Addressing Infrastructure Bottlenecks In India – Recent Measures Taken By The Government Of India
- July 13, 2012
- Posted by: INSIGHTS
- Category: Inside India
India’s poor infrastructure is the major roadblock that is holding it from achieving 9% plus growth. Many bottlenecks such as delayed decision making, red-tapism, problems in environmental clearance, skewed land acquisition policies, inadequate fuel supply to power plants, lack of private participation in investment and importantly corruption.
To address some of these problems government has finally woken up from slumber after the poor show of economy in 2011-12 and continued downspin of all economic indicators.
In 2009, Prime Minister constituted Cabinet Committee on Infrastructure (CCI) identifying infrastructure as priority area for speeding up the growth of the economy. CCI was given four main responsibilities:
1. To consider and take decisions in respect of all infrastructure related proposals costing more than Rs.150 crores specifically those concerning Energy, Railways, Roads and National Highways, Ports, Airports, Telecommunications, Information Technology, Irrigation, Housing and Urban Development with particular emphasis on rural housing and urban slum clearance.
2. To consider and decide measures; namely, fiscal, financial, institutional and legal required to enhance investment in the infrastructure sector, including grant of requisite approvals to facilitate private sector investment in specific projects;
3. To lay down annual parameters and targets for performance for all infrastructure sectors; and
4. To review the progress of infrastructure sector projects.
But, instead of speeding up the infrastructure projects, this committee became dysfunctional thanks to series of mega scams that started haunting this government. Many important projects involving thousands of crores are lying in suspended animation thanks to aforementioned bottlenecks.
In March 2012, government again woke up to the reality of looming danger of economic crisis and PM announced that his government would put in place a mechanism called ‘Investment Tracking System’ to ensure quick implementation of major infrastructure projects.
According to this system, Promoters of the projects in PPP (Public Private Partnership), where the proposed investment is Rs 1,000 crore and above, are requested to provide details of their projects along with reasons behind delay.
This was a vague proposition without much muscle.
Economic Survey 2011-12 mentioned that country would need 50% private participation in developing infrastructure in India up from present 36% contribution. Lack of enthusiasm from private investors is because of delays in clearance of projects from government and inflating costs that come with it affecting their profits.
In the approach paper to 12th plan whose period has already started (2012-17) planning commission has proposed that India needs nearly $1 trillion to fund infrastructure during this period.
To rope in private investors, Finance Minister proposed slew of measures including setting up of ambitious Infrastructure Debt Fund in his 2011-12 budget speech.
Infrastructure Debt Fund
Ministry of Finance issued the guidelines for the IDFs that inter alia allowed IDFs to be set up as NBFCs or as mutual funds in June, 2011. Regulations governing IDFs structured as mutual funds was issued by SEBI in August, 2011 and regulations governing IDFs structured as NBFCs was issued by RBI in November, 2011.
The IDFs through innovative means of credit enhancement is expected to provide long-term low-cost debt for infrastructure projects by tapping into source of long tenure savings like Insurance and Pension Funds which have hitherto played a comparatively limited role in financing infrastructure in India.
Further, the IDFs set up as NBFC shall invest only in PPP projects which have successfully completed one year of commercial operation and are a party to a Tripartite Agreement with the concessionaire and the Government authority sanctioning the project.
Banks and NBFCs would be eligible to sponsor IDFs subject to existing prudential limits. The restricted portfolio of investment of the IDF, tripartite agreement and first loss of the sponsors would enable the IDFs to issue bonds with at least AA rating.
Thus the IDFs would present an attractive option for such entities who wish to invest for long term in comparatively secure instruments. The off-shore investors that these IDFs are targeted to tap are Pension Funds, Insurance Companies, Sovereign Wealth Funds, Endowment Funds etc.
So far 3 IDFs have already been launched. The first IDF structured as a NBFC was launched on March 5, 2012, with ICICI Bank, Bank of Baroda (BoB), Citicorp Finance India Limited (Citi) and Life Insurance Corporation of India (LIC) entering into a Memorandum of Understanding (MoU). The initial size of this IDF is expected to be Rs. 8,000 crore. (source – PIB)
Latest Decision Regarding Infrastructure Development
On July 2012, government through its CCI (Cabinet Committee on Infrastructure) took an important step in speeding up the infrastructure projects by taking following decisions:
With an increasing reliance being placed on PPP projects across many wings of the government, it has become necessary to adopt a well-defined institutional structure for overseeing contract performance effectively. This is all the more necessary as concessionaires will have an incentive to cut corners whereas the criticism would be faced by government.
The Institutional Framework requires project authorities to create a two-tier mechanism for monitoring the performance of PPP projects:
(i) A PPP Projects Monitoring Unit (PMU) at the project authority level
(ii) A PPP Performance Review Unit (PRU) at the Ministry or State Government level, as the case may be.
The PMU is to prepare a report to be submitted to PRU within 15 days of the close of the relevant month. The report is to cover compliance of conditions, adherence to time lines, assessment of performance, remedial measures, imposition of penalties, etc.
The PRU is to review the reports submitted by the different PMUs and oversee or initiate action for rectifying any defaults or lapses.
In addition to these, concerned ministries will send compliance report to the planning commission and finance ministry every quarter.
With slew of measure in place, now the government needs strong will to comply with its own decisions to enforce speedy completion of many impending projects.
India can not afford to neglect its infrastructure especially in power, transportation and communication sectors. The more we neglect these areas, more we will lag behind while rest of the world moves forward.