Monthly Archives: June 2015

Smart cities: Designed for growth

June 25 will be remembered as a red-letter day in the history of urban India as three mission programmes with a huge spend were launched, all backed by India’s dynamic Prime Minister Narendra Modi: Smart Cities, AMRUT and ‘Housing for All’. The depth of these programmes can be gauged from the detailing in the guidelines and the extent of the detailed planning of the conduct of their launch. After the PM set the tone by defining a smart city as one ‘where the administration thinks two steps ahead of the needs of its citizens’, he urged the assembled urban development state ministers, mayors and municipal commissioners from across India to aspire to leave behind a legacy by which their contribution to building India’s model urban programmes would be recognised. Union Minister for Urban Development Venkaiah Naidu conducted the workshop for two full days where good work done by municipalities was presented and lauded and guidelines to the three missions were explained.
In four months, states will receive proposals from their cities that want to qualify as projects. The states will then choose from among the selected cities from the list, and propose them as their entry to the Smart Cities Mission. It is likely that by March 2016, 20 cities will qualify for funding under the mission. These cities will receive Rs 200 crore in the first year and Rs 100 crore during the next four years. The cities will have to observe certain criteria, which include proposals for retrofitting with 500 acre or redevelopment with 50 acre or greenfield with 250 acre plus a pan-city smart solution initiative that has received the support of citizen groups. Further, they need to ensure that 10 per cent of power is sourced from renewables in case of greenfield development or redevelopment; 80 per cent of the buildings have to be energy-efficient; and 15 per cent of total housing provided needs to fall under affordable housing. The Urban Local Bodies (ULBs) have to provide financial statements for the past two years and demonstrate improvements as per the Swachh Bharat Mission and revenue generations from citizens through provision of services. All this is bound to gear ULBs up for accountability and good governance. As all procurements will take place through e-procurement measures, corruption will be minimised.
The Smart Cities Mission along with AMRUT, Housing for All, Digital India, Swachh Bharat and HRIDAY will see a total spend of Rs 4 lakh crore over the next five years. All these missions are integrated and interrelated. The essential change in these schemes over the past has been that the Centre has passed down the responsibilities of city improvement to the state. Introducing a challenge has added an element of competition. Once the ‘smarter’ states win funding for their cities, private sector money a.k.a. builders will flow in, leaving some in the lurch. Once money starts taking sides, city leaders will compete. This opens up opportunities for PPP as nearly 50 per cent of the money for the cities will have to be generated by attracting the interest of private developers. The Housing for All’ scheme will accelerate ‘in-situ’ slum redevelopment projects as it offers an incentive of Rs 1 lakh per 30 sq m flat built to developers. Housing loans of up to Rs 6 lakh for a 15-year period at an interest rate of only 6.5 per cent is being issued to economically weaker segments of society to acquire a home.
The affordable housing segment is likely to continue to be the only beacon of light for the debt-ridden realty sector. On a similar note, the roads sector has been green lit and the PM is likely to trigger a wave in July. Government expenditure is slated to rise with a major bump in September to come from the additional amount of Rs 70,000 crore set aside for infrastructure. Last month, this column had wished away the dark clouds of despair (‘Bure din gaye’). By September, we are likely to see the first crack of dawn of ‘Acche din’!

Bure din gaye

On the completion of his first year in office, Prime Minister Narendra Modi reached out to all citizens and presented his case. The media extensively assessed the Government´s performance too. Generally, the verdict was that ´not enough has been done´ – yet everyone recognised that the fruits for such labour take a while to ripen. One of my favourites: ´Would you have preferred the UPA government to continue for one more year instead of the Modi Government?´

This one is a no-brainer. Yet, we seem to have forgotten how bad the situation had turned with an inactive government saddling its finances with burdens of ill-planned social schemes with an eye on the elections while keeping the economy at a standstill. As CW reported in its cover stories in March with Union Minister Nitin Gadkari, April with Maharashtra Chief Minister Devendra Fadnavis, and ´Report Card´ last month, the Government´s momentum is strong but the lag in process is holding back impact on the ground. Corporate results for the year ended March 2015 conclusively prove that the corporate sector is reeling under an almost negative demand and virtually nil margins with a debt overhang. The consumer sector, which was buoyant, is now not likely to throw up good numbers too, going ahead. The fall in inflation will see improvement in demand, albeit gradually, over the next six months.

