This paper gives an overview of the regulatory environment and a brief analysis of some important infrastructure sectors.
Since India adopted measures to liberalize its economy and encourage Foreign Direct Investment (FDI) in the country in 1991, there have been several measures to improve India’s infrastructure. Traditionally a major portion of the infrastructure was owned and managed by the government. Recognizing that growth in infrastructure will be inhibited if the Government of India has to rely only on state funds, it now involves the private sector in infrastructure development and marketing through agreements known as concession agreements that grant private entities the right to build, own, and/or operate an infrastructure service and to receive revenues generated, though the ownership of assets vest with the government.
The government also offers other modes of investment There is a division of power between the central government and the state governments. Some areas are reserved exclusively for central governance, while there are a few sectors that are subject to joint governance. An examination of the existing laws, policies and regulations indicate that they are a result of an ad hoc approach, which is exacerbated by the overlapping power of the central and state governments. The regulatory framework in different sectors has been developed without any co-ordination between the sectors. Sometimes only a set of laws and/or policy governs a particular sector without a regulatory body to oversee the development and operations. For instance, there is no sectoral authority in the transport sector as a whole, and the National Highways Authority of India acts as the regulator as well as the operator of the national highways and their development. In addition, many of the twenty six states have their own corporations or agencies in charge of state highways. In view of this, investors do not have recourse to a single, independent regulator.
To further exacerbate the issue, the power to make the rule of law, administer it and adjudicate disputes lies with the same entity. This raises complex problems as there are vested interests and there is no separation of power even though this is mandatory under the Indian Constitution. Sometimes disputes regarding a regulatory authority may arise between states and the central government. For instance, a dispute that arose when the state of Gujarat enacted the Gujarat Gas (Regulation or Transmission, Supply and Distribution) Act, 2001 was settled by the Supreme Court of India when it held that the centre has exclusive powers to regulate the transmission, supply and distribution of natural gas and LNG while the states may enact laws to govern gas and gas-works for industrial, medical or other similar purposes.
Since 1991, some independent regulatory agencies have been established on a sectoral basis by either a Ministry at the Centre or different State Governments. It is also important to note that separate ministries under the central government are responsible for separate sectors that work through elaborate executive bodies leading to bureaucratic hurdles. Though Infrastructure is recognized as crucial for economic development it is riddled with problems both basic and complex. For instance, currently there is no clear definition of infrastructure according to the Government of India’s Committee on Infrastructure (CoI). However, the CoI examined various Indian statutes that refer to infrastructure to compile a formal list which includes the telecom and power sectors among many others. Surprisingly, the list does not include important sectors of social Infrastructure such as educational institutes or healthcare, which are important for an overall development of the country.
India has 12 major ports and 187 minor ports along its extensive coastline. The major ports, that handle about 74% of the total traffic handled cargo of over 463 million tones in the last fiscal year, which was an increase of 9.5% over the previous year.
Traditionally, ports all over the world have been owned and developed by government entities. Similarly, the Government of India dominated port development in the past but presently encourages investments from the private sector and foreign entities in port development activities and operations. Ports serve as gateways to India's international trade by sea, handling over 90% of all foreign trade. The Indian government having recognized the inherent importance of port projects that generally involve a long development period, high costs and budget constraints and budget overruns is encouraging flexible funding schemes to form public-private-partnerships (PPPs). Many major ports now operate largely as landlord ports with international parties like Maersk, P & O Ports, and Dubai Ports International being involved in BOT terminals on a revenue share basis. Some Indian participants like the Adani Group are involved in the development of minor ports.
The Government permits FDI in port privatization and development projects, subject to certain restrictions. FDI that qualifies under this category is permitted under the automatic route wherein, foreign equity up to 51% is permitted in projects providing supporting services to water transport, such as operation and maintenance of piers, loading and discharging of vehicles, and foreign equity up to 74% is permitted in the construction and maintenance of ports and harbors. In addition, 100% FDI under the automatic route is permitted for port development projects. It is important to note that no tax is payable for a period of 10 years on such investments. In view of this several maritime and non-maritime companies are considering investments in this sector.
The Government of India, through the Central Authority for Ports in India governs some of the major ports whereas the other ports are governed by the respective governments of the state where the ports are located.
The Tariff Authority for Major ports, constituted in 1997 governs revenue matters pertaining to all the major ports and their operators, but not to minor ports. The Tariff Authority for Major ports aim at establishing an independent authority to regulate tariffs, cargo traffic; lease rates of properties under the authority of the Major Port Trusts. However, this body has power limited to the levy of tariffs and cannot regulate other aspects of this sector.
By way of recent developments, the Government of India is, for the first time formulating a comprehensive National Maritime Development Policy, which will facilitate enhanced private investment, improve service quality and promote competitiveness. This policy also aims at encouraging more investments in port projects at substantially higher levels to meet the medium and long term objectives.
