At a time when the ministry of power claims that the first units of the country's first two ultra-mega power projects (UMPP) — Sasan in Madhya Pradesh and Mundra in Gujarat — are expected to be up and running more than a year ahead of schedule, a major portion of land for both the projects is still to be acquired by the government.The power ministry's own assessment of India's first three UMPPs — Sasan, Mundra and Krishnapatnam in Andhra Pradesh, with a capacity of 4,000 MW each — shows it has lagged behind in meeting its own commitments to the projects. For instance, for the Sasan project, the central and state governments had to acquire 3,474 acres of land and then hand it over to the project company. Till the end of September, it had acquired just 1,873 acres.Around 46 per cent of the required land is still to be acquired. As against a PPA (power purchase agreement) commitment to start the first unit of Sasan by 2013, the company is expected to start the first unit by December of 2011.Land acquisition has been a major bottle-neck for other infrastructure sectors as well, especially the NHDP (National Highway Development Programme), where even linear tracts of land (as compared to bulk land in one area) could not be acquired on time, delaying even the Golden Quadrilateral that was started in 1999-2000. While UMPPs are a special case where the onus of land acquisition lies on government, in the past, R.S. Sharma, chairman and managing director of NTPC (National Thermal Power Corporation), the country's largest power generating utility, has said one of the biggest bottlenecks has been land acquisition. In fact, he said one major issue for companies such as his is being provided land "free of encumbrances" to execute projects on time.Of the 3,224 acres of land needed, only 80 per cent for the Mundra UMPP, or 2,559 acres have been acquired. As per the PPA, the first unit was scheduled to be up and running by August 2012, but the company is expected to start the first unit by September 2011. The entire capacity of 4,000 MW each of Sasan and Mundra is now scheduled to start by 2013 as against a commitment of 2016 and 2014, respectively.Interestingly, progress on land acquisition for the Krishnapatnam project — whose first unit is due to be commissioned only by 2013 — has been much better at 87 per cent.While the Sasan and Krishnapatnam projects have been bagged by the Anil Ambani-owned ADAG group, the 4000 MW Mundra project has been bagged by Tata Power. The concept of UMPPs involves the government (through Power Finance Corporation) setting up special purpose vehicles for each project, and then handing over the same to the successful bidder with all clearances in place. While ADAG officials did not want to comment on the status of land acquisition, they claimed such delay would not affect the project. The reason for this confidence is that the shortfall will not hold up work on the projects. For Sasan, where close to half the land is still to be acquired, they say most of the land needed for the "main plant" has already been arranged and that work on this power-cum-coal integrated project is on schedule. The delay, on paper, is in acquiring land for the ash pond — where out of the 811 acres needed, barely 5 per cent has been acquired.Both the Mundra and Sasan projects were handed over to the developers in 2007 and the promoters achieved financial closure for the two projects in 2008 and 2009, respectively. While the Krishnapatnam project was awarded last year, the fourth UMPP at Tilaiya in Jharkhand — also bagged by the Anil Ambani group — was handed over this year. var intro = jQuery.trim(jQuery('#commenth4').text()) var page = jQuery.trim(jQuery('#storyPage').text()) if (page.indexOf(intro) < 0) { jQuery('#commenth4').attr('style', 'display:block;') } (This story was published in Businessworld Issue Dated 26-10-2009)
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It might not be the panacea for all of India's power ills, but is surely a step in that direction. In 2006, the Union power ministry came out with the concept of merchant power plants (MPPs) with generation capacity of less than 1,000 megawatt (MW) each. These private power plants — which could be standalone plants or part of the capacity of regular power plants could be set aside for merchant power — would not be tied to any power distribution firm or electricity board through power purchase agreements (PPAs). Instead, they would supply power — to either power distributors or open access consumers — through an open grid. They are confident that there are consumers who are willing to pay in a shortage.Given that those seeking power during massive cuts will be desperate, merchant power companies are likely to make a neat pile. The greater the demand, the higher the price of power. But the flip scenario also applies: if there is less demand, companies would be sitting on huge investments that are giving no returns. The risks are enormous, but so is the opportunity, given the peak capacity shortage is currently at over 12 per cent of peak demand."We allowed merchant plants to come to make the most of the shortage situation," says Anil Razdan, former power secretary. The response has been phenomenal. Several private players have invested significant amounts in setting up MPPs. And banks have also been willing to live with the risks and finance their projects. The Chhattisgarh government, which is sitting on huge coal reserves, has entered into memoranda of understanding (MoUs) with companies for over 50 projects, each over 1,000-MW capacity. Of course, not all will finally take off as MPPs or even as conventional power projects with firm buyers. In all, an estimated 16 projects with a capacity of 14,000-15,000 MW of merchant power is now in the pipeline, say power ministry sources. The Power RushGreenfield private power projects that were lying undeveloped for several years have been fired into action on the back of the merchant power promise. UK-based Hinduja Group's 1,000-MW project in Vizag, Andhra Pradesh, is one such. Stymied for 15 years due to disagreement with the state government and the Centre over a PPA, escrow agreements, project cost, etc., the project has been reborn as a MPP.Ditto Videocon Power, which was to set up a 1,000-MW project in Tamil Nadu more than 10 years ago. The company has now revived plans to enter the power sector and intends to set up an MPP in Gujarat. Navin Jindal-led Jindal Power, a subsidiary of Jindal Steel & Power, has already set up a 1,000-MW coal-based MPP in Raigarh, Chhattisgarh. This project, too, had been languishing for over 12 years (see ‘The Suppliers').There are relatively new entrants as well such as Hyderabad-based KSK Energy and Indo Ferro Alloys, which are also planning MPPs, says Satnam Singh, chairman and managing director of Power Finance Corporation (PFC), one of the largest lenders to power projects. var intro = jQuery.trim(jQuery('#commenth4').text()) var page = jQuery.trim(jQuery('#storyPage').text()) if (page.indexOf(intro) < 0) { jQuery('#commenth4').attr('style', 'display:block;') } Apart from the potential profits that companies are eyeing, some other factors have also helped generate the push for MPPs.The EnablersTo run a power plant, you need fuel, and coal dominates in India. Coal has been in short supply in recent times even for the existing power plants. So, to ensure merchant power projects do not come a cropper right at the outset, the power ministry has reserved coal for them. Fifteen coal blocks with estimated reserves of about 3.6 billion tonnes have been identified for merchant and captive power plants. Of this, about 2.4 billion tonnes are expected