The roads sector would be the first to get into higher gear with loads of EPC projects being awarded in the second quarter this fiscal. Fortunately, this sector has been the quickest to fall in line and the most visible statement on infrastructure. Its track record too shows that the pace of construction has been over 12 km per day for the past seven years as given below:

I have seen many speakers at conferences compare regimes and quote incorrect figures on road construction per day, trying to ridicule the previous regime´s quest to build 20 km per day. As we can see in the table, in 2012-13 we were doing close to 16 km per day. If the NDA Government awards 10,000 km this year as intended and follows this up with a similar figure for 2016-17, we could move very close to 30 km per day as stated by Union Minister Nitin Gadkari.

Railways, too, is likely to see activity with 94,000 km of doubling and third line on choked routes receiving sanctions to decongest the rail network. To overcome the cycle of chronic underinvestment, the Railways is approaching the markets to finance revenue generating projects. Further, among urban infrastructure, metro projects are on course while projects under smart cities will take some more time to benefit from the allocation and provision of Rs 200,000 crore.

Energy is upbeat, which is good news for a country in growth mode. There is a sharp increase of 8.4 per cent in electricity generation, the highest in the past 20 years. The country has added 22,566 mw of generation capacity in the past year with some contribution from enhanced coal production, which is up by 12 per cent. The Supreme Court has breathed new life into the renewable sector with a landmark judgement enforcing renewable energy purchase obligations. This will help boost renewable power generation manifold.

Given all the developments, it is likely that an interest rate cut could come sooner than later, unless there are global pressures. The year 2015-16 will be the prep year for the boom year that is to come.

Radical solution to land acquisition bill impasse

Introduction

India has a total land area of 32,87,590 sq km, which is 2.4 per cent of the world’s surface area, making it the seventh largest country in the world. Forty-six per cent of the land is under agriculture and 50 per cent is inhospitable; 2 per cent of the land is urban and 1 per cent under industry. The Government has the largest land bank under its supervision and ownership. At present, Coal India has a land bank of around 7 lakh acre whereas the Railways has around 47,336 hectare, making them the owners of the largest land bank available at this point of time, followed by major ports at 2.64 lakh acre and PSUs at 2.5 lakh acre.

Putting land to work

Land needs to be made productive to add to national wealth. Historically, too, land has been offered for development of industry. The Bombay Spinning and Weaving Company was the first cotton mill to be set up in Tardeo, Mumbai, in 1856. A boom in the textile industry followed, with 10 cotton mills set up in Mumbai by 1865, and then a total of 136 mills being set up by 1900. The textile industry was offered added government incentives in the form of long-term leases (some of 999 years), as mills stimulated economic growth and employment. These mills were owned by former traders like the Tatas, Petits, Wadias, Currimbhoys, Thakerseys, Sassoons, Khataus, Goculdas and Greaves. Most of the mill workers came from areas around Mumbai; the Kolis were particularly represented. The mill owners housed their workers in chawls built in the areas of Tardeo, Byculla, Mazgaon, Reay Road, Lalbaug, Parel, Naigaum, Sewri, Worli and Prabhadevi. These areas gradually came to be known collectively as Girangaon (literally ‘the village of mills’).

Land was put to use once it was handed over on lease. The investors sought to make gains though the productive use of land. It did not matter that the land was not in their ownership as long as they had the right to develop revenues on it for a fixed period of time for rent. Although the rent was a paltry sum, it was reflective of the demands of the times. Even now countries like Ethiopia and Sudan offer land on very low rent to Indian entrepreneurs to help develop their economies. The cost of missed opportunity owing to loss of productivity of land can be mindboggling, especially in a country like India that is starved of infrastructure on all fronts.

