SAROD-Ports - a dispute resolution mechanism
Aims to resolve the disputes in the ports sector in a cost-effective manner. September 2020
Right now, India’s transport departments and ministries are structured in a way that they are operating in silos. But going forward, we need to come and work together, and make the most efficient and effective investment for the economy.
The industry and associated sectors should undergo a change, where we not only look at roads but also shipping, aviation, railways, metro and all other transport sectors—so that we are addressing transport needs together rather than individually. That is the kind of approach that is required.
We have choices,in terms of mode, energy sources, vehicles, etc.Even with that, the need for last-mile roads and highways is not going to go away. It will continue to remain a major mainstay of transporting solutions.
If you had an occasion to go through the economic survey of 2019, it shows a major correlation between the growth of different transport sectors and GDP growth. And I was quite surprised to see that the GDP growth rate is almost equally correlated with the transport sector growth—rail, shipping, highways, etc. Economic growth seems to be slowing down and we depended a lot on private conjunction-led growth. That now seems to be somewhat stuttering, so the need of public sector-led growth is very high at this stage.
Public investment-led economic growth needs to be there in times when economies need to be revived and economies need to be accelerated as had happened post World War-II across the western world. And this seems to be the prescription almost everywhere as we survey economies worldwide. Therefore,Prime Minister Narendra Modi has announced Rs100 trillion investment in the next five years; our finance ministry is preparing a set of projects for making that happen. Once these kinds of investments come into the economy, this sector alone would contribute 1.8-2 per centto GDP growth as well as improve the economy’s productivity for further growth development—and inclusive growth will happen. The logistic cost to the GDP at this moment is about 14 per cent for India. For developed countries, it is almost 8-9 per cent. There is a possibility of bringing down the logistics cost by investment in infrastructure.As you make that happen, your costs go down, your products become more competitive in the export market and your economy will improve. Therefore, infrastructure investment for improving connectivity is extremely essential.The Government is continuously working at it and I’m sure the highways sector will contribute significantly.
Currently, from MoRTH, NHAI, we are planning Rs 14 trillion worth of investment in the next five years. The primary vehicle for this level of investment is the Bharatmala programme, which looks at the economic corridors—44 corridors have been identified—internal corridor connectivity, feeder roads, port of connectivity, international connectivity. The Sustainable Development Goals of the United Nations mention that quality, reliable, sustainable and resilient infrastructure needs to be created, which includes border and transnational infrastructure, and that is the aim of the Bharatmala programme. One of the issues we are looking at in the Bharatmala programme, particularly the NHAI, is on how to ensure that the projects we take up are sustainable. That means looking at the financial rates of return. The financial rate of return is not always the yardstick and people in the house are aware that infrastructure worldwide includes investments the Government and public authorities need to continue, either by way of budgetary grants or cess. You cannot finance highway investments as investments in businesses. Therefore, the structure, modes of financing, sources of financing, all of these are quite different. Yet the reality is that we are looking at financial rates of return because budgetary sources and the need for investment have a mismatch—thus, we need to look at the financial returns before making the big investment.
In this correlation, a relevant issue is how to optimise the costs of the project. This is important because if you areable to optimise your rates of return,projects become more viable and, therefore, you can take a larger bouquet of projects. So, we are looking at the land requirement for the projects, we are looking at the features of the projects and that they should be functional and not extravagant without compromising the safety and quality of the project. We are also looking at improving construction technology. But we are also aware that construction technology issues do not happen in the short term; they happen over the medium and long term.
Therefore, cost optimisation and reduction in the cost of borrowing and then financing are the issues that need to be addressed. One of the ideas we are lookingat is how to take the cost of the land out of the picture. Currently, this is a difficult task. But over a long period of time, people who are affected due to the land acquisition of the project can be made stakeholders. That needs longer project development time and, therefore, it has an implication for the availability of infrastructure projects that can be made available for the industry to invest in, and, therefore, implications for growth. So, in the short term, one idea we are exploring is whether we could make compensations to people in a manner in which they are made stakeholders in highway construction. We could split the compensation into two streams: one which is given to him at the time the awards are made and the other could be if we are able to persuade them to make investments into the NHAI bonds. With this, the need for NHAI to raise resources from the market also goes down to some extent. We have shared this idea with the ministry and are awaiting their acceptance.