to be reserved for MPPs. There are some who plan to import coal.The government has also allowed hydel power plant developers to set aside 40 per cent of capacity for merchant sales, besides permitting developers of regular thermal plants to keep aside up to 15 per cent of capacity for merchant sales.But what has really got the sector buzzing is the Rs 1.19 tariff that Reliance Power, the developer of the Sasan ultra mega power project (UMPPs, plants with capacity of 4,000 MW), has promised to charge. Normal prevailing tariffs in the country average Rs 2.63. Sasan's tariff has made merchant power developers believe that they, too, can peg their costs really low. A lip-smacking possibility, given that state governments in distress have been willing to pay more than Rs 10 per unit in recent times. That translates to amazingly high margins in the best case scenario. "If I get customers who are willing to pay tariffs of over Rs 5 per unit, then there is a ready market for my project," says Kuldeep Drabu, director of Videocon Industries.According to ministry officials, Union Power Minister Sushil Kumar Shinde is planning to move a proposal to extend the tax sops — excise and customs duty waivers — given to UMPPs to MPPs. If implemented, these would help further bring down the cost of generating power and, consequently, the tariffs. There are issues, however, that need to be addressed before merchant power can live up to its potential.The Risks"One of the important aspects that needs attention is ensuring states implement the provisions of open access," says Razdan. "This will allow a consumer to choose his source of supply." Developers agree. "State governments have to move fast and expedite clearances," says the developer of a MPP, who wished not to be identified. Some states are still not keen on allowing open access, but the Centre is pushing them to implement this facility.Post-financial crisis, some banks have gone slow on funding MPPs, but the slowing down has been, well, slow. "It all depends on the lenders' comfort with the developer on the kind of payback assurance the developer undertakes," says Sushil Maroo, director of Jindal Steel & Power. To spread the risk, some promoters would like to apportion some capacity for merchant sale and tie up the balance with assured buyers through PPAs. The key for attracting debt financing for an MPP, according to Singh of PFC, is that the tariff should be around the national average of Rs 2.63 per unit.The Central Electricity Regulatory Commission recently capped the price of merchant power at Rs 8 per unit, but only for the next 45 days of the festive season. Merchant power producers will hope that the cap will not be extended beyond that period. Nevertheless, the difference between Rs 8 per unit and Rs 3 per unit (average cost of producing power) gives a sizeable margin of Rs 5. Which is why none of this has put a dampener on the rush to build MPPs. Razdan reckons the huge interest will die down once supply catches up with demand. Perhaps, but isn't that what this is all about?kandula dot subramaniam at abp dot in var intro = jQuery.trim(jQuery('#commenth4').text()) var page = jQuery.trim(jQuery('#storyPage').text()) if (page.indexOf(intro) < 0) { jQuery('#commenth4').attr('style', 'display:block;') }
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The Mumbai Port Trust has just decided to bury a bit of history, and the greens are not happy about it. Two of the port's oldest docks — the Prince's and Victoria — will be filled up to make way for a new offshore container terminal. Both the docks, built in 1885 and 1891 to provide access for small ships, are now in disuse. The Rs 1,228-crore terminal will be developed by the Indira Container Terminal Pvt Ltd (ICTPL), a joint venture between construction firm Gammon India and Spain's leading port group Dragados SPL. The Mumbai Port Trust (MbPT) will cover the cost of dredging and filling up the docks, estimated at Rs 366 crore."The process will give the port an additional 40 hectares," says MbPT's Chairman Rahul Asthana. "From this reclaimed waterfront, a trestle or a concrete pathway on piles in the sea will connect traffic movement to four new berthing stations."With a deep draught of 14.6 metres for the open-sea berths, MbPT hopes to increase its traffic of large vessels. "The filling work has started, but it will gather pace only after the monsoons. We expect the berths to be operational by December 2010," says Asthana.The MbPT chairman concedes the issue is contentious. Showing an artist's image of what Prince's and Victoria could become — a luscious water sports seafront replete with docked yachts, and the city's glitterati making their way on their speed boats — Asthana says there had been intense industry lobbying for converting the heritage docks into a waterfront marina. But the Ministry of Surface Transport rejected this idea in favour of enhancing the port's capacity and revenue-generating operations.A port trustee and president of the All India Port and Dock Workers Federation, Shanti Patel, hints darkly that the pressure for a stylish marina is coming from the Mukesh Ambani-backed Jai Corp that is seeking to develop the alternative port of Rewas across Mumbai's harbour. On the other hand, environmentalist Shyam Chainani, whose Bombay Environmental Action Group (BEAG) has consistently opposed increase in port traffic for the past two decades, says the move will heighten congestion in the city. "Nowhere in the world has city heritage been extinguished like this," he says. But, ironically, nowhere in the world are port operations, stretching over a 14.5-km arc on the eastern seaboard of the island city, enmeshed so hopelessly into one of the most densely populated cities of the world. The port operations pass through the city's transport networks. Also, the posh business district of Ballard Estate, which houses several businesses and markets, is located on the port land.That is why the 1,860 acres of land owned by MbPT becomes a contentious issue. In fact, it is variously seen as a panacea by many — the state government sees it as a remedy to the city's overcrowding; for planners and environmentalists it is a chance to decongest the city; and for scores of builders, it is a goldmine for development. So, which way will the Mumbai port go?Expanding GrowthThe Mumbai port has grown at a steady clip defying wishful thinking that it is shedding traffic over the years to sister port Jawaharlal Nehru Port Trust (JNPT) across the harbour at Nhava Sheva and other west-coast ports such as Kandla. But it has increased its cargo handling from 26 million tonnes (MT) in 2001-02 to 44 MT in 2005-06, and notched up 57 MT in 2007-08. Its operating surplus has also grown from Rs 47 crore in FY05 to Rs 263 crore in FY08. But in 2009, it slumped with the fall in exports and imports to Rs 123 crore.However, there are signs that MbPT has turned into a dinosaur. With an employee strength of 18,700 today, it is the biggest employer among the major ports in India, with one-third of the country's port labour of 57,000. But in cargo handling, it has slipped to fifth position after Kandla, Visakhapatnam, JNPT and Chennai. The highly mechanised JNPT, with a labour force of 1,400 that handles container traffic, notched up 55 MT in FY09 compared to the Mumbai port's 52 MT. MbPT's wage bill — Rs 350 crore in FY08 and close to Rs 488 crore in FY2009 — accounts for a whopping 60 per cent of the port's operating income.In this context, increasing container traffic and converting the defunct docks to container handling terminals seem to be a sensible business decision. The new terminals with railway connectivity are