Budget 2014: Six changes needed for better roads, rail and air transport
Director - Government Services, EY
It is just a welcome coincidence that a single party majority government has come in the centre at the time when the country just laid out its National Transport Development Policy for the next 20 years. As per the policy, if India has to grow its GDP at 8-9%, it needs to increase its investment in infrastructure six times from current USD 45 billion to USD 250 billion by 2032. This translates increasing the investment in infrastructure from 5.8% of GDP (during 11th FYP) to 8% of GDP by the end of 2031-32.
Investment of this scale would not only require significant government funding, but also building enabling environment to attract private capital, domestically as well as foreign. This would require government to take quick, planned and timely reforms across levels - policy, operational, institutional and capacity.
Urgent need for investment
According to the Global Competitiveness Report 2013-14 of World Economic Forum, India stands at 85th and 61st position in the global ranking of infrastructure and transport, respectively amongst group of 148 countries.
Since, investment in infrastructure sector, particularly transportation has multiplier effect on the economic growth; there is an urgent need for investment in these sectors to bring back economy on high growth trajectory. Hence, when the new government will table its first budget in July, 2014, it will have to strike balance between the prevailing inflation and long waiting reforms to remobilize funds in the transportation sector, which shall lay foundation for a long-term growth. For example, in highways, there is an immediate need to rebalance the concession agreements, to move the struck projects and attract private sector interest in the upcoming projects.
Concept of revenue guarantees, as being used in some of the Latin American and developed countries, where government shares with private sector, both upside potential and downside risk of traffic, beyond a threshold, should be brought in to attract investor confidence and lender's comfort.
At the same time it is important for NHAI, if it is moving to EPC model, to build its own pool of resources. For this purpose, fast tracking implementation of electronic toll collection to maximize toll revenues and raising funds through long-term bonds and capitalize its toll revenue earnings for interest and principal repayments, can be explored. In fact, India can learn from experience of Japanese Expressway Holding and Debt Repayment Agency, which used bond funds to develop expressways in Japan. These bonds were duly backed by government guarantees to provide security to bond subscriber.
Special Projects for Rural Development
To increase penetration in villages, particularly for effective implementation of food security, it is critical to continue fillip programs like Pradhan Mantri Gram Sadak Yojana (PMGSY-II), which are critical for farm to market linkages and connectivity to rural growth centres.
Revamps In Railways
In Railways, besides timely completion of dedicated freight corridors, particularly east-west DFC which carries minerals, it is important to complete diamond quadrilateral as envisaged by the new government. This can help in faster movement of goods into the hinterland and reduce the overall logistics cost of India, which is presently at 13-14% of GDP (as compared to 8-9% of GDP in developed countries). There is also a need that new infrastructure should be able to cater needs of milk and dairy industries, which are large producers of essential perishable goods. The new infrastructure should be able to handle refrigerator containers (similar to ports) to enhance mobility of perishable goods across country. However, to speed up the above initiatives, it is important to restructure the Indian railways in a phased manner, starting with broad policy and accounting reforms including allowing private sector participation/PPPS in a large scale.
An Integrated Transport System
Probably, it is right time for the government to think transport as an integrated system and all its components (rail, road, port and airways) should work in a holistic manner. Different modes of transport between two nodes should be developed based on the principles of demand-supply and balance between time and fuel cost. For instance, if time is not a constraint (non-perishable goods), goods can be transported using IWT or coastal shipping. To achieve this, coastal terminals at select ports and deeper stretches of the rivers (LAD) can be developed. For other routes, rail and road connectivity with ports should be enhanced on PPP basis.
Develop low-cost Airports
Similarly, low-cost airports in tier-II and tier-III cities can be developed which can be integrated with high speed rails at select stretches. This will provide faster connectivity to the entire country and thereby unlock growth potential. To move goods through airport, similar to inland ports and container depots, off-airport cargo processing facilities can be developed. Moreover, these facilities to be ably augmented by cold chains in the vicinity of low cost airports, which can facilitate warehousing and dispatching cargo of perishable goods. This will help reduce congestion and delays at airports. Development of such off-airport facilities can be defined as infrastructure and the respective benefits should be extended accordingly.
E-vehicles to Boost Urban Transportation
There is also a need to boost urban transport within the cities. In this regard, recent announcement of government to treat e-rickshaws with motor power of 650mw as non-motorised vehicles in the NCR is a welcome step. However, government will have to be mindful that although e-rickshaws are environment friendly, their use should not go out of proportions to increase congestion in already cramped up roads.
Hence, government should promote setting up of state level funding agencies to finance urban transport projects. Central government should facilitate states setting up such bodies and providing government guarantees to securing funds from international financial institutions.
Implementation through Fiscal Incentives
However, to effectively execute the above ideas, it is also important to back them by suitable fiscal incentives. Some of these include:
- relaxation of ECB norms for borrowing by infrastructure companies,
- extension of tax incentives on major augmentation of existing infrastructure, in particular Maintenance, Repair and Overhaul ('MRO') services in airlines,
- extension of depreciation on expenditure incurred to develop public assets on BOT, which is not owned by private sector, even for the sector other than roads
- exemption of MAT for infrastructure sector during 80IA period.
At the outset, there is a lot to be done, which poses a big challenge, but also presents an opportunity for the government for creating much needed transport infrastructure for doing business. Although, industry expects government to respond timely on the above hard-pressed reforms, in the upcoming budget Government will have to strike balance between its revenues and easing of complex net of regulations and approvals to enhance the value-addition process and making us more competitive.