Key Issues of Infrastructure

Development in India
Dr.Pravin Jadhav
https://www.moneycontrol.com/news/india/c
entre-may-shut-down-116-infra-projects-due-
to-long-term-delays-report-9460971.html
Key Challenges in
Infrastructure Development

Source : World Economic Forum,2015-16

Key Challenges in
Infrastructure Development
• Stalled Projects
• Financing
• Land Acquisition
• Clearances from numerous agencies
• Environmental Impact Assessment (EIA)
• Poor pre-construction planning
Stalled Projects
Stalled Projects..
Stalled Projects..

Period Stalled projects (As percentage of projects under Stalled projects (In Rs. Trillion)
implementation)

Dec-13 11.1 9.0615341

Mar-14 11.8 9.7880801

Jun-14 11.6 9.4864838

Sep-14 11.5 9.6202379

Dec-14 11.5 9.7298412

Mar-15 11.1 9.678603

Jun-15 10.6 9.3704346

Sep-15 11.8 10.4856454

Dec-15 11.9 10.7924931

12.3
Sour ce : CMIE
Mar-16 11.3631185
Stalled Projects
Stalled projects (As percentage of projects under implementation)
12.5
12.3

12 11.9
11.8 11.8

11.6
11.5 11.5
11.5

11.1 11.1

11

10.6

10.5

10

9.5
Sector-wise break up of
stalled project

% Contribution to stalled % Contribution to

Sector projects in December stalled projects in
2015 March 2016

Electricity 31.68 31.79

Mining 3.14 2.95

Manufacturing 32.94 34.51

Construction &
real estate 7.93 7.53
Services (other
than financial) 23.19 22.13

Source : CMIE
Reasons for stalled
projects..
Top reasons for stalling
across industries
Stalled projects

• The stalling rate of projects has increased at a high rate in the

last five years, and the rate is much higher in the private
sector projects.
• Further, the stalled projects are dominated by infrastructure
and manufacturing projects and is severely affecting balance
sheets of corporate sector and public sector banks, which in
turn is constraining future private investments
• The electricity sector has a large number of stalled projects in
both public and private sector. At the end of third quarter of
financial year 2014-15, 80 projects were stalled in the
electricity sector and 54 of these 80 projects are PPP projects
• Several commissioned electricity generation projects have
been stranded due to short supply of coal and gas.
Stalling of Projects
Low level of Investment

– the average infrastructure investment in India during

the period 1992-2010 constituted 4.7 per cent of the
Gross Domestic Product (GDP) as against 7.3 per
cent across countries like China, Indonesia and
Vietnam.
– Eleventh Plan is Rs.23,74,307 crore (at current
prices), which is 2.8 times the investment of
Rs.8,37,159 crore realised in the Tenth Plan (2002-
2007).
– The Twelfth Plan (2012-2017) projected an
investment of Rs.55.75 lakh crore (at current prices)
in infrastructure during the Plan period (2012-17),
which is more than double the investment in
infrastructure achieved in the Eleventh Plan period.
Infrastructure Financing
• A large number of projects are struck or delayed turning many
bank loans into NPAs and constraining further bank lending to
infrastructure projects.
• Stranded and stressed project have led to shrinking of equity
in PPP projects. Slowdown in fresh equity inflows have led to
over-leveraged balance sheets of developers, constraining
several domestic players from making further investments.
• The current practice of financing large infrastructure projects
based on revenue streams spread over 20 to 30 years, but
with project debt having tenure of 10 to 15 years, is
unsustainable. In the absence of long-term financing
instruments, it is becoming increasingly difficult to finance the
growing requirements of infrastructure.
 Estimation of funding gap

India will face a $526 billion infrastructure investment gap by 2040,

according to the latest Economic Survey

Source :Working Sub-Group on Infrastructure Infrastructure Funding Requirements and its Source
over the implementation period of the Twelfth Five Year Plan (2012- 2017)
Mobilizing Private Funding: the Case of the
National Highways of India