expected to handle as much as 1.2 million TEUs (container units). "From a paltry 118,000 TEUs in FY08, traffic will rise to 6.7 million TEUs in 2010-11, and touch 15.8 million TEUs in 2016-17. While JNPT is expected to level out at 11.6 million TEUs, we will be handling 36.4 million TEUs by 2025," says Asthana, citing a KPMG survey.Going Against The PlanBut this growth trajectory was not the future envisaged for the Mumbai port three decades ago by the then Prime Minister Indira Gandhi. When JNPT was being planned in the 1980s, and faced stiff opposition from environmental lobbies, the port was given the green signal on the ground that it would help decongest overcrowded Mumbai. The idea was to slowly get the Mumbai port to reduce operations and use the surplus land to green the city.A directive issued on 8 August 1980 by the Prime Minister's Office said when considering plans for JNPT "the feasilbility report should provide for the release of land and dock areas in existing Bombay Port area for parks, etc". Interpreting this directive, the Ministry of Environment and Forests (MoEF) laid down detailed guidelines when it gave clearance to JNPT in August 1988. "With the operation of Nhava Sheva port as a measure of decongestion of Bombay Port, the traffic in Bombay Port must be gradually reduced by steps to be taken by the Ministry of Surface Transport, Bombay Port Trust and Nhava Sheva Port Trust so that the total general cargo, inclusive of container cargo handled by Bombay Port, comes down within three years to 6.5 MT."The MoEF directions further stated: "The Ministry of Surface Transport and Bombay Port Trust must take action to gradually make the land of Bombay Port, which is not required for operational purposes of the port, available for greening and recreation."Meanwhile, a look at the global scenario shows that docks within city precincts ultimately give way to more pressing urban demands, and are shifted to independent port towns some distance from the main city. For instance, in the 1800s, Canary Wharf in London was one of the busiest docks in the world. The port industry began to decline by the 1950s, and the docks had to shut down in 1980. Several business groups, led by Credit Suisse First Boston (CSFB), backed an alternative plan for a business district there. Today, Canary Wharf is a bustling financial centre with London's tallest buildings and wealthiest tenants. var intro = jQuery.trim(jQuery('#commenth4').text()) var page = jQuery.trim(jQuery('#storyPage').text()) if (page.indexOf(intro) < 0) { jQuery('#commenth4').attr('style', 'display:block;') } In July 2007, at a land policy meeting, MbPT's then Deputy Chairman Ashok Bal tried to draw a distinction in respect of the Mumbai port. He said though other ports such as Kandla and JNPT had taken away substantial traffic from Mumbai and reduced the hinterland it served, cargo handling at the port continued to gallop. This showed "the economic development of the Mumbai region demanded continued existence of the Mumbai port". But the state government holds a contrarian view. "We opposed the development of the container terminal at the docks knowing it would increase congestion. But it was a fait accompli," says U.P.S. Madan, convenor of the Maharashtra government's Mumbai Transformation Support Unit. "The port land needs to be used for greening the city, and the port operations must be shifted out or gradually closed."The Demand For LandOver the past two to three years, there has been an incessant demand from the state government that part of MbPT's surplus land be used for the city's development. The state empowered committee that monitors the city's development, chaired by Chief Secretary D. Shankaran, formally raised the issue with MbPT in November 2006. However, Bal said there was little land to spare. In his tally, the surplus land was a measely 12 acre.However, a recent land policy presentation of the port trust revealed that more port land was leased out than used for port's own operations. Of the total 1,860 acre the port owns, 486 acre was used for dock operations, while properties leased out covered about 868 acre or 46 per cent of the total land. MbPT's tenants include government bodies, public sector units and 2,886 private tenants including the Taj Mahal Hotel, Unilever factory and the Ballard Estate.Asthana says a substantial part of his administration was devoted to administering these tenanted estates. Port records show leases for 379 properties accounting for 43 per cent of the land had expired and MbPT was not able to wrest the land back. In the process, the port became the second largest litigant, after the municipal corporation, with 1,800 cases pending in courts. Quips Asthana: "We also run a port."Finally, wilting under pressure from the public and the state government, MbPT, in August 2006, decided to settle the issue by formulating a land policy for the port. It set up a committee of port trustees that included Bal and two labour representatives, S.R. Kulkarni and Shanti Patel. The minutes of a meeting of the committee (July 2007) show Bal vigorously defending the existence of the Mumbai port, but conceding that in the 1988 talks with MoEF, a master plan of the port had earmarked about 131 acres as "green areas and public amenities".Patel has a different take. "MbPT has a lot of land, and it should be used in public interest. The trust should not behave like a private landlord," Patel told BW. He, however, says MbPT, set up as an autonomous body under the Major Port Trusts Act of 1963, was never allowed to function independently, and was ruled by "guidelines" of the surface transport ministry through the chairman's office. Not surprisingly, considering these pulls and tugs, three years after it was formed, the committee of trustees is still to release the land policy.Integrating With The City?Along with the Rs 1,288-crore container terminal at the Victoria and Prince's docks, MbPT has two significant projects on its agenda that it hopes will integrate the port with the city's needs. A Rs 133-crore investment has been planned to develop rail transport through the dock areas to ease the load on the arterial road networks. The plan to develop a dedicated railway line, linking the dockyard hub, Wadala, to the central railway hub, Kurla, will speed up cargo dispersal. Though mooted in 2006, the project has been held up due to delay in rehabilitating the 1,700 slum units that are on the railroad alignment, says Asthana.The second project, the construction of the Eastern Freeway, a road which starts from south Mumbai and exits at Chembur in the north, has kicked off with a 5-km section running on port trust land on elevated stilts. The Rs 300-crore 27-km freeway, though not a port trust project, is being developed by the Mumbai Metropolitan Region Development Authority (MMRDA) to provide a rapid exit for the city and ease traffic congestion. However, MbPT has given free land for the project and invested Rs 35 crore to develop the Anik-Panjarpur link road connecting the Eastern Freeway. Slated to be completed in December 2007, the freeway is now three years behind schedule.Though Asthana is not insistent that the port has no land to spare, as was claimed by his predecessor Bal, he says development of the port land must be commercially beneficial to MbPT. "The trust is not against giving land for the development of the city. But we would want to do it ourselves, and on terms that are financially advantageous to us," Asthana emphasises. "It should be part of a city master plan, and should not hamper port operations." Madan, who heads Maharashtra's Mumbai Planning Cell, says his team is in the process of preparing a concept plan that would include the port trust land in "a single integrated vision" to improve and decongest the city.To start with, land relinquished by lessees of the port trust could be pressed into city development projects, such as the four acres that the Central Warehousing Corporation returned a month ago. However, until the pundits in the surface transport ministry realise that Mumbai port has to reinvent itself as part of the rapidly changing megalopolis, all we will have is short-term, knee-jerk responses.gurbir(dot)singh(at)abp(dot)in var intro = jQuery.trim(jQuery('#commenth4').text()) var page = jQuery.trim(jQuery('#storyPage').text()) if (page.indexOf(intro) < 0) { jQuery('#commenth4').attr('style', 'display:block;') }
