Tuesday, August 26, 2014

Ministers handing out infrastructure projects to please voters

On 11th August 2014, there was a news article in the Economic Times titled "Akin to railways, aviation ministers handing out airport projects to please voters" [1]. I found this interesting since this brings out the influence of politics on infrastructure projects, an aspect that is often overlooked and overpowered by financial and technical perspectives in discussions about projects. 

The articles mentioned that "Andhra Pradesh is the new focus area for the civil aviation ministry which, with a politician from the state heading it, has set the wheels in motion to develop three international airports in the state, including one to be built from scratch." I wouldn't so much focus on the particular state or minister as much as I'd like to focus on the fact that many a times, projects are unnecessarily taken up to please voters.  In this particular case, the three airports that are slated to be given international status are Tirupati, Vijayawada and Vishakhapatnam, with the former two being upgradation projects and the last being an entirely new development. 

All three of these cities face shortages of basic amenities [2] [3] and the capital and expertise invested in the construction of airports could have been channeled to tackle these fundamental problems rather than using them to construct international airports, which, in fact are not even needed. With the national carrier Air India operating out of its hubs in T3 Indira Gandhi International Airport, New Delhi and T2 Chattrapati Shivaji International Airport, Mumbai [4], what every other city needs to have is a domestic airport of international standards instead of having an international airport that is underutilised. Moreover, the presence of an international airport in the state at Hyderabad further renders the development of more airports unnecessary. A passenger travelling to the US or Europe is typically taken to one of the hubs and then flown out of the country. For short distance flights to the Middle-East or the Far-East, mid sized international airports of Hyderabad, Chennai, Bangalore etc. are more than capable of handling the present and future traffic volumes. 

A classic case of how underutilised these projects become is the Raja Bhoj airport in Bhopal, the city where I hail from, that was upgraded to handle international air traffic in 2011 but the only international flights that are operated out of the airport are the seasonal Hajj flights operated by Saudia, Bhopal being a city with a considerable Muslim population. The upgrade did instill a sense of pride among the residents of Bhopal when it happened but now it is felt that maybe those funds could have been used to speed up the implementation of the Bhopal Bus Rapid Transit System or the Narmada Pipeline which address much more fundamental issues that the city faces. 

It is obvious that these projects are taken up by politicians to please the voters in their constituency because of the mileage that association with terms such as 'international' generate. It would be interesting to see what becomes of these airports over the next few years since quite clearly, these aren't well thought out projects aimed at developmental or social gains as much as they are aimed at ensuring the continuation of political reigns. 


  1. [1] http://goo.gl/JrMTf6
  2. [2] http://goo.gl/DI6wuu
  3. [3] http://goo.gl/wHWGWC
  4. [4] http://goo.gl/QiIxm8




Friday, August 22, 2014

Mumbai Metro : (Non) Cooperation between Infrastructure Players on RTI

   After struggling through a lot of problems similar to the Mumbaikar, the much coveted Mumbai Metro finally started running on 8th June 2014.  With total 63km of lines to be laid, the first line of 11.7 km between Versova-Andheri-Ghatkopar finally became operational. This PPP had raised lot of expectations not only from commuters point of view but also as a model on which other PPPs could be formualted. May it be cost and time overruns or  Reliance claiming the Metro to be Reliance Metro this project has shown the cooperation or (lack of it) that exists among Infrastructure Players.


  Latest to top it is the secrecy that Reliance Infrastructure has been maintaining about the project. Three RTI applications to get reports by RDSO, CMRS and Railway Board have not been responded to. This is not the first time Rinfra has been unwilling to share information with the public. It has ran away from taking responsibiltiy for signal failure near Jagruti Nagar Metro Station and technical failure at Ghatkopar Metro Station as well.
  Mumbai Metro One Pvt. Ltd. is the joint venture of Rinfra, Veolia Transport and MMRDA running the operations of the Line 1 of Metro. Rinfra has a major stake while MMRDA owns only 26%. With 3 of the 8 Board of Directors being from MMRDA other from Rinfra, the latter certainly has a upper hand in decision making process. Rinfra is a private organisation and hence does not come under purview of RTI. However, RTI experts claim that since CEO of MMOPL is Metro Rail Administrator, a public servant, MMOPL should come under RTI.
  In the current grievance redressal mechanism, Mumbaikars have to direct their pleas to MMRDA for information, which then alerts MMOPL, which may or may not reply since the RTI has not been served directly to it. Hence, Rinfra stays clean and non-accountable. Steps need to be taken to make the mechanism more transparent and hold Rinfra accountable, so that same mistakes are not repeated for other phases of the project. Any suggestions and also what are the problems that we may face in implementing them?