PRIVATE FINANCING :
▪ Private sector involvement has been considered by policy makers as a
promising option for overcoming resource constraints
▪ India has made intensive use of Public-Private Partnerships (PPPs), with
over 750 PPP projects approved since the late 1990s (as of 2011), most of
which in the transport sector.
▪ While private funds represented only 5 per cent of total investment in roads
and highways in the 10th Five-Year Plan (2002-2007) of India, private
sector contribution reached an impressive 34 per cent in the 11th Plan
(2007-2012), an increase of more than US$20 bill
• More specifically, the National Highways Authority of India (NHAI) has
been intensively using PPPs to develop its network and has awarded more
than 239 PPP projects as of April 2013
Cont…
• Implementation Strategy :
▪ First two phases of the programme, NHAI has mainly used traditional EPC
(Engineering, Procurement and Construction) contracts. In the EPC model, the
contractor carries out the project design, procures the equipment and materials, and
then executes the work according to the terms and conditions agreed in the contract.

▪ Up until 2013, 316 EPC contracts have been awarded under the NHDP programme.

▪ For Phase III, launched in 2005 , the government decided to prioritize PPPs for
highway development.
Public-Private
Partnership
• The objectives of a PPP in infrastructure are to:
• Increase the availability of infrastructure services
• To do so with greater efficiency (lower cost for the level
of services provided) than could be achieved using the
traditional public sector approach
• PPPs make this possible because:
• PPPs allow access to the substantial financial resources
of the private sector
• PPPs enable the public sector to benefit from private
sector technical expertise, experience and efficiency
• PPPs enable the public sector to transfer project-related
risks to the private sector
Characteristics of PPP
• The private sector is responsible for carrying out or operating the
project and takes on a substantial portion of the associated project
risks
• During the operational life of the project the public sector’s role isto
monitor the performance of the private partner and enforce the
terms of the contract
• The private sector’s costs may be recovered in whole or in part from
charges related to the use of the services provided by the project,
and may be recovered through payments from the public sector
• Public sector payments are based on performance standards setout
in the contract
• Often the private sector will contribute the majority of the project’s
capital costs, although this is not always the case
Overall Summary: Projects recommended by the Public Private
Partnership Appraisal Committee (PPPAC) From 20th December,
2005 – 10th August, 2021

1 Number of Projects 333

Rs. 458,079.17
2 Total Project Cost Crore

Number of Meetings
3 104
held
Year Wise Summary : Projects recommended by the
Public Private Partnership Appraisal Committee
(PPPAC) From 20th December, 2005 - 10th August,
2021

Financial Number of Projects Total Project Cost (In Rs.

S.No. Year Approved Crore)
1 2021-2022 3 31637
2 2020-2021 6 44475.45
3 2019-2020 4 5014
4 2018-2019 8 9730.38
5 2017-2018 4 7851.78
6 2016-2017 9 12401.28
7 2015-2016 17 28674.1
8 2014-2015 18 29070.77
9 2013-2014 25 55326.29
10 2012-2013 25 25641.53
11 2011-2012 52 53248.6
12 2010-2011 33 26010.24
13 2009-2010 53 57854.97
14 2008-2009 48 53381.78
15 2007-2008 13 11227.46
16 2006-2007 15 6533.54
Total 333 458079.17
Sector Wise Summary : Projects recommended by the
Public Private Partnership Appraisal Committee
(PPPAC) From 20th December, 2005 - 10th August, 2021

Total
Number of Project Cost
Projects (In Rs.
S.No. Sector Approved Crore)
1 Airport 10 9017
2 Housing 9 7633.55
3 Others 1 29432
4 Ports 39 59996.75
5 Railways 6 47698
6 Roads 257 302388
7 Sports 5 0
8 Tourism 6 1913.87
Total 333 458079.17
State Wise Summary : Projects recommended by the

Public Private Partnership Appraisal Committee (PPPAC )

S.No. State Number of Projects Approved Total Project Cost (In Rs. Crore)