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It seems there is no consensus within the government on privatisation of power distribution. While the power ministry is pushing to bring in sweeping changes to the mega power policy — such as removing the pre-condition for states to privatise their distribution business — officials in other ministries are opposed to this "retrograde step".The mega power policy, framed a decade ago, required that the power-purchasing states undertake to privatise distribution in all cities with more than one million population, within a period fixed by the Ministry of Power.As privatisation of power distribution has been a non-starter for many years, the ministry now wants to do away with this, to push the mega power policy. It has sent a note to other ministries for suggestions. To this, a note by the Committee of Secretaries (CoS) to the Cabinate Secretariate says: "Power reforms have slowed down... doing away of measures linked to fiscal concessions that require privatisation of major utilities and inter-state sale of power would be a retrograde step".A note to the CoS on the proposed changes in the mega power policy says that if some states have misused the provision of the Electricity Act to curb inter-state power sales, which the power ministry has opposed, "then why should the ministry (of power) itself send a contradictory signal and do away with this aspect"? One suggestion is that CoS should extend the existing mega power policy benefits to supercritical units (660 MW and above) and to expansion projects. But the tussle over power goes on. var intro = jQuery.trim(jQuery('#commenth4').text()) var page = jQuery.trim(jQuery('#storyPage').text()) if (page.indexOf(intro) < 0) { jQuery('#commenth4').attr('style', 'display:block;') } (This story was published in Businessworld Issue Dated 07-09-2009)
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Despite a special committee to remove bottlenecks for infrastructure development, the progress in sectors such as roads, ports, power, airports during the previous government's tenure was very slow. In fact, the creation of Committee on Infrastructure (CoI), chaired by the Prime Minister himself, was one of the first tasks Manmohan Singh undertook in 2004.However, this time round, under UPA II, the CoI has been disbanded, and a new cabinet committee on infrastructure (CCI) — on the lines of cabinet committee on political affairs, on security — has been created. Over the past few weeks, this cabinet committee, with the PM as the head along with other concerned ministers, has taken some important decisions and is now expected to also clear the much-awaited amendments to the model concession agreement for highways.What was the need for CCI? First, under the previous setup, policy decisions cleared by CoI had to be put up before the cabinet committee on economic affairs or the cabinet. This turned out to be a long-drawn affair. Second, many ministries perceived the Planning Commission to be the driver of some of these policy decisions on infrastructure that should have ideally been taken by the concerned ministries. This led to protracted discussions on policy matters with some key ministries even questioning the Planning Commission's role. With a CCI in place, though the Planning Commission will have a say on policy matters, there will be no stalemate as the CCI will have the final word. var intro = jQuery.trim(jQuery('#commenth4').text()) var page = jQuery.trim(jQuery('#storyPage').text()) if (page.indexOf(intro) < 0) { jQuery('#commenth4').attr('style', 'display:block;') } (This story was published in Businessworld Issue Dated 28-09-2009)
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India's ship-building industry's order book, roughly 1 per cent of the world's, is facing growth pangs with over 50 per cent of orders facing price re-negotiation, payment issues and client-related uncertainties. As the woes of the manufacturing sector distend, reflecting a 76 per cent drop in Baltic Dry Index (year-on-year up to May 2009), re-negotiations for the new rates, schedule of payment and delivery have intensified. The largest yard in terms of capacity, Pipavav has 48 per cent of its order book under review while 5-10 per cent each of ABG Shipyard and Bharati Shipyard book have already been renegotiated with much more to come. Analysts say such prolonged negotiations could affect the working capital flow as well as long-term profitability. About 78 per cent of the orders are to be delivered after 2010."Falling commodity prices have shrunk the value of orders while the severe liquidity crunch has certainly delayed payments," says Param Desai, analyst at Angel Broking. Pipavav Shipyard, for instance, is negotiating hard with Golden Ocean and AVGI Maritime Group to save 18 Panamax bulk carriers as the contract empowers clients to cancel the orders if they fail to arrange finances. While the shipping companies have sought a large discount in prices, Pipavav's other order from French shipping company Setaf to supply four panama bulk carriers has gone into an arbitration process on the issue of cancellation. Bhavesh Gandhi, vice-chairman of Pipavav Shipyard, admits that renegotiations have become the norm of the day for Indian shipyards. "We have no choice but to accommodate their demands, but the impact may be minimal on overall profits due to the rupee appreciation," he says. For example, while the new build price for capsize is at about $58 million (as per RS Platou monthly report), negotiations have brought it down to $36-38 million for Indian yards. Analysts such as Emkay Global's Pritesh Chheda say such strong re-negotiations are a stepping stone to cancellation or client delays beyond a specific time. Indian clients are easier to deal with, but the take-it or leave-it attitude of the foreign clients (contributing 60 per cent of the order book) has not helped. While ABG Shipyard and Bharati Shipyard declined to comment, analysts say that client-led delays have been severe since past two quarters on these players. ABG has been reporting lower operating margins for last two quarters despite a major rig order from Essar Shipping while Bharati is struggling with the completion of a large rig order from Great Offshore."Client-led delays and postponements are leading to lower execution of order backlogs. The industry may start reporting cancellation soon which could impact the visibility and consequently the revenue booking schedules for the next few quarters," says Chheda, who is quick to predict a consistent fall in profits. Shipyards are looking towards the government to renew the 30 per cent subsidy as even its low cost of labour is not helping much. However, the uptrend in crude prices sustains the hope that offshore segment orders may not come for cancellation. As global financial crunch continues to pinch, land is far too distant for comfort. var intro = jQuery.trim(jQuery('#commenth4').text()) var page = jQuery.trim(jQuery('#storyPage').text()) if (page.indexOf(intro) < 0) { jQuery('#commenth4').attr('style', 'display:block;') } (This story was published in Businessworld Issue Dated 28-09-2009)