The other idea is using the value captured and framework of financing. The NHAI board for a particular class of projects, like roads and bypasses, now prescribes that in such cases support by way of cost of the land required for the projects will come from the state governments upfront; and 50 per cent should come from the value captured. The prime minister had constituted a group of secretaries to look into ideas for five years to improve the economy and governance across sectors. One of the ideas that was presented was the need to introduce town planning kind of schemes, which is again apart of the framework.
The third idea we are looking at is how to squeeze more from the highways. In India, particularly, the configuration of highways is not a bigger issue. The issue is the kind of time we need to spend at toll plazas; part of this is because about 70 per centof people pay in cash at toll plazas. So, the transaction time is taking its toll on average speeds on highways and user experience and it has implications for the logistics cost as well. The Government has now decided that from December 1 onwards, 100 per cent tolling would be electronic. The implications in terms of movement across highways is that it will become smoother and the throughput of the highways would go up; therefore, we will be squeezing more out of the current highways. We are also working with the state governments so that their toll plazas are also given to the NHAI toll plaza so we use the same kind of technologies. Unfortunately, it has not happened in Delhi but about eight state governments that have a large number of toll plazas have come on board and are cooperating with MoRTH and the NHAI for rolling out the One Mission OneTime programme. This would also help the economy and the need for additional investments into the Centre.
Speaking about construction, an issue is what happens of the project pipeline three years down the line. I can assure you that the project pipeline will not go down. The National Investment Grid and National Infrastructure Grid would have about Rs 40 trillion worth of highway projects. So, the investments would not go down, the number of projects will not go down.The infrastructure industry has performed and has shown an output as against other sectors; the topline of the sector hasin fact gone up rather than gone down as has happened in many other sectors.
I now come to the kind of support we are providing to the highway sector in the reapplication of capital and investments. One is that in all the highways projects, either BOT or HAM, the promoter is permitted to completely diverse two years after the commercial operation date, and many investors, many promoters have taken advantage of that.
Even during construction, about 49 per cent equity could be divulged and I am told several promoters have taken advantage of this facility by the NHAIin setting up their units. This is one facility that we are offering to investors. The way the Bharatmalaprogramme was designed, it had to have about 30 per cent of the projects coming through the EPC mode while 60 per cent of the projects were to be executed through HAM and 10 per centthrough the BOT toll mode. But the way the Bharamalaprogramme has proceeded, more than 50 per centis through EPC mode. And we are promoting more and more HAM because it brings down the resource requirements of the NHAI and promotes the private sector. Therefore, HAM is a preferred mode and it enables the highway promoter to reap long-term benefits. There were some questions about the appetite and demand for a HAM kind of a mode in the market. I must mention that during the past and current year, we had brought out bids of many projects and almost all of them were HAM. In some projects, because the state authorities were not quick enough to provide us land, we have had to allot projects under the deemed annulment mode. But otherwise, almost all the projects under the HAM mode have succeeded. Therefore, the capital invested by the promoters has come back to them through diversement and through some situation.
There were also issues of BOT not being attractive. So, we are looking at the BOT concession document and making sure the features desired by the marketare present while bringing out bids. Therefore,the risk fora private promoter BOT bidder is quite negligible. We are also exploring one of the suggestions made to the ministry for the modification of BOT toll model concession document, to see if these features could be applied every fifth year so that there is more certainty for private promotersin BOT toll kind of projects. We are also looking at different policies to improve liquidity into the market in the institution of EPC projects; for example, even if the qualifying stage of payment has not come, payments are released. We have made many changes in the way EPC documents are being scrutinised.
As far as dispute resolutions go, in addition to arbitration, we have constituted three committees for consolidating the disputes and many disputes have been resolved through these mechanisms.
ICF would go a long way in getting ideas which help the sector grow, which help infrastructure into the highways be more productive, more efficient and increase the growth of the economy. NHAI has always been receptive to new ideas and certainly these ideas are well articulated and well thought of and we will welcome the industry’s needs and support them. Hopefully, with these initiatives, next year onwards we should see much better and higher economic growth and the infrastructure sector playing a larger role in accelerating the economy.