Confronting Issues: 12fth Plan Infrastructure Development

Confronting Issues: 12fth Plan Infrastructure Development Confronting Issues: 12fth Plan Infrastructure Development
Confronting Issues: 12fth Plan Infrastructure Development Confronting Issues: 12fth Plan Infrastructure Development

Various issues need to be addressed for the realization of infrastructure development initiative by the government during 12fth plan, reports P.P. Basistha.

The government has targeted a mammoth capital investment of $1 trillion for the development of infrastructure sector. However, before channelizing the investment for the infrastructure development programmes, many issues involving pre-feasibility studies, finance, litigation and others will have to be addressed, in order to neutralize time and cost overruns on the part of the project implementing agencies and developers.

A major issue that primarily needs to be addressed, is linking of funds with the pace of the project developments during different phases of construction. The implementing agencies and the contractors now regret that flow of funds are not actually linked to the pace of the development of the project. According to Mr. Chakanbabu, Executive Director, Central Public Works Department, “large scale cost overruns take place as the flow of funds from the implementing agencies are not synchronized according to the project schedules. Faced with delayed release of payments, the contractors ultimately resort to arbitration, as a result the project implementing agencies finally end up in paying up the contractor, eventually raising the cost of the project.” He explains, “the basis for liking of funds to the projects is actually based on the nature of the project. A project in its initial stages may need good deal of excavation or foundation work to be carried out, requiring adequate finances but in many cases owing to inadequate funding leading to cost and time overruns occurs to the project.”

Echoing his viewpoint, Mr. S.S. Johar, Chairman, C&C Constructions stating, “delay in approvals increases capital investments for the project. Dispute settlement process continues to be time consuming between the contractor and project implementing agencies. Delay in approvals continue to take place from local bodies. As a reason, actual project estimates made by the contractors goes haywire resultantly delaying the project.” “Despite the project being approved, providing physical possession of the land to the contractor gets extended by the project implementing agencies owing to lack of timely clearances.”

Agrees Mr. S.K. Kulkarni, Head-Business Development, GMR Highways says, “to make the projects commercially sustainable for the contractor, it is vital that frequent design changes have to be curtailed by the project implementing agencies. The overloading of vehicles should be stopped to minimize the maintenance cost of the BoT project developers.”

Confronting Issues: 12fth Plan Infrastructure Development

Obtaining timely clearances from local and other bodies continues to be major contentious issue behind development of projects. Mr. N Seethaiah, MD, Madhucon, Project Limited points out saying, “obtaining permission from the railways for constructing road over bridges, takes lot of time. Besides, getting right of way for aggregate quarries both for hydro, road and other core infrastructure projects by the contractor gets delayed, as the project implementing agencies, as well as the client continues to leave the onus of the same with the contractor. It is quite important that implementing agencies like NHAI or NHPC should get in place the right of way at the conceptualizing stage of the project.” According to Mr. Seethaiah, “single window departments should be in place at the central and state levels for project clearances where multiple bodies are involved.” Similar views are endorsed by Mr. Y.R. Patel, Chief Coordinator, Civil, Patel Infrastructure Private Limited. He says, “it is much pertinent that at least 80% of the land should be in possession with the project implementing agencies which is not the case.”

Mr. Nihar Ranjan. Dash, Director, Ministry of Steel points out, “getting possession of land and iron ore mines to support greenfield steel units continues to be major issue both with the government and private sector. The issues may be of local, the state and of central levels.” Getting possession of Chiria mines by steel authority of India Limited for the brown field expansion of its flagship Bhilai steel plant got delayed, before the PSU steel producing major finally got possession of the same owing to delayed environmental clearances at the central and state levels.

Private Investment

Confronting Issues: 12fth Plan Infrastructure Development
According to the infrastructure investment programme of the government, sizeable part of the targeted investment will come from private sector during the 12th plan period. Speaking at the recent conference on public private partnership in the development of infrastructure, Prime Minister, Dr. Manmohan Singh said, “PPP will continue to be the preferred mode of the government for development of infrastructure, as it will improve the quality of the projects as desirable construction practices will be put in place supported by the government. The ‘Model Concession Agreement (MCA) procedure of the government has been successful in attracting private investments in road, port and airport infrastructure development programme. However, it is quite important to note that, preliminary study, essentially involving bankability of the projects and finally their awarding is done in an appropriate manner, so the project becomes sustainable in the long run for the implementing agencies as well as the contractor.”