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Roads: Gearing Up For Change O.B. Raju, Managing Director, GMR Highways, & Director, GMR Infrastructure History shows that right from the invention of the wheel to the present age of multi-modal transport, the progress of human civilisation bears close links with transportation. Importantly, transportation has played an instrumental role in improving the quality of human lives. Rail, shipping, road and air transport have driven industrialisation, created the world's greatest cities, spurred international trade and globalisation, and allowed for free movement of people and goods. There is an intrinsic link between efficient road networks and economic prosperity, with new transport connections enabling new economic relationships. A robust transport system is an important enabler for sustained economic prosperity. For example, a 5 per cent reduction in travel time for all business and freight travel on the roads could generate a few thousand additional ‘man-hours' for a country and save crores of rupees. Good roads will ensure low maintenance cost, better fuel consumption and safer means of commute. As individuals and as business leaders, we have also experienced that delays and unreliability of road network can cost people and businesses dearly; increase business costs and affect productivity and innovation. Roads cannot create growth by itself: they are just enablers, which can improve productivity when other conditions are right. Transport corridors are the arteries of domestic and international trade. They boost competitiveness in imports and exports. Road networks support the productivity and success of urban areas and their catchments. They get people to work, support deep and productive labour markets and allow businesses within the area to reap the benefits of agglomeration. They contribute equally to the development of rural economy by creating new markets and also provide faster access to existing markets to sell agricultural produces. The Road Ahead Looking forward, roads will play key economic roles in India's future by supporting the success of the country's highly productive and cost efficient goods and services in the global market, and enabling efficient freight distribution. To meet its ambitious economic goals for roads, the government has already taken many measures. But these have to be strengthened further. The most important aspect is to have balanced development across the country. There is an immediate need to standardise the roads in the country. Our roads require regular preventive maintenance, more so in the dense traffic corridors. We need to create more passenger amenities. Truck lay-byes and related facilities are essential where freight movement is frequent. Our road networks need to be supported by the cutting-edge toll collection mechanisms. Implementing electronic toll collection system across the highways will help reduce the time wasted at toll plazas. For example, users can drive through a plaza without stopping to pay toll, as an on-board unit installed on their vehicle shall complete the transaction by communicating with a transponder at the plaza. To ensure that projects are viable and attract private and foreign investment, current policy measures need to be strengthened. These include availability of funds at cheaper interest rates, liberal fiscal and tax incentive packages and a review of contractual provisions constraining the funding of projects by financial institutions. To reduce execution level challenges and ease faster implementation, the government needs to hasten the process of land acquisition and explore faster approval process. It must ensure that enough checks and balances are built into the project-review system. The government should continue to invest and deliver sustained transport investment, along with the private sector. Investment in infrastructure by the government during this recession will provide great benefits in future. Not to mention the huge employment-generation capability of infrastructure investment; it is an added advantage for the country. The government spending will also help deliver a transport system capable of supporting the continued success of India's economy in the global market. Of course, this calls for a paradigm shift in the planning and execution of road projects. Aviation: Clearing The Runway Kapil Kaul, CEO, South Asia, Centre For Asia Pacific Aviation (Capa) Indian aviation industry is on a foggy runway today, courtesy the global recession and fluctuating oil prices, among other things. However, this crisis offers an opportunity to restructure the sector in order to make it more sustainable. The restructuring process must factor in four key aspects: airline viability, the policy regime, the role of Air India and the Airports Authority of India (AAI) and, more importantly, long-term planning. var intro = jQuery.trim(jQuery('#commenth4').text()) var page = jQuery.trim(jQuery('#storyPage').text()) if (page.indexOf(intro) < 0) { jQuery('#commenth4').attr('style', 'display:block;') } First off, restoring airline viability is critical. Indian carriers are so heavily taxed that even surviving is a big challenge for them. The first step to restore viability is to reduce excessive state-level sales tax to a uniform 4 per cent by categorising aviation turbine fuel (ATF) as a public utility raw material under the declared good status. This will help airlines reduce overall costs by 8-10 per cent. The next step is to bring ATF pricing in line with global benchmarks. Capa projects that fuel prices may once again touch $150 (per barrel) in two years, with the global economy recovering, and if this punitive taxation is not removed, it will clip the industry's wings forever. For A Smooth Takeoff So, it is imperative that airlines cut capacity by about 20 per cent and defer expansion until 2011. Air India has to lead this flight. Reducing the huge debt burden is another challenge. India's three big airlines (Air India, Kingfisher Airlines and Jet Airways) now have about $8 billion debt on their books. This is likely to reach $15 billion in three years due to their aircraft purchase programmes. These three airlines will incur about $3 billion in interest payments in the next three years — a burden they simply cannot afford. To rein this in, airlines have to defer aircraft purchases, refinance on terms that are more favourable and increase the equity base by divesting. Government, banks and aircraft manufacturers must ensure that the restructuring is effective. The current regulatory and policy regime needs to be more stable, involved and well directed. In India, private airlines control about 85 per cent of the domestic market and private airports have about 60 per cent of national passenger throughput. Therefore, it is critical to have an effective regulator, which has expertise on the issues plaguing the aviation sector. The lack of a coherent and stable aviation policy is, in a way, a reflection of the state of our regulatory structure. That said, restructuring of the Ministry of Civil Aviation in line with a good model such as the UK Civil Aviation Authority is important. The role and relevance of Air India and AAI also need a relook. Air India needs to be privatised within the next three to five years, as continued government ownership creates conflicts with respect to the policy environment. AAI's current business model will become