I n June last year, a group of CEOs led by the Confederation of Indian Industry (CII) presented a 15-point "action agenda" to the government. This list was also published in this column. Looking back, many of the suggestions have indeed seen various stages of acceptance and implementation. They included a fast-track clearance board, larger PSU investments, heavier public expenditure, release of dues from governmental systems, coal-related decisions, discom debt restructuring, support to domestic power equipment suppliers, and so on.
Recently, on March 23, CII again led a delegation of 16 CEOs from the infrastructure sector for a round of discussions with Montek Singh Ahluwalia and his team at the Planning Commission, and Pulok Chatterji and his team at the Prime Minister's Office. The CEOs represented different infra sectors like roads, ports, railways, power, capital goods, finance, and included companies like Larsen & Toubro, Veolia, Essar, DP World, Reliance Infra, Tata Realty and Infra, ICICI, Alstom, Suzlon, Avantha Power, Thermax, IDFC-Uniquest, Feedback Infra and J Sagar & Associates.
The delegation discussed several issues and came up with 30 solutions. In the first part* of the article, 13 recommendations from different sectors have been summarised:
PPP renegotiation
Issues: An inevitable increase in the number of public-private-partnership (PPP) projects coming up for renegotiation; "impractical" to assume that PPP documentation is "cast in stone" and unforeseen developments across 20 to 60 years will not require to be addressed in public interest; international data on PPP reveal 41.5 per cent projects underwent renegotiation; no institutional mechanism to transparently, and unbiasedly, reset terms.
Recommendation
1. Set up an independent PPP body.
PPP - General
Issues: A large middle space on annuity-structured PPP projects exists between engineering, procurement and construction and build-operate-transfer; needs to be exploited for greater involvement of private sector in current public-expenditure-driven projects; award of PPP projects without "sovereign clearance" single biggest factor for delays.
Recommendations
2. Consider setting up a National Infra Annuity Fund outside the Consolidated Fund of India with mirrored entities at the state level;
3. Issue government order that no statal entities to award projects to the private sector without securing key sovereign clearances.
Construction
Issues: A steady decline in credit flow; though construction accounts for eight per cent of the GDP, it commands only three per cent share of total bank credit to industry; an urgent need to raise the share of institutional lending.
Recommendations
4. 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 banks, with the purpose of supporting banks to do construction mortgage lending by refinancing banks' mortgage portfolios;
(ii) Setting up a construction bank in line with China, Singapore and Ethiopia.
Liquidity for developers
Issues: Over the past 10-15 years, several developers have emerged and made substantial commitments in the infra space; large amounts of equity are tied up in these assets and providing liquidity is a prime concern.
Recommendations
5. A bundle of measures to enhance liquidity are:
(i) Creation of business trusts (BTs) to allow assets to be handled by operations and maintenance professionals, while the underlying ownership gets accumulated in the BT whose units get subscribed by investors. Singaporean laws provide such an opportunity currently, particularly after the reduction of withholding tax by the Government of India. A compelling case to create BTs in India with necessary tax and regulatory facilitators, thereby attracting overseas investors;
(ii) Allowing sponsors to exit fully in operational projects.
(iii) Declaring commencement operations date (COD) for projects that have been operating with a provisional COD for a long time.
Dispute resolution mechanism
Issues: The existing mechanism goes 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 realised by executing it through the attachment of property - a process that's impractical.
Recommendation
6. 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 realised by the award-holder immediately.
Regulatory authorities
Issue: Independence of regulatory institutions still to be established.
Recommendation
7. Sectoral regulatory authorities need to be developed into truly independent bodies free from political and bureaucratic "capture". Implement draft legislation, prepared by the Planning Commission, to create a new regulatory architecture to enable true independence of functioning of sectoral regulators.
Infra capital goods
Issues: At present, facing five to 30 per cent top-line shrinkage, severely depleted order books and negative job creation; likely to see only 50 per cent capacity utilisation in 2013-14.
Recommendations
8. New Investment of Rs 35,000 crore for setting up of eight urea fertiliser projects is on hold, awaiting final clearance from the department of fertiliser and firm allocation of gas by the petroleum ministry. The government had notified the New Urea Investment Policy, 2012 on January 2. It needs expediting.
9. Sharpen economic diplomacy to garner large-sized overseas projects (a la China) and support liberally with Exim financing. Have annual target for the external affairs ministry.
Infra financing
Issue: Asset is classified as "impaired" when there is a change in the date of commencement of commercial operations (DCCO).
Recommendations
10. Asset should not have to be classified as "impaired" when there is a change in DCCO under the following circumstances:
(i) Repayment of the loan is regular and no change is being sought from the original documented repayment schedule;
(ii) Change in repayment schedule: If there is a delay in a project from the original documented DCCO on account of sovereign reasons like land acquisition, legal and statutory approvals.
Road sector
Issues: The current system of toll collection (by cash) is prone to being misused. NHAI is currently the final arbiter in case of a dispute between itself and the concessionaire. NHAI is, therefore, in conflict; lower total project cost estimates by government hindering funding by lenders, restricting termination payments and increasing contingent liabilities on the balance sheets of sponsors, and leading generally to most disagreements.
Recommendations
11. Switch to electronic tolling to ensure transparency;
12. Establish a separate agency to settle disputes between NHAI and the concessionaire.
13. System of finalising total project cost needs revamping by - (i) Aligning schedule rates with market; (ii) Providing for lead adjustments, where necessary; (iii) Providing realistic escalations for input prices; (iv) Aligning non-EPC costs with market estimates.
*The second part, comprising the remaining 17 recommendations, will be published tomorrow
The author is the Chairman of Feedback Infrastructure. vinayak.chatterjee@feedbackinfra.com; Twitter: @Infra_VinayakCh
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