Confronting Issues: 12fth Plan Infrastructure Development
Making the projects bankable is a major issue for the present public private partnership initiative of the government. Experts unanimously point out that the loophole lies in improper selection of the project consultants by the project implementing agencies and project contractors for the preparation of the detailed feasibility report of the concerned project. According to Dr. M.L. Roychowdhury, Senior Project Consultant, Ghezri Eastern India Limited and Faculty of Civil Engineering, IIT Kharagpur and Dr. M. Bhowmick, Senior Faculty, Transportation, Indian Institute Management Kolkata, “making an appropriate assessment of traffic flow in any road or port infrastructure project is a much critical task. Estimated traffic flow in the project can go through changes owing to socio-economic factors, political, domestic as well as international economic factors. Assessment of the present and future situation is of vital importance. It should take into account holistic factors, to somewhat make an appropriate traffic projection by the project implementing agencies and that is where the role of consultants engaged for preparing the DPR’s actually come in to identify a bankable project, the area ironically which leaves much to be desired from consultants."

Confronting Issues: 12fth Plan Infrastructure Development

The experts point out examples of projects involving newly commissioned International Container Transshipment Terminal at Cochin by Dubai Ports World, or expansion of iron ore and coal handling terminal by Paradip Port, Hooghly River Bridge or second Bally or Vivekananda Bridge in Kolkata created through colossal investments. Second Bally bridge is the largest ever PPP initiative formed through a consortium of Indian and foreign companies. All the projects are yet to attain the desired commercial viability owing to inadequate traffic flows or volatility in traffic. The observations to an extent are approved by Mr. K. Suresh, Principal Secretary, Planning, Government of Madhya Pradesh, Member Secretary State Planning Commission and previous Chairman Chennai Port Trust.

However, speaking to NBM&CW, Mr. Pratip Chaudhuri, MD, State Bank of India & Ms. Chanda Kocchar, MD, ICICI Bank said, “it is pertinent that to make a more realistic assessment of traffic flows, historical traffic data should be made available by the state and the central government bodies to the project consultants. This will allow identification of bankable projects. On top of inadequate data, two to three weeks time is given to bidders for submission of request for qualification, which is grossly inadequate as they are not able to carry out bankability studies for the proposed project.” They said, “electronic tax collections should be in place to prevent possible leakage of revenue flow from the projects. Standardization of traffic flow studies have to be done. Due to non availability of standardized studies, financial leakage from the project takes place, as a result the projected cash flow is not realised from the infrastructure project.”

Confronting Issues: 12fth Plan Infrastructure Development
They insist, “to make GDP grow at 9 percent, it will be always essential for the government to develop infrastructure, as a reason issues of funding, especially those involving long gestation period will have to be addressed. Setting up of infrastructure, debt funding have to be made. Projects attracting less premium will have to be supported by viability gap funding.”

However apart from requisite financing, there are manifold risks that need to be addressed by project implementing agencies for timely completion of the projects. According to Mr. Kamal Verma, CEO, SREI Infrastructure, “there are prevailing risks in way of timely completion of projects. It is quite necessary that the risks should be identified and solutions to tackle the risks are put in place well in advance during the conceptuali- zation of the project.” He elaborated, “the risks are in nature of market revenue, design operating (for PPP projects), construction in terms of design, legal, environmental, and political.”

Confronting Issues: 12fth Plan Infrastructure Development

Legal risk is a major area of concern that should to be addressed. Expansion of major port projects, involving high capital investment have been slowed down by litigation issues. This is despite the government having a proper revenue sharing agreement in place for the concessionaire. Having been long overdue, the bidding process for Jawaharlal Nehru Port Trust’s 4th container terminal finally got through after four years, not before Mundra Port and Special Economic Zone (MPSEZ), moved the Mumbai high court after it was declared security clearance for the project by the Union Government. The lag in project was also due to a case fought by APM-Terminals after it was excluded from bidding due to a Government Policy. Bidders for the project included, DP world Private Limited, MPSEZ, Adani Enterprises Limited-Isolux Corsan Concessions SA, GVK Developmental Projects Private Limited, Samsung C&T Corp and Sterlite Industries (India)-Leighton Contractors (India) Pvt Limited.

The project is likely to be developed by PSA-ABG, emerging as the highest bidder, would be India’s largest container terminal by capacity and cost. The terminal will handle about 4 million TEU’s a year. However, commissioning of the terminal is projected to face cost escalation by about Rs.1,000 crore from its original cost of Rs.6,700 crore owing to two years delay over litigation. According to Shipping Ministry, there would be escalation clause for the project. The terminal is expected to take two years to complete post awarding of the tenders. However, as per recent reports, PSA is expressing its apprehensions in signing the concession agreement. The component of the 4th terminal will include construction of back yards, berths having length of 2kms.

The importance of addressing the confronting issues emanates from the fact that, in the present context of economic volatility, getting requisite finance back up for long- term projects is getting difficult owing to lesser availability of finance. Protracted delay in creating new projects, arising out of the issues may delay finance availability altogether, thereby hurting the business interest of all stakeholders in the sector in mid-term and long-term. This will ultimately take its toll on the economic growth.
NBM&CW February 2012
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