1 Andaman and Nicobar Islands 3 1161

2 Andhra Pradesh 22 21220.48
3 Assam 5 4078.53
4 Bihar 13 12262.44
5 Chhattisgarh 4 3466.07
6 Delhi 9 14417.58
7 Goa 5 4936.3
8 Gujarat 17 22928.01
9 Haryana 12 16046.2
10 Himachal Pradesh 5 6419.73
11 Jammu & Kashmir 8 20927.55
12 Jharkhand 5 11862.88
13 Karnataka 23 20501.62
14 Kerala 12 10869.44
15 Lakshadweep 2 604
16 Madhya Pradesh 20 20758.9
17 Maharashtra 30 52818.94
18 Meghalaya 1 536
19 Multiple State 17 88782.76
20 Odisha 21 25436.82
21 Punjab 12 10981.37
22 Rajasthan 21 18839.77
23 Tamil Nadu 26 21879.95
24 Uttar Pradesh 25 31248.81
25 Uttrakhand 2 1021.61
26 West Bengal 13 14072.41
Total 333 458079.17
 PPP modal families and
their main variants
MODES / Asset ownership PPP duration Capital Private partner Private partner Features, relevance in India&
FEATURES during contract investmentfocus revenue riskand roles examples
& responsibility compensation
terms

Management Contractual arrangement for the management of a part or whole of a public facility or service by the private sector. Capital investment is typically
Contracts not the primary focus in such arrangements.

Note: service contracts and management contracts of less than 3 years duration are not included in the definition of PPP in India.

Management Public Short – medium Not the focus Low Management of This involves contracting to the private
Contract (e.g. 3-5yrs) Public (Pre-determined all aspects of sector mostor all of the operations
fee, possibly with operation and and maintenance of a public facility or
service. Although the ultimate
performance maintenance. obligation of service provision remains
incentives) with the public authority, theday-to-
day management control isvested
with the private sector. Usuallythe
private sector is not required to make
capital investments.
These are prevalent in Indiaacross
sectors. e.g., Karnataka Urban Water
Supply and ImprovementProject,
performance basedmaintenance
contracts in highways.

Management Public Medium – long Limited Focus Medium Minimum Capex, This is similarto management
Contract(with Brownfield (Tariff /Revenue Management, contracts but includelimited
investments for rehabilitationor
rehabilitation/ (Rehabilitation / share) Maintenance
expansion of the facility.
expansion ) expansion) This mode has been adopted inthe
Private power distribution and water supply
sectors e.g. BhiwandiDistribution
Franchise, Latur Water Supply Project.
 Cont..
Lease Contracts Asset is leased, either by the public entity to the private partner or vice-versa.

Lease Public Medium Not the focus High Revenue Management e.g. Leasing of retail outlets at railway stations
(e.g., 10-15yrs) Public from and by Indian Railways
Operations maintenance
Build Lease Private Medium Greenfield Low-medium Capex Involves building a facility, leasing it to the Govt.
Transfer (BLT)or (Leased tothe (e.g. 10-15yrs) Private Pre-set leasefrom and transferring the facility after recovery of
Build-Own- government) the government. investment.
Lease-Transfer Primarily taken up for railway projectssuch as
(BOLT)
gauge conversion in India in the past, with
limited success.

Build-Transfer- Public Medium Greenfield High Capex Involves building an asset, transferringit to the
Lease (BTL) (e.g., 10-15yrs) Private Revenue from User and Operation Govt, and leasing it back. Here the private
Charges s sector delivers the service and collects user
charges.

Concessions Responsibility for construction (typically brownfield / expansions) and operations with the private partner while ownership is retained by the public
sector.
Area Public Long Brownfield/ High Design, Herein the private sector (concessionaire) i
Concessions (e.g. 20-30 yrs) Expansions co finance, responsible for the full delivery of services i a
Tariff revenue
Private nstruct,
specified area, including operation
manage,
maintenance, collection, management, an
maintain
construction and rehabilitation of the system
Importantly, the operator is now responsibl
for all capital investment while the assets ar
publicly owned even during the concessio
period. The public sector’s role shifts fro
being the service provider to regulating th
price and quality of service. For example
water distribution concession for a city o
area within the city.
Build-Operate- Responsibility for construction (typically greenfield) and operations with the private partner while ownership is retained by the public sector.
TransferContracts

Design-build-operate Public Short-medium Greenfield Medium-High Design,construct, Not very common in India. Typically financing
(DBO) (e.g. 3-5 yrs) Public Tariff revenue manage,maintain obligation is not retained by the public sector.

