India must bring down the overall cost of logistics to improve its ranking in the ‘ease of doing business’ index. The movement of goods and services through this vast country is expensive and inefficient, with the overall logistics cost at about 14 percent of GDP being significantly higher than many other countries. Transporting goods by rail costs 45 percent less (on a per tonne, per km basis) compared to road, but three-fourths of all goods are sent across India by road because of the inefficiencies in rail transport.
In this context, the initiative of the ministry of road transport and highways (MoRTH) to set up a network of 35 multi-modal logistics parks (MMLPs) is laudable. But after nearly six years of the stated intent, the actual implementation has been suboptimal - only five are at various stages of implementation. The MoRTH told Rajya Sabha on March 29 that 30 of the 35 MMLPs are still at various stages of feasibility studies.
In another reply in Lok Sabha during the Budget Session, the ministry pointed out that state governments of Delhi, Gujarat, Punjab, Rajasthan, West Bengal, Haryana, Odisha, Kerala, Chhattisgarh, Madhya Pradesh, Andhra Pradesh and Goa were yet to identify land for MMLPs. In the list of 35 parks, four are slotted for Gujarat, three for Punjab and two for Orissa.
Land Related Problems
Land acquisition is a huge stumbling block in establishing large logistics parks. For one, the land parcel needed is usually quite large - the project in Indore needed more than 255 acres and the one in Chennai required nearly 184 acres. Finding a contiguous land parcel, on the outskirts of the intended city and then securing it at a reasonable price requires active participation from state governments. This may not happen in many instances.
MMLPs are large complexes with rail and road connectivity, where goods coming in get seamlessly transferred to trains and other modes of transport in a hub-and-spoke model. So, freight from production zones gets shipped to the nearest logistics parks, where it is aggregated and shipped on a larger vehicle to a logistics park near the consumption zone. Then, the freight arriving at the destination logistics park is disaggregated and distributed to the consumption zones inside the city. Logistics parks, acting as freight aggregation and distribution hubs, enable freight movement (between hubs) on large trucks, thereby aiding in the reduction of freight transportation costs.
These parks are designed to offer mechanised warehousing services - cold chains for storing perishables and racked warehousing facilities for packages and apparel. Value-added services such as customs clearance (which currently happens at sea ports for export consignments), warehousing management services and late-stage processing facilities are also envisaged for these MMLPs.
Besides land, the multiplicity of government agencies involved in setting up MMLPs is another impediment. The involvement of multiple central ministries, state governments and various state departments makes the entire process of getting clearances cumbersome and time-consuming.
Upfront Investment
The response from private developers for building these parks has been lukewarm so far. In certain instances, just two bidders qualified. Private developers are key to developing a nationwide MMLP chain since the government has envisaged nearly 50 percent of the total investment from the private sector. The estimated total investment in 35 MMLPs has been pegged at about Rs 52,500 crore, of which private developers are expected to bring in around Rs 26,000 crore.
The MMLPs are to be built on a design, build, finance, operate and transfer (DBFOT) mode, a format of public-private partnership. In the first phase of each project, which is to be completed within two years from the award of the concession, the private developer is mandated to bring in at least 30 percent of the promised investment and the MMLP should have begun commercial operations. Some potential bidders are uncomfortable with this condition that requires a large sum of money to be invested within two years.
Also, as per the concession agreement designed for these parks, the concessionaire is required to pay a percentage of gross revenue from the third year to the government and also promise a minimum guaranteed revenue share. This has been a source of unhappiness for some developers. Of course, the condition that no new MMLP can be built by either the government or a private developer within a 50km radius of an existing project for 10 years provides some comfort and has been welcomed by the bidders. To make the projects more attractive and improve their viability for private developers, the government has already amended the concession agreement to award each project for 45 years instead of the earlier 30 years.
The government would do well to tweak future concession agreements to succeed in enlisting robust private sector participation. Greater cooperation between the Centre and state government agencies in identifying and acquiring land would go a long way in accelerating the development of MMLPs.
Sindhu Bhattacharya is a journalist based in Delhi who writes on a range of topics in business and economy. Views are personal, and do not represent the stand of this publication.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