Source : http://www.dnaindia.com/mumbai/report-dna-exclusive-is-rinfra-s-mumbai-metro-a-top-secret-project-2012706

Monday, August 18, 2014

Public Vs Private - A contradiction

Hey ! I have recently come across an article in Economic Times. I thought of sharing some of the interesting observations.
There was a comparison made between the government run Kandla port and the privately run Mundra port in Gujarat.It turns out that the Mundra Port is excelling a lot more compared to the Kandla port. Mundra loads nearly seven times more cargo compared to Kandla.
The Adani Group which owns the Mundra Port charges up to five times more compared to the Kandla Port. But still the shippers prefer Mundra, this is mainly because of the high quality of infrastructure provided by Mundra in comparison to Kandla. Mundra does charge more but it properly uses the money in improving the Infrastructure which attracts the shippers.
Anand Sharma, director, Mantrana Maritime Advisory, said that "Shippers choose to go to a port with higher charges but better infrastructure than a port that is cheaper but is saddled with poor infrastructure. A cheaper, but clumsy port would eventually make shippers pay more in total end-to-end logistics cost".
(Economic Times, August 3-2014)

So, I think low tariffs do not make a port more attractive, in fact what matters is the infrastructure of the port. The government should start looking into this, may be it should start charging more and use the revenues in modernizing the ports.
Have a good read at:
http://articles.economictimes.indiatimes.com/2013-08-01/news/40963238_1_mundra-kandla-port-trust-adani-port
http://m.economictimes.com/advantage-pvt-easier-tariff-guidelines-for-govt-run-ports-not-sufficient-to-revive-them/articleshow/39493701.cms 











Monday, August 11, 2014

Land Acquisition Act, 2013

Land is needed for all infrastructure projects. Highway projects require more land in the cities and road side (for expansion) compared to other infrastructure projects and hence Land Acquisition is the main reason stated for delay in highway projects.

In India, land is a considered as a source of livelihood and identity as majority of the people are agrarian. Many argue that it would not be fair on the government to rip this resource from the poor for the sake of infrastructure development. So, there is a need to balance the objectives of development and social justice. With this aim, the government took a step to replace the 120-year old prevailing Land Acquisition Act, 1894 with the Land Acquisition Act, 2013. This act came into force on 1st Jan 2014. 

Some of the key reforms and issues in this act are as follows.

Reforms
Issues for implementation
There is a minimum consent to sell from land owners. This is fixed at 70-80% for projects involving private.
Lands in India are highly fragmented. It is said that 12,000 owners were there in 1,000 acres to be acquired by Tata motors for Singur plant (West Bengal). It is difficult to get consent from these many owners.
Market value of land fixed based on consent of land owners, average prices of recent transactions in the vicinity, etc.
-Effective compensation becomes 2-4 times earlier. Huge concern for Investors.
-Definition of recent transactions and vicinity not given.
-Since consent of owners are required, they would escalate costs to high values.
Gram sabhas, Panchayat and Collector involved in decision making process.
-Sequential time would be 48-60 months from inception to payment of award
-Since more levels of sanction, there is scope for misuse of powers (corruption)
These new reforms are applicable for projects of 100 acres in rural and 50 acres in urban
Rather than land area measurement, the number of people displaced would have been a better criteria

The Act is criticised to be favouring land owners and not favouring new projects in this infrastructure deficient country. This also puts a lot of pressure on the government as it promises land owners so many benefits like 4X land value, Job to family member, house of 50 sqm. plinth area etc.

Rather than giving owners all these benefits, it would be better to give Land bonds (Infrastructure bonds) as currently practised in many countries. These land bonds would reduce upfront costs of payment to owners, would be a livelihood for owners who lost land and land owners would not delay the process as they are also stakeholders of the project. 

Reference- Infrastructuretoday - LA Bill
TOI - Land Bonds

Saturday, November 16, 2013

Debt Vs Equity Financing

The appropriate ratio of debt to equity is vital in financial structuring of an infrastructure project.  Debt financing means borrowing for a particular project with provisions for repayment with interest. In equity financing, the capital is either invested by the stakeholders or by raising money via selling interests in the company (stocks/bonds).

