Sunday, November 19, 2017

Infratrack

Logging on

 

A heavy increase in freight traffic against a background of inadequate infrastructure presents a great opportunity for improvement in the logistics sector. Presenting an assessment of the road and railways logistics network from a recent Deloitte report 

 

India’s need for infrastructure creation in the logistics sector is striking. In just a decade India has seen its economic size more than double to $ 1.37 trillion in 2012 and total foreign merchandise trade multiply from 20 per cent of GDP in 2000 to 42 per cent of GDP in 2012. This growth has been accompanied with a phenomenal rise in the volume of freight traffic movement over the period. However, logistics infrastructure and services in the country have arguably not developed at the same pace to support and further this growth. Going by global standards, the Indian logistics sector is characterised by concerns around higher costs, lower profitability, lack of adequate availability of trained manpower resources and lower adoption of technology in its processes.

 

These concerns are also reflected in the drop in India’s rank on World Bank’s Logistics Performance Index (LPI) which measures a country’s performance on six key criteria. Over the past five years, the country’s LPI rank has fallen from 37 in 2007 to 46 in 2012 as its score has stagnated over the period while competing countries have improved on the same. India lags behind other major markets such as Brazil (41), China (26), US (9), and Germany (4). Particularly, India’s rank on quality of trade and transport-related infrastructure (ports, railroads, roads and information technology), which is one of the six criteria, has deteriorated from 47 in 2010) to 56 in 2012). Congestion witnessed on roads and ports, longer dwell times on ports, longer overall transit times and overloading of trucks leading to faster deterioration of road infrastructure would reflect this.

 

For any economy, the logistics sector, encompassing transportation, warehousing, cargo consolidation and border clearances, would form the backbone of its trade, and associated economic activity and growth of key sectors. The cost of trading whether by sea, land or air forms a critical component of the final price of a commodity. An efficient logistics system reduces this cost, providing a competitive edge and propelling economic activity. As per a McKinsey study, inefficiencies in logistics infrastructure cost the Indian economy an extra $45 billion, about 4.3 percent of the GDP, every year. It warns that a 2.5 times growth in freight traffic demand by 2020 (compared with 2010 levels) will put further stress on India’s infrastructure.

 

However, such high demand prospects also present an opportunity for logistics industry players in India. The Emerging Market Survey, 2013, conducted by Transport Intelligence (Ti) ranks India as the second most attractive logistics market in the future after China, and its position has not changed over the past four years. As a fast growing economy with one of the largest consumer markets, industries such as automobile, pharmaceuticals, FMCG and retail will drive the demand for logistics in India in the future. Further impetus will come from the increasing emphasis on enhancing manufacturing and exports.

The current stress on the logistics system and its performance suggests that one of the key issues is inadequacy of transportation logistics infrastructure. In recent years, the Indian government has accorded high priority to this and allocated greater public budget to boost overall infrastructure spending. Planning Commission has budgeted for an initial infrastructure investment of Rs 4.1 trillion (9.95 per cent of GDP) over the 12th Five Year Plan period (2012-2017) in order to sustain a real GDP growth rate of 9 per cent over the period. This is almost double the amount proposed under the 11th Five Year Plan (2007-2012) in real terms. The government has opened up the sector to private investment to bring in better technology, operational efficiencies and other best practices. Initiatives have been taken to facilitate private participation and attract private, foreign and multilateral finance to the sector.

 

Planning Commission estimates of mobilisation of private investment during the 11th FYP indicate that out of the plan outlay for respective sectors, about 80 per cent in Ports, 64 per cent in Airports and 16 per cent in Roads came through private sector. But global and domestic economic slowdown over the past two years has stymied overall infrastructure creation. Moreover, several issues have cropped up – some universal across sectors and others more specific to certain sub-sectors. On one hand, the gloomier macroeconomic conditions – slowing growth, rising inflation and interest rates have weighed on the risk appetite of lenders; on the other, such conditions have distressed developers, whose balance sheets felt greater stretch on account of low liquidity and cash flows compared with earlier years. This was further complicated by changes in project viability in many cases as initial traffic projections were deemed overestimated. Creation of infrastructure was also delayed on account of issues related to environmental clearances, land acquisitions as well as sector specific challenges that stalled financial closures for awarded projects or impacted investor interest for new projects.