The Indian Railway is one of the largest railway systems in the world under a single management and manages more than 63,000 km of railway tracks. The financial outlay for the Indian Railway is large enough to present a budget separate from the general national budget. The formation of policy and overall control of the railways under the aegis of the Indian Railway Ministry is vested in Railway Board comprising the Chairman, Financial Commissioner and other functional Members for Traffic, Engineering, Mechanical, Electrical and Staff matters.
The railway, which is relatively efficient and inexpensive, is the most popular form of long distance travel, though in the past few years it has faced competition from low budget airlines, which has decreased in the recent past due to high aviation fuel costs.
Since the Indian Railway has a monopoly in freight and passenger trains there is an enormous strain on the existing networks of rail tracks. In view of this, the Government of India has decided to invest about $5 billion to enhance the rail routes in India. Additionally the Indian Railway has formulated a well-planned strategy to reduce bottlenecks and boost the railways capacity to match to the requirements.
The Government of India has also taken certain initiatives which include low-cost and high-return investments with the emphasis on, port connectivity, gauge conversion, signaling and telecom, renewal of asset and modernization of passenger terminals. Further due to the increasing containerization of cargo there has been a rapid increase in the need for movement by rail. Until now container transport was a monopoly of the public sector but this has now been opened to competition and private companies in order to improve infrastructure and subsequently encourage PPPs. In view of this, the Rail Land Development Authority has been established recently to encourage and monitor PPP projects. The Indian Railway has offered over 500 acres of land to private developer across the country for the development of railway stations, freight terminals and rail link projects. Further the Indian Railway has identified about 22 railway stations which are to be modernized under the PPP model of development.
Highways and RoadsIndia has an extensive road network of 3.3 million kilometers which is the second largest in the world. Though the roads in India carry about 65% of the freight and 80% of passenger traffic, the quality and extent of the roads is inadequate, making it a priority sector for development. For this reason the Government of India spends nearly US $ 4 billion annually on road development, and encourages private and foreign investments in this sector. Private sector participation is increasing and is usually through construction contracts, or BOT models for about 36% of total investment, based on competitive bidding or the lowest total government investment involved. Developers or owners as the case may be are permitted to collect tolls on roads that are part of the National Highway Development Plan, India’s largest road project till date.
The National Highways Authority of India (NHAI) is the apex Government body that overseas road development in the country that are under the purview of the central government. The NHAI awards all contracts, whether for construction or BOT, through competitive bidding.
The government with an incentive to increase the investment in highways and roads has granted a 100% income tax exemption for a period of 10 years for all road development projects. In addition, the NHAI also considers grants or viability gap funding for marginal projects. The government has also formulated model concession agreements.
Indian airports handled approximately 95 million passengers and 1.5 million tones of cargo in the last fiscal year witnessing an increase of more than 30% in 2006-2007 over 2005-2006. Cargo traffic grew by about 11% over the previous year. More specifically, India’s air traffic grew by 21.75% annually between 2003 and 2007 and in the first three quarters of 2007 there has been a record increase of 37.74% in this sector, which is expected to attract US $30 billion by 2020.
In the past airports in India have been developed and operated by the Government till they were transferred to the Airports Authority of India in 1994. In 2003, India amended the Airports Authority of India Act, 1994 to facilitate investments from the private sector in almost all areas of airport infrastructure. Airports are generally developed through concession agreements through PPPs or the Build-Own-Operate-Transfer (BOOT) model. The government generally holds a 26% stake in joint ventures with the private sector, but recently developed two projects at Kolkatta and Chennai as wholly owned concerns.
There are 126 airports in India that are owned and operated by the Airport Authority of India. These include five airports in the major metros that account for the majority of traffic.
The government is considering investment by private companies at 25 city airports. Further, the Government of India is formulating a new civil aviation policy which includes corporatization of the air traffic control system. With air fair being more affordable, the Indian government plans to market India’s rich heritage and natural beauty to international leisure travelers. Consequently a high demand for investments in aviation infrastructure is estimated to about US$ 9 billion for airport development over the next 5 years.
A Greenfield airport is one where a private entity or a public-private joint venture builds and operates a new facility, entering into Build-Own-Transfer (BOT) or Build-Own-Operate (BOO) contracts. However, Greenfield airports either in the public or private sectors can be initiated only with the prior approval of the Government. A Greenfield airport can be allowed both as a replacement for an existing airport or for simultaneous operation. The government permits 100% FDI for Greenfield airports under the automatic route. Investments of more than 74% in other airport development ventures require the approval of the Foreign Investment Promotion Board (FIPB). By way of incentives, 100% tax exemption for airport projects is granted for a period of 10 years.
