Ramping Up Infrastructure

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Ramping Up Infrastructure
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Ramping Up Infrastructure

01 Feb 2020 Long Read

The recent National Infrastructure Pipeline report details reform initiatives to be considered by the Centre and state governments. CW takes a closer look.

Accordingly to media reports, Union Finance Minister Nirmala Sitharaman recently made a brief statement on the contents of the National Infrastructure Pipeline (NIP). She has indicated that the government will examine the recommendations of the appointed Task Force and take early action.

A Task Force was constituted to draw up the NIP for each of the years from FY2019-20 to FY2024-25, with the approval of the Finance Minister. The Task Force is chaired by Secretary, DEA, with the CEO, NITI Aayog; Secretary, Expenditure; Secretary of the Administrative Ministries; and Additional Secretary, Investments, DEA, as members; and Joint Secretary (IPF), DEA, as member secretary.

In its detailed report, the Task Force has given recommendations on reform initiatives to be initiated by the Centre and state governments. (For more details on the report, turn to page 36). The report states that to ramp up infrastructure investments in various sectors throughout the country, it is critical to introduce a set of general reforms and update existing sectoral policies and reforms. This will help propel investments in the sector. Some key policies and reform initiatives to be undertaken are highlighted below.

Improving project preparation

There is an urgent need for a robust project preparation framework consisting of:
  • A transparent policy and legislative framework.
  • The presence of an overarching, capable and empowered public institution for infra planning.
  • The presence of guidelines, national standards, model-bidding documents and standard procedures, and design considerations, including technology choices and disaster resilience.
  • Well-defined workflows, multistage reviews, audits and approvals for quality assurance of project preparation documents.
  • The establishment of a project organisation or SPV with such structure and capabilities.
  • Enhancing execution capacity of private-sector participants

    It is critical to have a deep pool of experienced developers with required competence and execution capacity. To alleviate the lack of capacity for scheduled delivery of projects and development of a pool of private developers, it is necessary to have an effective enabling environment and capacity development of both, private and public sectors. Collaborations and JVs with strong global infrastructure developers must be facilitated to build domestic capacity.

    Robust enabling environment

    Any issues related to contract deviation should be smoothly adjudicated through a dedicated dispute resolution mechanism in a timely manner by focusing on the elements below:
  • Optimal risk sharing: A new mechanism is required to ensure all key clearances and approvals are in place upfront before awarding the project. Loading contracts with difficult conditions, financial and non-financial, has caused unnecessary burden, leading to financial stress and potential insolvency among developers. This must stop. Hence, international contract standards (such as FIDIC standards) should be adopted by all infrastructure departments, including Railways, with clear procedures for change of scope, standardisation of contract and safe exits for parties. Also, project bidding and awards must be done only after fulfilling conditions that are precedent, such as 90 per cent of contiguous land acquisition and all project clearances.
  • Sanctity and enforcement of contracts: To boost private-sector interest, the sanctity of contracts must be upheld by the Centre, state and local governments. Repudiation of contracts must be restricted only to situations clearly defined in the contract. Provisions of contracts therein should be legally enforceable, which impels the parties involved to legally abide by them. In case of inability, there should be adequate safeguards built in the form of clearly quantified termination payments under various possible scenarios.
  • Dispute resolution

    This mechanism can be a critical step in addressing dwindling private- sector participation in infrastructure to efficiently resolve disputes related to PPP projects. Adequate investments must be made in the institutions created under The Commercial Courts Act 2015, The Specific Relief (Amendment) Act 2018 and the New Delhi Arbitration Centre Act 2019 to enable delivery of sound results in enabling speedy resolution in the next few years. The Task Force also recommends that ministry-level committees resolve complex contractual issues as mediation mechanisms to settle disputes out of court.

    Improving capacity development of project execution agencies

    Steps as below should be undertaken:
  • Establish a robust project governance structure.
  • Use agile planning.
  • Improve procurement process and strengthening contract management.
  • Strengthen people management processes to improve the project management capabilities of public institutions.
  • Provide flexibility to hire top talent at the senior level, including project leadership.
  • Strengthening quality of infra

    Initiatives such as uniform regulation and output-based performance standards need to be adopted, developing consistent processes for updating and setting standards, improving compliance mechanism, and aligning with development strategy and social and environmental sustainability. A number of global benchmarks are available, including the G20 Principles for Quality Infrastructure Investment. The Task Force recommends that a National Framework for Infrastructure Quality is laid down in each sector within the next three months, based on global and national standards.

    Promoting competition

    We need to establish an anti-trust resolution mechanism to expedite the resolution of anti-trust cases, improve collaboration between the Competition Commission of India (CCI) and sector regulators to ensure coordination between them to address competition related concerns, and operationalise the National Competition Policy 2011 to establish uniform competition principles across different sectors. Ministries must build capacity and coordination mechanisms with market players and consumers to periodically assess the state of competition and put in place enabling conditions for the growth of healthy competition.

    Financial sector reforms

    To address key issues and attract foreign and private capital into infrastructure, it is critical to undertake the following:

  • Revitalise the bond and credit markets: A credit enhancement fund (CEF) to be established for infrastructure sector projects. A well-capitalised CE Institution should be set up early.Building up capacity of banking institutions to provide long-term infrastructure finance is vital for growth. The Task Force also recommends suitable governance reforms in IIFCL.
  • Strengthening the municipal bond market in India: Key steps the local government must undertake to raise funds through issuing municipal bonds include improving financial discipline and regular disclosures; augmenting the revenue base and buoyancy of revenues of local governments; addressing the gap in creditworthiness of local governments through innovative credit enhancement structures; and encouraging pooled bond issuances.
  • Revitalising asset monetisation: The Task Force recommends that the pipeline for the next two years be finalised within three months. Moreover, it recommends further facilitation and regulatory tweaks to enable InvITs to emerge as a crucial source of financing of public and private infrastructure.
  • Enabling user charges to finance infrastructure: The Task Force recommends setting up independent regulators or legislating regulatory mechanisms (such as the Fare Fixation Committee under Section 34 of the Metro Railways Act 2002) in sectors where such market pricing mechanism is lacking.
  • Long-term financing landscape: The Task Force recommends a regulatory revamp to enable significant participation of FPIs. Inflow of FDI into IDFs, DFIs and securitisation markets may be undertaken in consultation with the RBI and SEBI.
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