 

ROADS

 

The overall road network in India has witnessed significant expansion over the last two decades with the network doubling to 4.7million km by 31st March 2011. Key government initiatives leading to such growth include Pradhan Mantri Gram Sadak Yojna (PMGSY) and National Highway Development Program (NHDP) focusing on rural roads and National Highways respectively. However, concomitantly, the country’s reliance on roads for its freight movement has grown even faster. Growing at 10.2 per cent per year for the last five years, vehicular population growth has outpaced expansion of the road network.

For the development of roads sector, during the 12th FYP the Planning Commission has made a budgetary provision of Rs. 1,447.7 billion in addition to internal generation and Extra Budgetary Resource (EBR) of Rs. 648.3 billion. This is around 33 per cent higher than the actual outlay over the 11th FYP period. With the overall budgetary constraints of the Government of India, initiatives have been taken to attract private investment. Compared to other infrastructure sectors, framework for private sector participation in the roads sector is at an advanced stage of development.

 

Sector Outlook

 

Even though these initiatives have helped revive investor interest, the targets set by Ministry of Road Transport and Highways for 2013-14 had to be trimmed. Bidders’ interests remain limited on account of previous experiences with projects and cautious approach by lenders. 100 per cent availability of land has become a pre-condition of the lenders. Insufficiently addressed issues related to time and cost overruns due to delays in land acquisition, project approvals etc. continue to be factors impacting investor interest. The sector is also witnessing secondary transactions. However, the conditions typify a “buyer’s market” leading to a reduction in transactions on account of mismatch with sellers’ expectations on valuations.

 

RAILWAYS

 

Passenger and freight traffic on Indian Railways has seen a consistent increase during the period from FY 2006-07 to FY 2011-12 at a CAGR of 8.54 per cent and 6.70 per cent respectively. Comparatively, creation of infrastructure has not kept pace. Infrastructure addition took place at a snail’s pace with CAGR for addition of line capacities and rolling stock over the same period being less than 5 per cent. As a result, rail infrastructure has been facing stress and major routes face congestion and oversaturation. Particularly in the freight segment, from which Indian Railways (IR) earns nearly 70 per cent of its revenue, IR has been losing market share to the roads sector. Given that rail transportation forms is hugely important especially for transportation of major bulk commodities like coal, cement, food grains and iron ore, inadequate railway capacity expansions and modernisation could stymie future economic growth of the country. A McKinsey Study highlights the under-utilisation of rail infrastructure as a means of transportation and points out that rail transport costs in India are about 70 per cent more than that in the US. It estimates that the share of rail in the freight market would decline to 25 per cent over the next few years, if adequate investments are not made. Recognising the potential, Ministry of Railways (MoR) set ambitious growth targets in the 11th and 12th FYPs and initiated policies to create opportunities for private participation.  Investment plans have been set at still higher levels for the 12th FYP emphasising completion of the big ticket Eastern and Western Dedicated Freight Corridors projects. Similar ambitious targets have been set for acquisition of rolling stock with more than 100,000 wagons and 25,000 coaches being planned to be acquired during FY 2012-13 to 2016-17. MoR targets to increase rail’s freight market share by at least 2 per cent during the period.

 

Sector Outlook

 

Thus far, private investment in railways has not been as much as it has been in other infrastructure sectors. On account of factors such as requirement of high upfront investment, as well as lack of precedence of projects, policies and regulatory framework attractive for private investment, evaluating viability and risks for projects in railways is perceived to be harder. The proposed frameworks need to provide greater clarity on models within which private and public entities could participate. For instance, IR does not prefer private participation in train operations and it makes the monitoring of IR’s operating performance on the concerned stretch difficult for the private investor. Private container train operators expect a level-playing field to be able to compete or collaborate with CONCOR and create a success story. Presently, the enthusiasm for PPPs or any private participation with IR appears to be low and would perhaps need to be tested going forward. On the whole, while the sector offers a major opportunity, more needs to be done in terms of sector governance, facilitation of private participants and opening up of Indian Railways to attract private participation.




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