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BW Businessworld

Highway To Happier Times

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From infrastructure experts to economists, everyone has underscored the importance of transport. While India has taken a few steps towards improving connectivity betweenits cities using transport networks such as the Golden Quadrilateral highways and the Delhi Mumbai Industrial Corridor (DMIC), yet bottlenecks to infrastructure development are so grave that India continues to lag behind other emerging nations in its quality of roads, railways, ports and airports.

Transport infrastructure projects in India face a catena of problems (such as delays in the pre-tendering process, land acquisition, clearances and construction) throughout the project cycle, resulting in time and cost overruns. Even after completion, several transport projects have faced financial challenges due to regulatory uncertainties. For instance, the dispute over the applicable statute in tariff determination for the Mumbai Metro project can have a significant financial impact on the project.

Land Acquisition
Land acquisition is, perhaps, the most significant roadblock to the execution of transport infrastructure projects in India. Pervasive state controls often become a highly contentious issue between the state/developer and landowners. The new Land Acquisition, Rehabilitation and Resettlement (LARR) Act, with its various ambiguities, has worsened the situation. First, the term “public purpose” is not well defined and can, therefore, hinder land acquisition by the government, even for government or public-private projects. Second, the requirement of obtaining consent from 80 per cent of landowners for acquisition is a catastrophic concept in “eminent domain” legislation. This was demonstrated in the recent case of land acquisition for the Navi Mumbai airport project, where landowners of a few villages rejected the acquisition formula despite the highest ever compensation package offered in India’s land acquisition history. Clearly, the LARR Act requires a complete overhaul if any significant infrastructure development is to take place in India.
 
Hemant Sahai & Avirup Nag
Multiplicity Of Approvals
A major bottleneck leading to delays and cost overruns is the tedious and complex process of obtaining clearances from multiple authorities. Even projects like the Golden Quadrilateral and DMIC aren’t immune to this. Again, construction of transport projects is often held up due to law and order problems and other peculiar issues like difficulty in removing religious structures; a strong political and administrative will is needed to tackle such issues. In order to streamline the process of obtaining clearances, better co-ordination is required between the central and state governments. A co-ordinated “single window” clearance mechanism should be created, especially for the more complex projects.

Given the mercurial disposition of Indian politics and governance, projects are often affected by the shifting legal and regulatory environment. For projects that cut across states, a common set of rules and regulations should be put in place. Such policy frameworks should be based on binding targets or key performance indicators and should reassure investors that the regime is stable and can provide the basis for a long-term capitalintensive investment. Integrated Approach Transportation projects face planning issues, are complex to execute and operate, have long lead times, and are usually very expensive. Therefore, given the budgetary constraints faced by India, prioritising projects requires changing the approach from the current “internal rate of return/ viability” to the “economic rate of return” evaluation, meaning projects should not be evaluated merely on the viability of the project but on the economic impact the project will have on the economic region.

Take, for example, a road project that connects an industrial development to a new port project. As an isolated project, the road may be hard to justify based on a cost-benefit analysis. However, when one combines the larger macroeconomic benefits of delivering products to export markets with the increased throughput of the port and the potential for job creation, it becomes abundantly clear that the road can provide exceptional economic value.

Another key factor in the success of transport projects is their ability to interconnect with alternative forms of transport that together can provide a wider operation network to enable ‘door-to-door’ service. The São Paulo Metro PPP and the Gold Coast Rapid Transit project in Australia are good examples of how regional and inter-city modes of transit can be integrated with other forms of public transport.
 
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On similar lines, Indian planners need to ensure that new transport projects are integrated with the existing transit system, including airports, high-speed rail, Metro, rapid rail and regional railways. This will not only enhance the value of the new transport system but will raise the individual value of each infrastructure asset in the network by enhancing usage and, as a result, revenues.To this purpose, the lesser exploited rail and air routes need to be given a significant push to effectively connect Indian cities.

Innovative Funding
Another significant consideration that relates to transportation projects is the implementation cost. With constrained government budgets and competing priorities, there is a need to explore innovative funding approaches. For example, in London, the local authority raised more than £4 billion to fund the new Crossrail initiative through a supplementary business tax. India can also take lessons from Japan’s initiatives in road development through integrated toll pools; the total toll collected can be used for development of all toll roads instead of making it project-specific.

Globally, the trend is moving towards private-public partnership (PPP) models, where the authority procures the infrastructure and underwrites part of the demand risk, while private sector partners provide funding, construction expertise and operating experience.

The new government’s decision to continue with the PPP model (including in railways) and further strengthen it as the primary source of investment in infrastructure development is a welcome announcement. According to a World Bank report released a few years ago, India is ahead of the rest of the world in PPP projects. PPP development is one area where India has had extremely valuable experiences.

The country has a vast pool of projects that are suited for PPPs. Transport projects, including railways, highways and airports, form a significant portion of existing
partnerships.

However, in the Indian context, the government and project planners must carefully consider the implications of their financing choices. Given the economic and demographic set-up in India, few people are willing to spend a big part of their personal budget on daily transport, so any transport project must stay focused on being financially competitive, efficient and affordable. In this context, India has had mixed success as the regulatory framework on tariff determination varies significantly across sectors. There is, therefore, a need to bring uniformity on tariff principles across sectors. Ideally, we should be moving away from the traditional “cost-plus” methodology to “price-cap” or predetermined tariffs, coupled with “viability gap funding”. The government should ensure that affordable and world class infrastructure assets are created.

Its key focus should be on improving efficiency of such projects through effective implementation and better interconnectivity with existing projects. Also, it is imperative to set up a transparent, organised and systematic body of experts and government officials (both from the Centre and relevant state governments) for complex projects
to ease obtaining consents.

Sahai is managing partner of HSA Advocates and Nag is an associate partner

(This story was published in BW | Businessworld Issue Dated 08-09-2014)
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