Infrastructure Development Finance Company

The global economy is in a deep and widespread recession, the likes of
 which have not been seen since the 1930s.  Starting from a financial
 crisis in the western world, which spread to the real sector, there has
 been a rapid downward economic spiral which has enveloped most
 countries. World trade has plummeted, industrial production has plunged
 in many countries, and unemployment has risen.  The global crisis has
 not left India unscathed.  Although our financial institutions had
 limited exposure to the toxic assets and to the global financial
 institutions directly, we have felt the impact through the channels of
 trade and finance. Our export growth is estimated at a mere 3.4% (in
 dollar terms) in 2008-09 while growth in industrial production is down
 to 2.3%.  Moreover, the reversal of capital inflows caused significant
 disruption in financial markets. As foreign finance dried up, Corporate
 India turned to domestic sources of finance which brought the domestic
 credit markets under pressure.
 
 And infrastructure development, central to India’s growth prospects,
 has also taken a toll.  Reduced demand for transportation services is
 one such impact, which affected the viability of new projects. But the
 primary impact has been through the financial channel. In particular,
 some project developers faced problems in bringing the requisite
 equity. Capital-raising through IPOs was badly affected by the
 depressed stock market. Private equity fund raising was affected to a
 lesser extent but fewer deals took place because the reduced valuations
 assigned by them were not agreeable to many developers.
 
 Against this background, and in these uncertain and difficult times, it
 is no small feat that IDFC continues to show focused, steady,
 relatively predictable growth performance.  It should also be noted
 that underlying the small growth in profit after tax was a large
 precautionary provisioning. IDFC is well capitalized, so we enter the
 coming year from a position of strength.
 
 Though the year was dominated by the gloom of the global financial
 crisis and slowdown of our economic growth, the end of the year brought
 hope with the launch of the much awaited and once considered
 impossible, Tata Nano. It is the world’s cheapest car and is expected
 to provide safe, affordable, four-wheel transportation to families who,
 till now, have not been able to own a car. The common man can now look
 forward to a better mode of travel. But while the world lauds India,
 India needs to celebrate with caution.  Not to belittle this
 achievement in any way, we need to ask ourselves – Can our roads take
 the immense pressure that the Nano would bring?  Do our cities have
 adequate parking facilities to absorb the Nanos that come on our roads?
 In all certainty the answer would be No. In short, we are trying to
 give shape to our dreams on an inadequate and creaking infrastructure.
 
 Our industries have expanded faster than our capacity to power them,
 our air traffic has outgrown the capacity of our airports even in the
 smaller cities, our trade has grown faster than the capacity of our
 ports and our cities have grown without the capacity to provide
 affordable housing, efficient and comfortable public transportation and
 clean and safe water and sanitation. And this remains an undisputed
 reality despite the slowdown of our economy in the aftermath of the
 global financial meltdown.  Our infrastructure is crumbling under the
 weight of the past economic progress and cannot support even the
 moderate growth rates that we are now projecting – let alone the high
 growth regime that we aspire towards.
 
 Let me cite some statistics to illustrate the dismal progress in
 building infrastructure in 2008-09. In the power sector, compared to
 9263 MW generation capacity added in 2007-08, only 3454 MW was added in
 2008-09, which was merely 31% of the targeted capacity addition for the
 financial year. In the ports sector, capacity addition at major ports
 in 2008-09 is estimated at only 12 million tonnes as against 38.72
 million tonnes in 2007-08. In the roads sector, 1574 km of national
 highways was upgraded during the year till December 2008.  The
 performance for the entire year, once known, may be comparable to that
 of 2007-08 when 1683 km of national highways was upgraded. But this is
 sorely inadequate considering that only 20% of the total road length
 under the National Highways Development Programme (NHDP) had been
 completed as of February 2009.
 
 Delays are rampant and are a reason for the low capacity addition.
 Almost two-thirds of power projects under construction are delayed!
 There are also delays in earlier stages of project development. The bid
 process for the Tilaiya Ultra Mega Power Project (UMPP), for instance,
 has been delayed, largely due to the global economic conditions. But
 the poor progress in executing projects may only partly be attributable
 to the global crisis. There are other reasons too. To highlight a few,
 there are delays in the allotment of coal linkage to power projects by
 the Standing Linkage Committee. Even in airports where some progress
 has been made, such as in the upgradation and expansion of Mumbai and
 Delhi airports, differences between the public and private partners
 have diverted attention and energy during implementation.
 
 Of course, actual capacity expansion is the fruition of the previous
 few years’ investments and reflects the number of projects started say
 3 or 4 years earlier. But the performance was no better in terms of
 projects awarded during the year. For instance, the National Highways
 Authority of India (NHAI) was able to award only 7 out of 60 projects
 for which it invited bids.  Besides funding constraints and expected
 low returns due to traffic inadequacy which could be ascribed to the
 global crisis, other reasons for the poor response to the bids included
 problems with the Model Concession Agreement (MCA).  Similarly, few
 significant projects were awarded in the case of major ports, which
 included three terminals at the Ennore Port and one terminal at the
 Mumbai Port. The expansion and modernization of the airports at Kolkata
 and Chennai, to be undertaken by the Airports Authority of India, needs
 to be speeded up as also does the development of minor airports at the
 non-metro locations, where city-side development is envisaged under a
 Public Private Partnership (PPP) framework.
 