unviable soon, since most of the profitable airports have already moved to the private sector. The private sector will have to adopt a larger role in airport development and management. We have 50-odd airports under AAI management, which have limited or no traffic. They should be handed over to the state governments for upgradation, with AAI providing only management and strategic expertise. AAI needs to be restructured keeping a focus on air safety, air traffic control (ATC) and other strategic aspects of airport development. Finally, the sector needs a long-term holistic masterplan. All stakeholders, including the government and industry leaders, must be party to the plan. There needs to be a clear vision of aviation development for the next 10-20 years. What is decided today must keep in mind how this would impact the viability of the industry in the future. If we are to create a sustainable industry, we need vision and planning. Land: Their Own Soil Sebastian Morris, Professor, IIM Ahmedabad The new Land Acquisition (Amendment) Bill 2007 seeks to reform the land acquisition processes in India in many ways. Though a step in the right direction, the Bill is riddled with incompleteness and contradictions. It also allows the state to hedge its responsibilities. Today, the issue of land acquisition revolves around the use of eminent domain (the power of the state to seize citizens' land by providing due compensation). Democracies need eminent domain, but they must be careful with its use. They must ensure that when land is compulsorily acquired, the compensation is more than adequate. Sadly, the Indian land law does not ensure this, given its origin in the need to maintain the imperial rule. In all cases of compulsory acquisition, the state itself should not ascertain the value of the property, but professional and independent valuers should do that. Also, the highest value arrived at, by using the standard methods of valuation, should stand. Today, farmers get little of the post-sale value (even when the sale is not under eminent domain but to a private party). This is because of a regulatory depression in value or as a result of what can be called regulatory takings. Notable among these takings are the non-agriculture clearance required, the processes involved in converting farmland for non-agricultural use and the prohibition of sale to non-farmers. These regulations are operative in many states. They depress prices pre-sale to as much as one-tenth of their post-sale value. So, the jump in prices, entirely on account of (prior) regulation, causes heartburn and deprives the farmer of appreciation in land values, and gives it all on a platter to the developer-buyer. Reform The Rules Clearly, the solution is in getting rid of these inane restrictions, and cover all land only under urban zoning restrictions and other meaningful planning-based restrictions. Mercifully, having incorporated a clause that the future values should be taken into account, the proposed law goes somewhat forward when eminent domain is involved. But it allows vast rents to be made by buyers when they, rather than the farmers, are able to get the clearances. var intro = jQuery.trim(jQuery('#commenth4').text()) var page = jQuery.trim(jQuery('#storyPage').text()) if (page.indexOf(intro) < 0) { jQuery('#commenth4').attr('style', 'display:block;') } Land, unlike many other traded assets, is subject to the holdout problem. In land aggregation, some can hold out to extract value from the buyer-aggregator. To overcome this, a provision can be used whereby any private party could register in the collector's or tehsildar's office that he is in the market for land purchase and is interested in certain pre-declared plots. After registration, the buyer-aggregator can start the process of negotiation with the titleholders. Once he has purchased 70 per cent of the land area and the titles, and if there is hold out, he can appeal to the government to buyout the rest at the highest price paid to any party who has sold the land. This provision will ensure that the buyer has formally put in a negotiating position vis-à-vis the community and cannot play an individual seller against another. The existing land law does not give the required fillip to the need for cities to use town planning schemes (land pooling and shrinkage to develop roads and serve other public purposes) rather than acquisition. Town planning schemes have been repeatedly used (even when not too competently executed) to great advantage by Ahmedabad. Similarly, the use of Transfer of Development Rights can be used to great effect by the state and public authorities in order to make town planning less onerous on those giving up land. Finally, the way the proposed Bill is worded is also causing problems. The responsibilities of the government are being hedged through phrases such as "the state may", whereas it should have been "the state will". The sooner the policymakers can incorporate these suggestions, the better. Port: A New Cruise Prakash Tulsiani, Managing Director, Port Pipavav The shipping industry is one of the oldest industries in the world. Globally, it has been a prime catalyst for economic growth in several countries for several centuries. In fact, it was the shipping industry that actually ushered in what is today called globalisation. Even today, the industry continues to be the backbone of economies across the world, though the romance of ships and sailing — embodied in tales such as Twenty Thousand Leagues Under the Sea or Treasure Island — no longer exists. In India too, the shipping industry's rapid growth will lead economic recovery in India and the world, once the current sluggishness in the economy gets over. Despite the fact that Budget 2009 was silent on the shipping sector, the government has encouraged the sector through building ports, ushering in privatisation and announcing substantial investments to the tune of Rs 55,000 crore in various projects. Further, the government has launched the National Maritime Development Programme with an investment of more than Rs 1 lakh crore to improve the traffic-handling capacity of all major ports. The new shipping minister, G.K. Vasan, has also pledged many new ports, especially in states such as Gujarat. The Centre is also encouraging state governments to set up non-major ports through public-private partnerships — an ideal way forward. Port Pipavav is a good example of that. Building new ports and modernising old ones are important. But focusing only on waterfront infrastructure is not enough. What will truly make ports efficient is the evacuation of cargo on land and, therefore, the infrastructure support on land. A port requires an efficient network of roads and railways in order to be successful. Ports, roads and railways have a symbiotic relationship. Without the last two, the first cannot survive. Given this scenario, India desperately needs dedicated corridors to transport goods. Today, though attracting shipping lines to Indian ports has become much easier, we still have a long way to go to transport goods to their final destination within India. Often, this becomes our weakness, as delays lead to losses and erosion of bottom lines. Future Tracks In this context, one must say the government has taken the right step by planning dedicated freight corridors in the country. It has planned the Western corridor in the first phase of the project — from Mumbai port to New Delhi via Vadodara, Ahmedabad, Palanpur (Gujarat), Jaipur and Rewari (Haryana). The government has already started acquiring land for the project. As it can improve transit times by at least 40 per cent, the project needs to be completed