortgage lending by refinancing banks’ mortgage portfolios; and

(ii) Setting up a construction Bank in line with countrieslikeChina,Singapore,Ethiopia.

liquidity for Developers

• Overthepast10-15years,severaldevelopershave emerged and made substantial commitments in the infrastructure space. LargeamountsofEquityaretiedupintheseassets and providing liquidity is a prime concern.

n a bundle of measures to enhance liquidity are:

(i) creation of Business trusts (Bt). this allows assets to be handled by professional o&M operators while the underlying ownership gets accumulated in the Bt whose units get subscribed by the investors. Singapore laws provide such an opportunity currently, particularly after the reduction of withholding tax by Government of india. compelling case to create Bts in india with necessary tax and Regulatory facilitators thereby attracting overseas investors also.

Policy Barometer

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(ii) allowing sponsors to exit fully in operational projects.

(iii) Declaring coD for projects that have been operating with provisional coD for a long time.

Dispute Resolution Mechanism

• The existing dispute resolution mechanismgoes through the process of reconciliatory meetings followed by arbitration. however, in almost all cases, the award passed by arbitration tribunals leads to the award being challenged at various courts of law. thereafter, even if the courts dismiss the appeals, the award has to be realized by executing the same through attachment of property, a process which is impractical.

n amendments to the existing laws are necessary to restrict the appeal against an award or even if appealed against, the award amount has to be deposited in the court such that once the courts dismiss the appeal, the amount can be realized by the award-holder immediately.

Regulatory authorities

• Independence of Regulatory Institutions ininfrastructure sectors have still to be credibly established.

n Sectoral regulatory authorities need to be developed into truly independent bodies free from political and bureaucratic 'capture'. implement draft legislation (prepared by planning commission) to create a new Regulatory architecture to enable 'true' independence of functioning of sectoral regulators.

infra capital Goods

• Presently facing 5-30 per cent top-lineshrinkage, severely depleted order books and negative job creation. likely to see only 50 per cent capacity utilization in 2013 – 14.

n New investment of Rs. 35,000 crores for setting up of8UreaFertilizerprojectsisonholdawaitingfinalDepartmentofFertilizerclearanceandfirmallocationof gas by the Ministry of petroleum & Natural Gas. the Government of india had notified New Urea investment policy 2012 on 2nd January 2013. Needs expediting.

n Sharpen economic diplomacy to garner large-sized overseas projects (a la china) and support liberally withEXIMfinancing.HaveannualtargetforMinistryofExternalAffairs.

InfraFinancing • Asset is classifiedas 'impaired'when thereis change in Date of commencement of commercial ops (Dcco).

n asset should not have to be classified as ‘impaired’ when there is a change in Dcco under the following circumstances:

• Repaymentoftheloanisregularandnochangeis being sought from the original documented repayment schedule;

• Change in repayment schedule: If there is adelay in a project from the original documented Dcco on account of sovereign reasons like land acquisition, legal and statutory approvals.

Policy Barometer

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Policy Barometer


Road Sector • Electronic Tolling: The current system oftoll collection (by cash) is prone to being misused.

• NHAIiscurrentlythefinalarbiterincaseofadispute between itself and the concessionaire. Nhai is therefore in conflict.

• Lower Total Project Cost (TPC) estimatesby Government hindering funding by lenders, restricting termination payments and increasing contingent liabilities on the balance sheets of sponsors, and leading generally to most disagreements.

n We need to quickly move to Electronic Tolling toensure transparency.

n we need to establish a separate agency to settle disputes between Nhai and the concessionaire. hopefully, the proposed Road Regulator will discharge this function. Needs urgent expediting.

n System of finalizing tpc needs revamping by:

(i) aligning schedule rates with market

(ii) providing for lead adjustments, where necessary

(iii) providing realistic escalations for input prices

(iv)Aligningnon-EPCcostswithmarketestimates

Renewable Energy

• Non-enforceability of Renewables Purchaseobligation (Rpo), since there is no penalty or deterrence for non-compliance.

• DiscontinuityofTariffOrdersandhencelackof Visibility/policy for investment Decisions.

• InadequateGridEvacuation.

n in pursuance to stated objectives of achieving 15 percentpowerfromRenewableEnergy,RPOhastobe enforced and there should be penalties for non-compliance.

n tariff orders should be issued with validity of at least 3-5 years, so investors can plan investments.

n NeedtourgentlyimproveGridEvacuation.PowerGridcorporation of india ltd. (pGcil) should create green corridors to evacuate and transfer.

ElectricityDistribution Reform

• Non-periodicandinadequateTariffRevision.

• Huge Liquidity stuck in Regulatory Assets.[Delhi alone has > Rs. 20,000 crores stuck in Regulatory assets.]

• PoliticalInterferenceinSERCfunctioning.

n TheElectricityAct2003(EA03)shouldbeamendedtoensure Regular and cost-Reflective tariff, including, if required suo-motoasfunctionofSERCs.

n perspective and operational plans for Regulatory asset Recovery.

n Independence of SERCs: EA03 shall provide forindependence of SERCs both in appointment andfunctioning. in this respect the recommendations of Shunglu committee must be considered.