 - FEW SUGGESTIONS
 
 would like to take this opportunity to make a few suggestions for
 boosting infrastructure development in the country.
 
 - First and foremost, strong execution is the critical missing link in
 our infrastructure sector. Many of our agencies at the forefront of
 infrastructure development lack autonomy, which paralyzes decision
 making and project implementation. The NHAI is a case in point. It has
 had four chairmen in the past five years.  Such frequent changes at the
 helm of the organization impaired its ability to pursue critical issues
 when needed, and impeded the development of national highways.
 
 We need to take bold steps to empower our agencies, and take measures
 to improve their managerial and decision making efficiency, so as to
 ensure that they respond to changes taking place in their environment
 in an effective and timely fashion. At the same time, we need to
 increase their accountability by establishing robust independent
 monitoring mechanisms.  While projects under the Central Government
 undergo such monitoring and information is available on time and cost
 overruns, similar mechanisms need to be put in place at the state
 level. Further, at all levels, project monitoring should be done not
 just to know the status of an individual project but also to make the
 project proponents and line agencies more accountable for delays.
 
 - Second, we need to place greater emphasis on integrated policy
 planning for related infrastructure sectors. Our planning is often
 ineffective due to inadequate attention to upstream and downstream
 sectoral linkages.  In 2008-09, there was a severe shortage of power on
 account of shortage of fuel for power generation viz. coal and gas. The
 Bill on the coal sector which was placed in the Parliament earlier than
 the Electricity Bill in 2000-01, if passed by now, could have enabled
 integrated energy development ensuring secure and reliable availability
 of energy resources.
 
 Integrated planning also entails better inter-agency coordination. All
 too often inter- agency differences result in inordinate delays in
 execution of policies or projects. The year also saw this issue emerge
 as a key stumbling block to the efforts to sustain infrastructure
 development and maintain investor confidence.  The modernization of
 many non-metro airports was held up due to differences of opinion
 between various agencies on the model to be pursued. In the telecom
 sector, the auction of third generation (3G) spectrum had to be
 postponed thrice during the year for various reasons including the fact
 that concerned Ministries could not agree on the reserve price for the
 spectrum.
 
 - Third, Government at all times should demonstrate commitment to its
 decisions and not send out confusing signals to potential investors.
 This also calls for the government to have better foresight of all
 issues while formulating a policy framework for the sector.  Five years
 after the award of the gas block under the New Exploration Licensing
 Policy (NELP) and signing the production sharing contract, the
 government intervened in both the allocation of gas as well as the
 pricing of gas. And it has done this while there are active disputes in
 the courts.  Although it is understandable that the present impasse and
 the implications for the fertilizer and power sector arising from gas
 shortage necessitated government intervention in the allocation of gas
 to these sectors on priority, the fact remains that the government got
 involved when it was not envisaged to do so. Further, the government
 has sent out confusing signals by giving up its claim on possibilities
 of higher revenue when it has changed the floor price to the actual
 price to be charged. The Government, by not keeping the price
 determination of gas within the purview of the Regulator, has further
 complicated the situation.
 
 Similar shortcomings are also found in the context of allocation of the
 captive coal blocks. The conditions for identification and allocation
 of captive coal blocks to private- end users are unduly restrictive and
 also leave scope for unfair practices. Coal blocks allotted to private
 power project developers are often far away from the existing coal
 blocks of Coal India Limited and its subsidiaries, and do not have
 basic infrastructure like road and rail links.  The clearances required
 from a multitude of agencies at the central and state government level
 for private sector allottees, not only delays the development of the
 projects but also opens the door for corruption and malpractices.
 
 The telecom sector, which has otherwise grown rapidly, has also been
 affected by some arbitrary government decisions. For instance, the
 manner in which 2G spectrum was allotted was not in line with best
 practices for allocation of a scarce resource.
 
 At this point, I would like to underscore the role of the states in
 infrastructure development.  While the overall policy environment has
 been created by the Centre, there is a large and crucial space occupied
 by the states in the development of the institutional framework for
 infrastructure. States have a significant role to play in providing a
 favourable investment climate through simplified procedures and
 reforming the institutional framework.  States that quickly responded
 in developing a favourable investment climate, have been able to
 attract considerable private investment. For instance, Gujarat has seen
 all-round progress in infrastructure development, thereby providing an
 attractive base for industrial development.  The state has instituted
 greater transparency and accountability in its governance system and
 established a state level internet-based wide area network connecting
 over 2,800 government offices, facilitating easier access to
 information and speeding up government processes.  According to the
 Department of Industrial Policy and Promotion of the Government of
 India (GoI), the state ranks first in the country in terms of total
 value of Industrial Entrepreneurial Memoranda filed in the period
 1991-2008.  Further, a Reserve Bank of India Report of August 2008
 indicated that Gujarat was the top investment destination in India
 during 2007- 08, with 22 per cent of India’s total investment being
 registered in the state. It is important that all states deliver on
 infrastructure to ensure inclusive growth of the country as a whole.
 