Recent airport development projects mostly focus on passengers with little attention to cargo facilities. According to government statistics, air cargo is expected to grow from 1,020 tonnes in 2006-2007 to 1,745 tonnes by 2011-2012. This growth is propelled by an increase in economic activities within the country and the growth in the perishable goods sectors that require quick and reliable transport. With a view to taking corrective measures, the government has made it mandatory for all new Greenfield airports to provide separate cargo facilities that include storage, ground handling and loading capabilities.
The Telecom Regulatory Authority of India Act, 1997 is the governing statue applicable to the telecom sector of India in general. The Telecom Regulatory Authority of India (TRAI) is the authority that regulates telecom and internet services in the country.
In addition unlike other sectors the telecom sector sees a balanced participation from both public and private sector companies. The Government of India permits 100% FDI in telecom equipment manufacturing and a 74% to 100% FDI for various other telecom services. With a view to creating a more efficient environment, the government has appointed a committee to design a unified and single levy for the telecom sector, as the sector is currently burdened with additional taxes, charges and fees. Since the government predicts a 150% growth in the telecom sector, large amounts of investment opportunities of approximately $ 22 billion are being offered to foreign and/ or private players.
India has the fifth largest power generation capacity in the world. Despite this and an enormous growth in investment in the power sector, India still faces power shortages in major rural and urban areas across the country. In India, a majority of electricity distribution and transmission is owned by the public sector or state electricity boards although there is an increase in private sector participation in generation distribution. Large generation projects have been planned with the involvement of the private sector.
The major statutes governing this sector include the Electricity Act, 2003 and the National Electricity Policy, 2005. In all technical and economic maters, the Ministry of Power is assisted by the Central Electricity Authority constituted under the Electricity (Supply) Act, 1948. The construction and operation of generation and transmission projects in the central sector are entrusted to Central Sector Power Corporations. The Power Grid is responsible for all the existing and future transmission projects in the central sector and also for the formation of the National Power Grid. The programmes for rural electrification receive financial support from the Rural Electrification Corporation under the Ministry of Power and the Power Finance Corporation provides term-finance to projects in the power sector. An independent regulator, the Central Electricity Regulatory Commission, addresses issues between central public sector units and between states.
The Indian Government is keen on drawing private investment into this sector and offers 100% FDI in power generation, transmission and distribution along with some incentives that include income tax exemption for a block of 10 years in the first 15 years of operation and a waiver of capital goods import duties on mega power projects (above 1,000 MW generation capacity). Increased private sector participation is visible in the generation and distribution of power with several distribution licenses being held by the private sector.
Additionally nearly 150,000 MW hydroelectric power is yet to be tapped in India and opportunities in power distribution through bidding for the privatization of distribution is expected to materialize over the next 2-3 years. With an approximate investment opportunity of about US$ 200 billion in the next seven years, the Government of India aims to fulfill its ambitious project “Power for All” project by 2012.
Renewable EnergyRecognizing the importance of alternate sources of energy, the Government of India has established a separate Ministry of Renewable Energy that develops policies and implements them with regard to rural energy, solar energy, wind power generation, the development of energy from waste and rural village electrification among other things. The broad aim of the ministry is to develop and deploy new and renewable energy to supplement the energy demand of the country that is not met by the conventional sources of power.
The Government of India has also introduced various programs and schemes for the benefit of villages and urban or semi-urban centers making India’s initiatives the world’s largest programme for renewable energy. The Ministry of New and Renewable Energy has created a number of investment opportunities in this sector.
Until recently most Indian infrastructure was owned by the government, however private participation in public infrastructure has given a new impetus to this sector. Several infrastructure services and projects are governed by concession agreements or contracts between the government and/or public authorities and private entities. These agreements also address tariff determination and performance standards that are typically subject matters of independent regulation. In areas that do not have Model Concession Agreements and in view of an evolving policy framework investors may be able to negotiate favorable investment structures. Going forward the Government should strive to establish regulatory entities that are unaffected by political changes and operate autonomously. In order to govern the various regulatory authorities, an apex department of regulatory affairs, which could be under the aegis of the Ministry of Personnel and Administrative Reforms, would help create efficiencies. Throughout the process of establishing this regulatory framework, it is paramount that the regulators are aware that it is important that consumer rights are protected by ensuring a high quality of service on cost effective terms. In order to minimize bureaucratic autocracy, leading to more hurdles, it is necessary that the regulators and the apex regulatory department operate transparently and are made politically and financially accountable to the government and legally accountable to the public through judicial review.
** Poorvi Chothani, Esq., the founder of LawQuest, a general practice law firm, is a U.S. qualified attorney in the U.S. and a member of the global Alliance of Business Immigration Lawyers. She is a registered Solicitor in England and Wales and admitted to the Bar Council of Maharashtra and Goa. *Madhooja Mulay, LL.B.(University of Mumbai) is an Associate at LawQuest. She is admitted to the Bar Council of Maharashtra and Goa
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