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Private capital in Infrastructure

The investment proposals announced by the private sector for building critical infrastructure indicates that Indian companies are willing to bring in more investments than expected provided the government creates an investor-friendly environment. Shashikant Hegde surveys the scenario.

Post-liberalisation, thanks to private initiatives, rapid growth was seen both in the manufacturing and services sectors. This in turn put heavy pressure on the existing infrastructure. In India, bulk of the infrastructure is owned and built by government agencies. Under investment and slow execution of infrastructure projects by the public sector units saw the gap between demand and supply of critical infrastructures like power, roadways, airports, seaports, etc increasing alarmingly in the last five years. This glaring deficit is now threatening to stifle the overall growth of the economy.

To narrow the gap between demand and supply for infrastructure, Indian government decided to involve private sector on large scale through various forms of entrepreneurship. To enable this, amendments were introduced to the existing laws and additional reform measures were announced. Further, in sectors like power, airports, seaports, roadways, projects were identified for private participation, and nodal agencies were set up to do the initial spade work and later hand over such projects to private players through competitive bidding routes.

Though the private sector's reaction to the government's open policy was overwhelming, especially in sectors like telecom, power, roadways, etc., the painfully slow pace of awarding the project and equally slow process adopted by state governments in transferring land, saw most of the private proposals remain on paper. The telecom sector was the lone exception where capacity creation happened at a very fast pace.

As of March 2008, private players share in building infrastructure (other than power projects) stood at 33 per cent.

Telecom

After opening up the cellular and basic services for private sector in 1992, the government introduced an investor-friendly telecom policy in 1994. Foreign direct investment up to 74 per cent was permitted and to take care of the customers interest the Telecom Regulatory Authority of India was constituted in 1997. These measures not only provided the required conducive investment environment, but also ensured less interference from the government agencies. As a result, private investment including foreign investment to the tune of Rs 50,000 crore came into this sector.

After successfully completing their first round of investment and creating a cellular population of around 200 million by 2007-end. The four large private players - Bharti, Reliance, Tata Telecom and Idea have firmed up plans to invest Rs 50,000 crore over the next five years. The goal is to raise the cellular population to around 500 million by 2012.

Airports

After the successful transfer of Delhi and Mumbai international airports to private parties for modernisation, and the recent commissioning of two green field international airports by private sector in Bangalore and Hyderabad, the privatisation process in this sector is expected to gain momentum.

The civil and aviation ministry plans to develop about 100 green field airports across the country at a total cost of Rs 36,000 crore. Two-third of this investment is expected to come from private players. As of March 2008, total investment planned in this sector was Rs 39,000 crore of which Rs 17,000 crore were by private parties. If the government clears the pending proposals at the earliest, the sector will be able to attract more than the targeted money from Indian as well as foreign companies.

Seaports

India's 7,517 km coastline is studded with 12 major and around 60 active minor ports. Thanks to the excellent exports performance by Indian companies, the cargo traffic increased by average rate of 15 per cent during the last five years. According to an estimate, by 2010 Indian ports will handle around 1,000 million tonnes of cargo. This calls for heavy investment in ports development.

The National Maritime Policy has estimated that to meet the increased exports, the total capacity of the ports has to be increased from around 750 million tonnes to around 1,500 million tonnes by 2012. To make this possible, fresh investment to the tune of Rs 55,804 crore will be needed. Nearly 60 per cent of this amount is expected to come from private investors.

The willingness of the private sector to invest in this sector is aptly indicated by the fact that the share of private investment increased from 33 per cent in 2006 to 39 per cent in 2008. The share will increase further, if the government cuts down the inordinate delays in clearing the projects. At present bulk of the investment is happening in states like Gujarat, Maharashtra, Andhra Pradesh and Orissa.

Roadways

During the 11th Plan period the government expects a total investment of Rs 100,000 crore to take place in building expressways, highways, and other roadways. Nearly one third of this investment is expected to come from private companies. Though private companies are willing to invest on large scale in road building, lack of transparent policy which will ensure decent returns on their investment and inordinate delays faced by private promoters who are currently executing roadway projects has made the other willing players to hold back their investment plans for the time being.

Among the states, Rajasthan, Gujarat, Maharahtra, Karnataka and Tamil Nadu have managed to attract sizeable private investment. Maharashtra and Tamil Nadu governments have formed separate companies to execute large roadways projects in joint venture with private investors. As of March 2008, the share of private sector in total envisaged investment in the roadways was around 7 per cent. This share is not expected to go up sharply in at least next five years.

Railways

Private investment in railway infrastructure was next to negligible till a few years ago. However, things are bound to change in coming years. Along with executing a massive Rs 25,000 crore expansion plans in the next five years, Indian Railways has also proposed to build 10,000 km long dedicated freight corridor connecting the four metros at a cost of Rs 43,000 crore. Indian Railways has formed a joint venture to execute this project in collaboration with private companies. Plans are also there to involve private companies in its proposed expansion plans.

After the successful execution of the phase-I of Delhi Metro Rail projects, states like Maharashtra, Karnataka, Tamil Nadu and Andhra Pradesh have proposed to set up metro rail projects with private participation.

Power

Even though power transmission was opened for private players, the response so far is very poor. Of the total investment lined up in power transmission projects across India, the share of private sector is only 5.4 per cent. In April 2006, the government identified 14 transmission projects worth Rs 20,000 crore for development by 2012. Rural Electrification Corporation and Power Finance Corporation have been appointed as nodal agencies for transferring the identified projects to private developers. Of the 14 projects, till date only one—Maithon-Kodarma-Bokaro extension transmission line project—has been awarded to KEC International.

In November 2006, Reliance Power Transmission, an EPC division of Reliance Energy, bagged two contracts worth Rs 1200 crore for execution of 400kV extra high voltage transmission systems in the Western part of the country. These two projects are part of the Rs 5,000 crore western region transmission strengthening projects, which spreads over 3,000 circuit kilometers of 400kV line capacity.

Outlook

The investment proposals announced by the private sector for building the critical infrastructure indicate that Indian companies are willing to bring in investments, more than expected from them, provided the government create an investor-friendly environment, clear their proposals swiftly and put in place sector specific regulatory authorities which will assure decent returns on their investments. If Indian government ensures this in coming years, we might see the success story of telecom sector being repeated in other infrastructure sectors.

Published in Projectmonitor issue: 19-May-08