 - Finally, I would like to prod us to start exploring new avenues. To
 my mind, unless we think farsightedly and in a strategic way, we will
 be left behind and constantly struggling to catch up. I could touch
 upon a few emerging areas here. The enormous potential that renewable
 energy, like solar power, has to offer is an opportunity that we cannot
 afford to ignore. The development of solar power gained prominence
 during 2008-09 with the launch of the National Action Plan on Climate
 Change by GoI which proposes to generate 10,000 MW of solar energy by
 2020 by setting up a national mission on solar energy. GoI is in the
 process of finalizing details of this mission.
 
 Corporate India is also waking up to the potential of this energy.
 Solar energy is now being used to run ATMs, bank branches, and mobile
 phone towers. With acute power shortage and escalating cost of captive
 power generation threatening the development and operations of the
 increasingly technology-driven banking sector, several banks are not
 just running their ATMs on solar power, but are also running a number
 of branches on solar energy (along with electricity supply). We need to
 encourage such decentralized access to clean, reliable and sustainable
 forms of energy by providing suitable incentives.
 
 - Another area where new opportunities are now opening up is nuclear.
 With the 45-nation Nuclear Suppliers Group (NSG) lifting the three
 decade old nuclear trade embargo on India, we now have before us
 immediate opportunities for export of indigenously developed
 technology, besides, of course, the import of much-needed better
 quality nuclear fuel which could raise our nuclear capacity. In the
 longer term, we should also explore prospects of importing technology
 to re-process our used nuclear fuel and develop indigenous technology
 to utilize our large thorium reserves.
 
 - We also need to promote greater regional ties with neighbouring
 countries through development of infrastructure such as hydro power and
 cross-border trade of power. In a future environment where we may need
 to increasingly import energy, energy trade with near neighbours such
 as Nepal, Bhutan and Myanmar will, on the one hand, be a
 diversification of energy sources and on the other, complement our
 regional co-operation strategy.
 
 - A priority area is water. Reports of water problems haunting our
 cities dot our newspapers throughout the year. Rural India has also
 been suffering from a water crisis resulting from inadequate rainfall.
 Manifestations of the water crisis include falling water tables and
 inadequate access to safe drinking water. The severe drought sweeping
 the Bundelkhand region (comprising 13 districts of Madhya Pradesh and
 Uttar Pradesh) since 2003 should serve as a wake-up call. A recent
 report indicates that this drought has impacted 16 million people; 40
 per cent farms were not sown bringing down food production by 30 per
 cent while 70 per cent of ponds and tanks dried up. This is nothing
 short of a livelihood crisis. With the water crisis becoming a common
 phenomenon in every nook and corner of the country, we need to explore
 solutions to conserve and recycle water. Water harvesting is clearly an
 area that needs stronger focus.
 
 - Urban transport is another area that merits attention. Increasing
 urbanization is putting greater pressure on the public transport
 systems in our cities. Public transport is a more sustainable form of
 transport and can be a fundamental solution to the ever-growing
 congestion. We have put in place policies that envisage the provision
 of multi-modal public transport systems that are well integrated and
 provide seamless travel across modes. We need to hasten the planning
 and development of such systems. The Bus Rapid Transit System (BRTS) is
 an area that needs focused attention as it is a sustainable, flexible,
 quickly implementable and economical mode of transport. However, we
 must learn from the problems experienced in Delhi and incorporate the
 lessons in other cities.
 
 - Last but not the least, we need to improve city level governance.
 There is fragmentation of authority between the centre, state and local
 levels with there being multiple agencies at the local level as far as
 infrastructure development is concerned. This has resulted in diffused
 responsibility, lack of coordination and disjointed planning in our
 cities. We need to empower the city government to take economic and
 service delivery decisions as far as infrastructure is concerned, while
 being accountable for it. Further, we need to create a single source of
 responsibility to manage the process of infrastructure development,
 thereby eliminating problems of effective interface between different
 administrative agencies. A single source of responsibility would also
 ensure that there is properco-ordination between states and the centre.
 
 To conclude, I would like to emphasize that there is no time to waste.
 Our policy makers have the experience and the tools to resolve the
 problems facing our infrastructure sector.  Time has also come to plan
 infrastructure development such that, rather than just trying to catch
 up with unmet demand, we view it in a strategic context. It is said
 that Indias GDP growth would run two percentage points higher provided
 the country has decent roads, railways and power. With the country
 ushering in a Government that is more stable, one hopes that
 underpinning the infrastructure sector and building world class
 infrastructure will receive top priority and bring about a greater
 transformation of our country.
 
 DEEPAK S.PAREKH
 Chairman