Build-operate-transfer Public Long Greenfield High Design, finance, Most common form of BOT concession in
(BOT)/ Design-Build- (e.g. 20-30 yrs) Private Tariff revenue construct, India.
Finance-Operate- manage,maintain e.g. Nhava Sheva InternationalContainer
Transfer (DBFOT) Terminal, Amritsar Interstate Bus
Terminal, Delhi Gurgaon
Expressway, Hyderabad Metro, Salt Lake
Water Supply and Sewage DisposalSystem.
Build-operate-transfer Public Long Greenfield Low Design, finance, This has been adopted for NHAI highway
(BOT) Annuity (e.g. 20-30 yrs) Private Annuity revenue / unitary construct, projects in the past. More recently, it is the
charge manage,maintain preferred approach for socially relevant
projects where revenue potential is limited.
e.g. Tuni Anakapalli Project,Alandur
Underground Sewerage Project

Build-own-operate Private partner has the responsibility for construction and operations. Ownership is with the private partner for the duration of the
Transfer (BOOT) concession.
Contracts

Build-own-operate- Private Long Greenfield High Design,construct, Most common form of BOOT concession in
transfer (BOOT) or (e.g. 20-30 yrs) Private Tariff revenue own, manage, India.
DBOOT maintain, transfer For example, Greenfield minor port
concessions in Gujarat are on a BOOT basis.
Build-own-operate Private Perpetual Greenfield High Design, finance, Under this structure the asset ownership is
(BOO) Private Tariff revenue construct, own, with the private sector and the service / facility
manage,maintain provision responsibility is also with the private
sector.
Not common inIndia.
 Characteristics of typical PPP modes in
the roads sector

MODES / Asset PPP duration Capital investment Private partner Private partner roles
FEATURES ownership duringthe focus & responsibility revenue risk and
contract compensationterms

Build-operate- Public Long Brownfield or High Design, finance,

transfer (BOT) Toll (e.g. 15-30 yrs) Greenfield Private Toll revenue construct, manage,
maintain andcollect
tolls

Build-operate- Public Long Brownfield or Low Design, finance,

transfer (BOT) (e.g. 15-30 yrs ) GreenfieldPrivate Annuity revenue/ construct, manage,
Annuity unitary charge maintain

Build-operate- Public Long Brownfield or High Design, finance,

transfer (BOT) (e.g. 15-30 yrs ) GreenfieldPrivate Shadow Tollrevenue construct, manage,
Shadow Toll maintain

Performance based Public Medium Not the focus Public Low Management of all
Maintenance (e.g. 5yrs) Pre-determinedfee, aspects of operation
Contracts based on and maintenance.
performance
Main PPP Models in Road
Sector
• PPP Models :
A)BOT : Under the Build-Operate-Transfer (BOT) Toll model, the private investor is granted the right to collect
tolls. As such, the government’s fiscal burden is limited and traffic risk is allocated to the private partner (i.e.
revenue for the private investor depends on the number of road users). This has been the preferred model so far
due to its limited impact on public finance.