on a fast-track mode. There are other issues as well. The Indian road network is the second-largest in the world with about 3.3 million km of roads. But expressways, national and state highways and major district roads account for only 2 per cent of the total road network. Since the Golden Quadrilateral highway network and other landmark projects do not cater to port traffic requirements, we need separate infrastructure projects to support ports. Alleviating pressure off roads and rails is important. To this end, we should aggressively promote coastal shipping. Encouraging public-private partnerships will also give a fillip to the industry. We should have policies to incentivise coastal shipping so that much of the domestic cargo movement can move off roads and rails. This will be easier and faster to accomplish, as it does not involve complex and time-consuming land acquisition activities. Coastal shipping also has the advantage of being environment-friendly. var intro = jQuery.trim(jQuery('#commenth4').text()) var page = jQuery.trim(jQuery('#storyPage').text()) if (page.indexOf(intro) < 0) { jQuery('#commenth4').attr('style', 'display:block;') } Most importantly, we must take a holistic view of port development. We must plan and punctually execute a complete network of roads, railways and ports. If this is achieved, India's economy can cruise ahead to great progress. Power: Let There Be Light Anil Razdan, Former Power Secretary Business and industry look for adequate, reliable and quality power at affordable cost. However, its attainment requires a paradigm shift in targets, manufacturing capacity, investment, management at execution and delivery levels, and a manifold increase in trained workforce. Given the resolve the country shows today, this is attainable. An appropriate emphasis on the power sector is a way to ensure that there is no slowdown in its progress. It can only lead to higher economic growth, increased demand for cement, metals, more skilled jobs and a better standard of living. Today, India's power demand is about 107,000 MW, while the availability is 94,000 MW. That leaves a shortage of 12 per cent. The present installed capacity is about 151,000 MW. However, the demand is expected to rise up to 153,000 MW by the end of the 11th Plan (2011-12), and 218,000 MW by the end of the 12th Plan (2016-17). To meet this surge, the government has envisaged a capacity addition target of over 78,000 MW for the 11th Plan. This is four times what has been added in the past five years. For the current Plan, 80,000 MW capacity is under monitor and 16,000 MW has already been commissioned. The overall picture looks bright. Furthermore, the overwhelming reception to the initial public offerings of power companies over the past three years has proved that the sector enjoys high investor confidence. Evidently, private investment and enthusiasm is overtaking public investment in the sector. The generation, transmission and distribution of power need to be unshackled. Power generation under any kind of ownership or fuel is welcome, provided the fuel is available and viable. The mega power policy benefits should be available to captive (independent) and merchant power plants. The continuing private investments on equipment such as inverters are wasteful and uneconomic. It makes better economic sense to invest in utilities or captive power generation for large commercially utilisable generation that can be fed into the grid. Hydropower is essential to meet the peak-hour requirements. It is a state subject, though. Grid frequency can only be maintained with hydro. In fact, peaking power tariffs will encourage more investment. We must also encourage competition in domestic equipment manufacturing. BHEL has been able to supply only about 5,000 MW equipment a year. It is not adequate. We have the space for at least four major players. More competition means lower prices, better delivery and quality. Coal will continue to be our mainstay for fuel owing to domestic availability. Due to severe shortage of natural gas, which is less polluting than coal, fast-track capacity addition of nearly 14,000 MW has been put on hold. Gas deserves to be given on top priority for power generation. Unlike other commodities, power can hardly be imported. Conjunctive use of natural gas for generation and air-conditioning can yield fuel efficiencies of about 80 per cent compared to 55 per cent for generation. Liberalise Norms In sum, electricity must flow freely across the country. The states need to step up investment in transmission and distribution (T&D). The open access system for power has to be made fully operational. Here, the restrictive practices of some states are deplorable. Also, the Rs 2,72,000-crore National Electricity Fund announced in Budget 2008 for meeting the 11th Plan requirement of state sector in T&D is yet to start functioning. These desired results will not be achieved without liberalising lending and exposure norms for the capital-intensive power sector. For the commercial viability of the distribution segment, which is the real customer interface, stringent reform has to be adopted by all states. There has been reasonable improvement in the aggregate technical and commercial (AT&C) losses, which average 30 per cent today. But this has to come down to at least 15 per cent. Moreover, avoiding time and cost overruns helps reduce project costs. Demand side management, entailing energy conservation and energy efficiency, deserves the highest attention of consumers, particularly the industry. The standards and labelling programme of the Bureau of Energy Efficiency and the listing and rating of Energy Service Companies (ESCOs) are a help in this regard. Doing more work with less energy is good for the economy and the environment. Hence, energy-efficient goods need duty cuts, which are long overdue. There are no short cuts to overcome power shortage. We need political will, perseverance and stepped-up investment to achieve that. var intro = jQuery.trim(jQuery('#commenth4').text()) var page = jQuery.trim(jQuery('#storyPage').text()) if (page.indexOf(intro) < 0) { jQuery('#commenth4').attr('style', 'display:block;') }
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‘The Gas Price Is Too High' The touching concern being shown by the government for India's natural resource in gas in the dispute between the Ambani brothers is becoming murkier and murkier. Having gone on record even in Parliament that contractors have the freedom to market the gas under production-sharing contracts (PSCs), the government through a series of policy reversals has come to a stage where it wants full price and distribution control of gas. Its policy flip-flops and intervention in courts in third party disputes raise issues critical to good governance — sanctity of contracts, especially those in which the government itself is a party; non-discriminatory role of government as a regulator; and the collective responsibility of the Cabinet. Minerals in their natural state belong to the government. But when the government gets it extracted, the licensee gets paid in kind in the form of the mineral extracted for his investment and risks, on his payment of seigniorage, royalty, etc. The title to the commodity passes on to the licensee for its disposal in the market, under legally enforceable and arbitrable contracts. The government's policy somersaults began when Reliance Industries (RIL) found its fortunes shifting in court in its dispute with National Thermal Power Corporation (NTPC) and Reliance Natural Resources (RNRL). The Centre fixed the price for the gas from KG Basin only. Moving away from the practice of getting