Comparison

Equity need not be paid back while debt has to be. Additionally equity ownership adds credibility to a venture while high debt projects are considered to be risky. In debt financing, the lender has no claim on the profits generated as opposed to equity owners.  And the interest on loans is tax deductible thus providing a tax shield. Furthermore, actions taken by the company need not undergo clearance from the lender as opposed to voting from equity holders for approval (Thomson Reuters, 2013). On the other hand the advantages of equity financing cannot be over emphasized. It adds to the net worth of the venture providing financial strength and preserves the borrowing capacity for future needs ( Ebi Ofrey, 2011).

Figure 1: Growth: Debt Vs Equity Financing (Sweeney, 2013)
Both debt and equity have their pros and cons. It is up to the stakeholders in the business venture to analyze and arrive at the option that best suits their needs. Figure 1  (Sweeney, 2013) gives a graphical representation of expected growth via debt and equity financing. Hence, debt financing would be appropriate for business owners who do not want to dilute ownership, have limited ability to raise equity, or share future profits  (Sweeney, 2013).

Monday, October 28, 2013

Equator principles as a hindrance to developing economies

The equator principles defines the term "Designated countries" as "those countries deemed to have robust environmental and social governance, legislation systems and institutional capacity designed to protect their people and the natural environment." The list (which can be viewed at: http://www.equator-principles.com/index.php/ep3/324) of such countries comprises of almost exclusively developed countries. I find this quite one sided, it is obvious that developed countries will have far less pollution and energy usage emenating from construction when compared to developing countries. The latter have not reached their optimum yet, and as such they obviously need to keep their economic stability first.

To put things in perspective, there are just 6 out of the 70+ lending institutions from Asia and the Middle East, and just one from India (IDFC). IDFC only joined in the earlier half of this year, so it will be quite interesting to see how this move is received.

The equator principles, if applied to institutions financing projects in these countries, would definitely hinder their growth. This is probably why we see so few institutions from Asia and the Middle East.

It is not that these principles have not been violated. There have been cases such as the Baku-Tbilihi-Ceyhan pipeline, where the principles were tossed aside because the project had to go ahead. Selectively applying them in situations can lead to all sorts of irregularities in the future, all the way up to banks strong arming the client into doing things their way in the name of these principles. 

These factors have made lending institutions of developing countries very wary of the principles as they view them as something that will just slow them down and reduce their competitiveness.

Eminent Domain and its implication for project finance

This is an interesting article regarding eminent domain that was published very recently:
http://www.theatlanticcities.com/housing/2013/10/why-eminent-domain-cant-save-broke-cities-richmond/7358/

In most cases, we see it being used to seize land for an infrastructure or construction project. This is a case where the government of Richmond, California is attempting to seize the land from the project sponsors in order to save the numerous homeowners who have defaulted on their mortgages.

This has quite a few implications for the infrastructure market, as explained by this article.

While not illegal, this is a move that brings extremely bad faith.The main implication is that banks will have to stop lending to cities willing to resort to this form of eminent domain. These cities are then likely to fall behind due to a lack of funds to pursue projects. And if this is done by every city in America with similar issues, the effect on their economy would be crushing. Creditworthiness and trust would take a huge hit, similar to what happened to India after Dabhol.

Therefore, I am inclined to agree with the author when he says that this move is somewhat suicidal to the economy of Richmond or any other city that does it.

Monday, October 14, 2013

Findings on Tirupur Project

I came across a case study which was quite contradictory to the one which we had
discussed in class. The case study which was authored by Gaurav Dwivedi stated Tirupur as a
failure in meeting its customer needs leading to a lot of slum dwellers still depending on
water vendors and other water sources due to scarcity. A lot of facts regarding the
concession like operations, shareholding, debt, revenue, expenditure and profits, remains
unavailable to the public. Also there were confidential clauses incorporated in the
concession which were against the transparency concerns. In fact the author had to move
legally against the New Tirupur Area Development Corporation Limited (NTADCL) in order to
obtain real data regarding the project.

Ref: http://www.manthan-india.org/IMG/pdf/PPP-Tiruppur_Paper_IIMB_Conference_for_Website.pdf