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Policy Barometer


independent power production

• IninterpretingthePowerPurchaseAgreement(ppa) terms for quantity of coal to be supplied. coal companies are giving annual contract Quantity (ACQ) of coal in the FSA close to50 per cent of what is required to feed the power demand of ppa.

• InabsenceofactiveCaseItendersandalsoon account of delayed finalization of case i bids, constructed plant capacity would be idleforwantofFSA.

• Historicshortfallofcoalandgas.

n as per the discussion in october 2012 the pMo and subsequent instruction of Secretary coal, the suggested basis of calculation of acQ would have met the demands of ppa. coal companies do not have instructions from cil / Moc. this needs to be sorted out.

n Bilateral ppa’s with the States be allowed and these PPA’scanberegulatedtariff(asperCEAnorms).

Railways • RollingStock

• DedicatedFreightCorridors

n PutouttendersforElectricandDieselHighHorsepowerlocomotives. this matter has been pending since 2009. the magnitude of orders would be such that over US$ 6 billion of locomotives would be ordered with new factories to be built, and jobs created.

n Pace of projectization for the Dedicated Freightcorridors needs to be accelerated.

Urban water ppp

• Positive political atmosphere needs tobe created for enabling ppp, as is being advocated in electricity distribution.

• Urban Local Bodies (ULB) need to begalvanized into action.

n Next burst of JNURM funding should have clear linkages to capacity building in UlBs for ppp formats in urban water, and their purposeful and practical projectization.

ports • Most ports facing bottlenecks in cargoevacuation.

• Captiveuserpolicyisessentialforthegrowthof the port sector and port based industries.

• TheroleofTariffAuthorityforMajorPorts

• Regular and impactful dredging canimmediately enhance port capacities significantly.

• Corporatization

n port connectivity projects should move along with port expansion plans.

n Draft of this ‘captive User’ policy has already been circulated and the Ministry has received the comments of various stakeholders. policy should be notified at the earliest.

n a comprehensive new architecture for port Regulation may be synthesized, including common rules of the game for major (central) and minor (State) ports.

n capital expenditure and maintenance for dredging may be taken up as a key sovereign activity in a far more focused and professional manner than presently.

n the archaic trust Structure of major ports may be changed to the more contemporary corporatized Structure.

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Industry Voices

Fortheeconomytogrowataround7percentthereisanurgentneedtoraisetheshareofinstitutionallending to infrastructure/ construction sectors. at present, while the infrastructure sector is battling a slowdown, i am hopeful that with the right blend of conducive policies, effective clearance processes and access to low cost long term funds, the sector will soon tread on a growth trajectory.

K Venkataramananchairman, cii Manufacturing council and ChiefExecutiveOfficer&ManagingDirector,Larsen&ToubroLtd.

Economic slowdownanddelays inproject implementationhave impacted thegrowthof infrastructuredevelopment. however, a slew of recent policy initiatives announced by the Government are in a positive direction.IexpectthelatterhalfofFY14tobebetterthanFY13forthecapitalgoodsindustry,bothfororder book as well as revenues.

M S Unnikrishnan Chairman,CIINationalCommitteeonCapitalGoodsandEngineering

andManagingDirector&CEO,ThermaxLimited.

infrastructure is the only asset class that cannot be relocated elsewhere. as such, infrastructure ppps are the game changer for india. clearly, we have an infrastructure gap and the world recognises a great opportunity therein. all we need to do is to make infrastructure our national, state and local level priority, put out more (not less) viable projects for bidding and make infrastructure investors true partners in nation building.

Sanjay UbaleMember, cii National committee on infrastructure and ManagingDirector&CEO,TataRealty&InfrastructureLtd.

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Factfile

Sector Projected Investment Private Sector Contribution

Electricity(incl.NCE) 329.3 173.2

Roads & Bridges 173.4 55.5

telecommunications 166.6 146.4

Railways (incl. MRtS) 105.13 23

irrigation (incl. watershed) 81 ---

waters Supply & Sanitation 39.13 0.94

ports (incl. inland waterways) 30.25 26.17

airports 13.38 10.64

oil & Gas pipelines 22.65 10.6

Storage 8.98 6.42

Total 970 453

Source: planning commission, Government of india

Sector - wise Investments in Infrastructure

Investment in Infrastructure as percent of GDP

4.60% 5.02%

7.22%

9.95%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

9th Plan Period (1997-2002) 10th Plan Period (2002-2007) 11th Plan Period (2007-2012) 12th Plan period (2012-2017)-Projected

% o

f GD

P

Source: planning commission, Government of india

Projected Investment in XII Plan (2012-17)(US$ billion)

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CII Policy Watch : Action Agenda for Infrastructure Sector

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Transcript of CII Policy Watch : Action Agenda for Infrastructure Sector