B)BOT - Annuity : The BOT Annuity model was developed for projects that were not viable financially (i.e.
where the revenue flow expected from tolls is insufficient to repay the investment made by the private partner). In
this case, the private partner’s revenues come directly from the government through “availability” payments: the
government checks at regular time intervals whether the asset is available (if the road can be used) and whether
the asset meets the quality standard defined in the contract. If the availability criteria defined in the PPP contract
are met, then the government pays a fixed fee to theprivate operator

C)Operate-Maintain-Transfer (OMT) : A third model was introduced in 2009 for the operation and maintenance
of existing national highways (“brownfield” projects). The OMT model allows the private partner to avoid the
construction risk as the infrastructure is already built. Traffic risk remains, however, with the private operator.
About 19 projects (approx. 2860 km and US$239 million) have been awarded by NHAI under OMT before 2013
(most in the last two years).
Cont..
Successful Factors:
• Contract Streamlining : Model Concession Agreement (MCA) is one of the most
important features of Indian PPPs.
– The MCA is a ready-to-use contract that facilitates the process of negotiation while ensuring uniformity in different
PPP project agreements

• Viability Gap Funding :

– VGF is provided in the form of a capital grant at the stage of project construction. VGF provides a maximum of 20 per
cent of the total estimated project cost. An additional 20 per cent could be provided by the sponsoring Ministry or
agency. The primary objective of India’s VGF programme is to fill the gap between the expected revenue stream and
the project‘s cost.
Cont..
Major Issues : In 2013, the daily targeted construction of National Highway was 20 km.
However, the construction rate was only 10-12 km per day, lower than the 16 km per day
construction rate in 2012.
A) Land acquisition : According to an industry survey, 80 to 90 per cent of road projects suffer
delays from land acquisition. These delays constitute 15 to 20 per cent of the total project time
B)Dispute resolution : In 2013,more than 200 cases involving NHAI were at different stages of
arbitration or were pending in court, representing claims worth between US$1-2 billion.
C)Project preparation: Inadequate project preparation can lead to changes in the project scope
during the implementation phase and result in the tendering of unviable PPP projects where the
infrastructure capacity planned exceeds what the traffic can justify. IIPDF would provide interest
free loans up to 75 per cent of the total project development cost for project identification and
preparation such as engaging consultants and transaction advisors
D)Access to finance: debt and equity financing have become limited in India. Infrastructure
Development Finance Company (IDFC) has become over the years an important source of financing
for infrastructure projects. In 2006, the government also established the fully-owned India
Infrastructure Finance Company Limited (IIFCL) to further stimulate long term financing. IIFCL
provides financial support up to 20 per cent of the project cost through direct lending.
Clearance and
Procedures
• Large No. of Procedures and approvals
• delayed approvals and land-acquisition processes that
put a strain on the long-lasting and sometimes opaque
tendering processes.
• Large road and energy projects can take several months
to be awarded and if processes are not clear and
impartial enough, investors hardly mobilize resources to
bid.
In spite of Electricity Act 2003 has clearly stated
that no license required for any Thermal Power -
we have to take more than 65 clearances for TPP
Case Study : Power
• most power producers still sell most of the power they produce to
state electricity boards and consumers have no choice but to buy
from the sole distribution entity in their respective states
• The widening gap between the average cost of supply and the
average revenue coupled with high AT&C losses have led to the
deteriorating health of state utilities. Despite rising costs of electricity,
states are not regularly revising tariffs
• The level of cross-subsidy in the power sector has crossed
unsustainable levels. Industrial or bulk users in India subsidize the
household sector.
• Cost of coal which is used as fuel for 74 per cent of electricity
generation, have sky-rocketed in recent years.
• Private investors mostly stayed away from the power sector
Regulatory Aspects..
 KeyIssues
• Huge Costs
• Lack of funds to maintain and improve the infrastructure
• High cost + lack of comprehensive approach to managing
infrastructure
• Condition of infrastructure and level of service has deteriorated
through aging and usage
• Some infrastructure components have failed due to normal
disaster
• Design process has not given adequate consideration to loads,
material variability, climate, environment etc. – Past designs
produced physical systems that would last a given life with no
consideration of maintenance
Key Challenges in
Infrastructure Development
1) Infrastructure investment Gap
2) Inadequate and weak Regulatory Framework
3)Sustainability of business models of infrastructure
development
4) Limited Public Finances
5) Demographic Challenges
6) Maintenance and upgrading of existing infrastructure
7) Environmental concerns
8) Corruption
9) Land acquisition for green field projects