• FEBRUARY 27, 2006

Infrastructure: 'Hard' facts!

India is on the verge of witnessing a sustained investment phase in infrastructure buildup. With a slew of announcements in the power sector, road, port and airport development and hydrocarbons, we are seemingly on a path of sustained higher economic growth on the back of improvement in infrastructure in the country. The government, in its mid-term appraisal of the tenth five-year plan (2002-07), has revised upwards its infrastructure investment target from Rs 10,890 bn to around 11,100 bn.

From a policy perspective, there has been a growing consensus that a private-public partnership is required to remove difficulties concerning the development of infrastructure in the country. A substantial chunk of the abovementioned investment target is likely to come from the private sector. In this article, we take a look, through the eyes of the economic survey of 2005-06, the kind of progress we have made on the infrastructure front, especially in the core sectors of power, telecom and road construction.

The Indian economy continues to suffer from the slow pace of expansion in the power sector. As a matter of fact, electricity generation during the period April-December 2005 witnessed a growth of 4.7% YoY, much lower than the 6.5% YoY growth achieved in the corresponding period of 2004. This slow growth in generation was mainly due to lackluster addition to thermal capacity (see thermal generation growth in the adjacent chart), which is around 66% of the total power generation capacity in the country. Nuclear generation, on the other hand, showed a sharp turnaround during the said period. Thermal plant load factor (PLF or capacity utilisation) dipped from 74.8% in FY05 and 73.1% in 9mFY05 to 71.5% in 9mFY06. Decline in thermal PLF, apart from due to coal shortages at some plants, can also be attributed to good monsoons that boosted hydro-generation thus reducing the demand from thermal plants.

The economic survey has also indicated reduction in the generation capacity addition target for the tenth plan, from 41,110 MW to 34,000 MW. This is concerning considering the huge power requirements of the Indian economy. As a matter of fact, in India's case, the elasticity of power generated to GDP growth should usually be 1.5times i.e., to achieve economic growth of 8%, power generation should grow at 12% pa, which is not the case, thus leading to energy shortages.

As such, we believe that 'effective' enforcement of the Electricity Act of 2003 is necessary for solving the problems facing the power sector, in all the three areas of generation, transmission and distribution. Considering that China is adding nearly 30,000 MW per year (even when it has around 3 times Indian's generation capacity), we have only ourselves to blame for the slow progress made on this front.

One of the big factors leading to lower private sector investments in power and consequently slower addition to generation capacity is the poor transmission and distribution (T&D) infrastructure. To counter this issue, the government has envisaged integrating the regional grids to form a 'national grid' by 2012. The total inter-regional capacity is planned to increase from 9,450 MW to 37,150 MW by 2012.

The last fiscal was another year of reckoning for the telecom sector. Explosive growth rate in the mobile telephony segment was almost counterbalanced by sedate growth of the fixed line and broadband businesses. Pressure on tariffs continued and this aided the improvement in teledensity. The year also witnessed increasing gap between the urban and the rural teledensity. At the close of the year, while urban teledensity stood at around 33%, rural teledensity was a low 2%. India currently has a telecom subscriber base of 126 m, including 78 m mobile subscribers and 48 m fixed line subscribers, with an over penetration level of 11.3%.

The economic survey states that the increasing penetration of mobile phones has been brought about by rising income levels, increasing need to be 'on the move', and of course, from the service providers' side, the lowering capital costs of establishing a mobile telephony network. The economy survey indicates that by the end of 2007, Indian's telecom base has the potential to cross 250 m.

However to reach this target, we believe that a large amount of investment is required. Opening up of the sector to greater FDI is a right move in that direction. As a matter of fact, the total FDI approved for the telecom sector up to September 2005 was Rs 415 bn, including investments from behemoths like Hutchison, SingTel, AT&T and Vodafone.

Infrastructure: Other important aspects

  1. At the end of September 2005, there were 683 projects with and estimated investment of Rs 2,819 bn spread over 16 sectors like atomic energy, civil aviation, coal and fertilizers. Out of these, around 171 projects faced cost overruns of 38.9%. Then there are 247 projects, which have a time overrun ranging from 1 month to 14 years.

  2. The survey states that taking cognizance of the advantages that private-public partnership (PPPs) offers in terms of cost saving, access to specialized expertise and proprietary technology, sharing of risks with the private sector and the ability to take up a larger shelf of infrastructure investments, the government is actively encouraging them. In order to accelerate and increase PPPs in infrastructure, two major initiatives have been taken by the government - (a) provision of viability gap funding and (b) setting up of a special purpose vehicle, India Infrastructure Finance Company Limited to meet the long term financing requirements of potential investors. The viability gap funding will normally be in the form of a capital grant at the stage of project construction, not exceeding 20% of the total project cost.

  3. The international airports in Delhi and Mumbai are being modernized and upgraded through private sector participation. In the joint venture (JV), Airport Authority of India and government will be holding 26% equity. The balance 74% will be held by the strategic partners. The AAI has also identified 25 more non-metro airports for development.

  4. As of November 30 2005, 6,271 kms of the national highway development project (out of a total of 14,279 kms) has been completed. The Golden Quadrilateral project is likely to be completed by June 2006. The North-South and the East-West corridors are likely to be completed by December 2008.

World-class infrastructure has emerged as one of the most important necessities for unleashing high and sustained growth and alleviation of poverty in any economy. And with poor infrastructure to support other growth initiatives, the Indian economy continues to be a laggard when compared to its developing peers. From a policy perspective, however, there has been a growing consensus that a private-public partnership is required to remove difficulties concerning the development of infrastructure in the country. The realisation finally seems to be setting in. Considering these factors, we expect the sector to grow strongly into the future. However, scale and execution capabilities will be the key mantras for success for the engineering companies.

In the last year's budget, the government had outlined an investment of Rs 100 bn (US$ 2.3 bn), through a special purpose vehicle, to finance infrastructure development in the country. While this is a step in the right direction, we believe that the corpus of investment outlined is not enough to match the growing needs of a developing country like India. In order to sustain a growth of 6% to 7% in the long-term, we need to raise infrastructure spending to around 10% of GDP, or US$ 50 bn per year!

What is required now is thus a framework that promotes greater PPPs in infrastructure development across the country. The economic survey states that the telecom sector can very well serve as a role model where competition has delivered immense benefits. In all areas of infrastructure, namely roads, power, ports, aviation and urban infrastructure, the private sector has to be provided the necessary support by the government on carry on the development process. Not only will this aid the sustenance of rapid growth in GDP as seen in the past two years, it will also be a source of employment to millions of Indians.

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