Delays and derailment

To illustrate the sheer cost of delay in putting a project to work, let alone the cost of leaving land idle, here are some details: In December 2014, 127 out of 251 projects were delayed with respect to original schedule. The delay is in the range of one to 96 months with respect of projects relating to the railway, power, steel, road and petroleum sectors. Out of the 127 delayed projects, 32 projects have an overall delay in the range of one to 12 months, 25 projects in the range of 13 to 24 months, 37 projects n the range of 25 to 60 months, and 33 projects of 61 months and above.

The total original estimated cost of these 251 projects was Rs 788,629.01 crore and anticipated completion cost is likely to be Rs 970,972.78 crore, which reflects an overall cost overrun of Rs 1,82,343.77 crore (23.10 per cent of original cost). The expenditure incurred on these projects till December 2014 is Rs 411,545.86 crore, which is 42.40 per cent of the anticipated cost of the projects. Out of the 251 projects, three projects are ahead of schedule as per the original timeline, while 52 projects are on schedule and 127 projects are delayed. Brief reasons for time overruns as reported by various project implementing agencies are delay in land acquisition, forest clearance, delay in supply of equipment, fund constraints, geological surprises, equipment erection, geo-mining condition, shortage of labour, inadequate mobilisation by the contractor, contractual issue, ROU/ROW problems and law-and-order situation.

The railway sector has witnessed maximum project delays owing to land acquisition. Out of the 83 projects that have been reported, 21 projects are delayed. In the road sector, 23 out of 37 projects are delayed. Last year, delays in land acquisition and statutory approvals cost road projects heavily. Against the target of 6,300 km of road construction works under various schemes of the Ministry of Road Transport and Highways during the current year, only 3,038 km was constructed till January 31, 2015.

Non-issue for private sector

Private players like Nikhil Gandhi, GMR, GVK, Hiranandani, Lodha, Raheja etc have all successfully amassed land banks for their projects without raising a hue and cry. Even industrialists like Sajjan Jindal, Anil Agarwal, Anand Mahindra have all successfully bought large land parcels for their projects with no cause for delay. So land acquisition is only hurting big-ticket public projects where vested interests are either interested in derailing the success of the government or those who want to leverage this opportunity for their own selfish agenda.

Act now

The Land Acquisition Act has been constantly running into rough political weather every now and then. And if the Government caves into the demands of the opposition, many infrastructure projects (including smart cities, rural electrification programmes and industrial corridors, to list a few) will be stuck in limbo. However, the solution lies in turning the idea on its head. Land for such projects need not be bought but taken on a 99-year lease. Apart from the rent that would accrue to the landowner, some token compensation should be made such that the landowner can buy a piece of land elsewhere for agriculture activity and would also be given a share in the super-profits on the project. This solution can ensure that the capex for such projects is contained and that the landowner continues to get rent for subsistence, does not end up destroying his wealth and capital and can continue to be an agriculturist with another piece of land. ( Recently CIDCO, a state-run undertaking in Maharashtra, acquired 671 hectares of land owned by 1,200 villagers in ten villages of Navi Mumbai for the airport project. In lieu of the surrendered land, the Maharashtra government, in a unique compensation model, offered the owners developed land measuring 22.5 per cent of the acquired land, including 15.75 per cent of buildable plots, and 6.75 per cent development amenities, in Pushpak Nagar township which CIDCO is developing near the proposed airport ).

Renting land for infra projects is a viable and practical solution. It will help save capital by not requiring a large amount of capital to be locked up and saving time in purchase and the entire process of land acquisition, thereby fast-tracking projects ( As per recent estimates the capex for land alone for road projects is Rs 1,85,000 crore). Some industries already follow the model of leasing land instead of acquiring it. Oil and gas extraction usually follows the land-lease model. And renewable energy projects such as wind power, solar farms and bio-fuel projects often lease the land from owners instead of trying to acquire it, which could make the projects prohibitively expensive.

Leasing land can ease the pressure on demands for capital expenditure that does not add any wealth to the nation. True wealth to the nation is generated only when the land is put to productive use. Land on rent will result in accelerating the cycle of investment in projects by at least three to five years for each project and consequently accelerate the return on investment. This will also defuse the social upheaval caused by these injections of wealth in the lower economic strata of society while enhancing lives owing to a consistent flow of rental income. This debate on land acquisition is as unproductive as the land sitting idle with no investments to enable its productivity.