the price determined by official agencies such as Bureau of Industrial Cost & Prices, Tariff Commission or an expert body, the government outsourced it to RIL itself and sanctified it by a GoM (group of ministers) endorsement, overruling objections by the Cabinet Secretary and the PM's Economic Advisory Council. The price fixed is almost double of what RIL had quoted to NTPC, and close to the second-lowest price quoted by a Malaysian firm for the costlier LNG and ferried from distances longer than KG Basin. Global prices of gas have been low since then, almost half of the fixed rate. International analysts say the outlook for gas and LNG is not going to improve till 2012. India is perhaps the only country to have increased its energy prices during a recession, when a dose of low energy prices would have boosted our economy. The government then proceeded to make allocations enforcing this high price, which RIL would not have otherwise got, if buyers were to resort to tenders as NTPC did. The net effect of these two decisions — in the unlikely event of their being upheld by courts — would be to nullify both the NTPC tender and the memorandum of understanding (MoU) between the brothers for gas supply. Contrast this with the government's treatment of a Rajasthan PSC. The largest on-land oil find in India with a potential volume of 20 per cent of India's production, and the contractor still does not know its price or the buyer. He is denied the indulgence of his own price discovery and getting it anointed by a GoM, to be foisted on public sector refineries. Any further delay could result in distress sales with losses for all including the government. What is sauce for the KG Basin goose (which lays the golden eggs) is not sauce for the sterile gander of the Rajasthan oil. The duty of the government is to put in place a policy environment for a gas market to develop, with appropriate regulations. It is essential to establish a national reference point for price discovery, enforce reserve disclosure norms and unbundling practices for a level playing field. The government has done little in these key areas. Instead, it has created vertical monopolies in pipelines, encouraging price gouging in transportation. Ministers have always played favourites. But what is more worrisome is the abrogation of cabinet governance and collective responsibility. Just before the last general elections, the UPA government approved the recommendations of the Integrated Energy Policy report to move towards a market-based regime for oil/gas. But now, it is allowing a ministry to ride rough shod on these and take back the oil sector to pre-reform days. Are the inaction in policy matters and bursts of activism innocent? There is no free lunch, as they say. Ministers know it too well. Businessmen know it even better. But, the cost is to be borne by the hapless consumer. var intro = jQuery.trim(jQuery('#commenth4').text()) var page = jQuery.trim(jQuery('#storyPage').text()) if (page.indexOf(intro) < 0) { jQuery('#commenth4').attr('style', 'display:block;') } ‘Uniform Price Is Not A Must' The Centre should get its rightful share; and the prices could vary for different users Much has been said on the Krishna-Godavari Basin gas row, more has been written, and much more will follow. Yet, very few know the realities and the implications. On ownership, there is hardly anything to dispute about. The exploration agreement is governed by the laws of India, and as per this, all mineral deposits belong to the nation. Also, the agreement contains a specific provision that petroleum products from the licensed area belong to the government. The right to sell has been granted to the contractor, but it provides that the gas shall be used in accordance with the national policy, and national priorities. So, there is no question of treating the KG basin gas as a private property, to be divided between the family members or reserved as a first charge for their future usage or marketing. It is for the government to decide how much should be used for power generation, fertiliser production, transportation, and so on. The pricing issue too is reasonably clear. The production-sharing contract stipulates that the product should be valued at the price realised while selling to agencies nominated by the government. For third party sales, the valuation will be done as per a pricing formula decided by the government. Under the agreement, the contractor is compensated for the investments made, by allowing for adjusting 90 per cent of the value of the petroleum products each year, leaving balance 10 per cent for the government. As the ‘investment multiple' increases, the government's profit share increases. The ‘investment multiple' has been defined as the ratio of cumulative total of the value of petroleum products produced, to the cumulative investment made. If the investment amounts are higher than what was originally approved — there is an increase from $2.5 billion to about $8.5 billion in the case of KG Basin — the government's profit share remains pegged to the minimal level of 10 per cent for prolonged periods. Criticism in certain quarters that the government will receive only a few hundred crores of rupees compared to what the contractor keeps, or a counter argument that the government will receive several thousands of crores, are both irrelevant. The issue is whether the government receives its rightful share, without this being compromised by unwarranted inflation of development costs. The contract provides for scrutiny of all financial aspects by an agency nominated by the government. It is, therefore, necessary that investment amounts are scrutinised by the Comptroller and Auditor General. When it comes to uses, the first priority should be power generation. India has been facing serious shortages. Coal is in short supply and poses environmental risks. Hydro energy is not dependable. Therefore, capacity additions in the power sector need a government commitment to make gas available to all power plants, existing and stranded, as well as new ones — and at reasonable affordable prices. There is no need for the prices to be uniform for all users. For instance, it could be comparable to the price of fuel that gas replaces. For power sector, it could be based on the costs of coal, at about $2 per mmbtu. For fertiliser industry where the feed stock is naphtha, the price could be related to naphtha, at $5-7 per mmbtu. Unfortunately, different players in the field have conflicting interests. The fertiliser ministry wants a pricing that will eliminate subsidies and maximise usage of gas. Those advocating piped supply for domestic usage are seeking political mileage. But little attention is paid to the concerns of the power sector. A very high price for natural gas may fetch the government a sizeable sum, but this may not be right. And more importantly, it will pave the way for very high prices for imports in the future. For instance, the price of gas fixed now will influence the negotiated rate in the Indo-Iranian pipeline deal. In deciding who will receive the KG Basin gas at affordable rates, the government should avoid situations of power being purchased at high prices on ostensibly laudable grounds (such as free power to farmers) only to bring huge profits to some players. State-run power generating companies fall in this category. And not merchant plants or those selling power on open access basis. var intro = jQuery.trim(jQuery('#commenth4').text()) var page = jQuery.trim(jQuery('#storyPage').text()) if (page.indexOf(intro) < 0) { jQuery('#commenth4').attr('style', 'display:block;') }
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