Infrastructure Infrastructure Advisory Advisory CRISIL Infrastructure Yearbook 2019 Analytical contacts Vivek Sharma Senior Director CRISIL Infrastructure Advisory [email protected] Anand Madhavan Director CRISIL Infrastructure Advisory [email protected] Contributors Sudip Sural, Jagannarayan Padmanabhan, Abhay Kantak, Pranav Master, Akshay Purkayastha, Hyrdhal Damani, Anshuman Chauhan, Meghana Goradia, Probal Biswas, Parul Garg, Golesh Gupta, Pratik Desai and Nidhi Bansal Editorial Raj Nambisan, Subrat Mohapatra, Sowmya Sivakumar, Varsha D’Souza, Nisha Prabhakaran, Smitha Puthiyadan, Rajesh Pandathil, Mustafa Hathiari, Yohan Paul, Shachi Trivedi and Narasimham Vemuganti Design: Harshal Bhavsar, Kedarnath Khandalkar, Rajesh Gawade, Sanket Nagvekar CRISIL Infra Intelligence is a platform that aims to offer multi-dimensional views and insights on the infrastructure space in India 3 Infrastructure Advisory 4 Foreword It is a matter of immense pride for us that the CRISIL India Infrastructure Conclave has, since its pioneering launch in 2017, become one of the most sought-after platforms for tracking – and deliberating on – the trends, challenges and opportunities in India’s infrastructure sector. The annual CRISIL Infrastructure Yearbook has also become a benchmark national publication that has contributed to shaping policies and improving the infrastructure ecosystem. In 2017, we had highlighted the need to scale up infrastructure spending and the criticality of strengthening the supply side of infrastructure financing. In 2018, we flagged concerns around the sharp fall in private investment and called for actions to reverse this slide. We find their resonance in the policy actions and announcements of the central government – be it the goal of increasing infrastructure spending to over Rs 100 lakh crore over the next five fiscals, the proposed credit enhancement fund, or the plans for asset monetisation across infrastructure sectors. In keeping with tradition, our yearbook and conclave this year focus on yet another crucial but under-analysed aspect – the central role of states in India’s infrastructure build-out. While the government needs to push ahead on several fronts to step up infrastructure investments, including creating greater fiscal space, ushering in more private sector investment, reviving stalled projects, resolving financing and legal challenges, we believe the time has come to also shine the arc lights on states. It is our deeply held view that India’s infrastructure build-out cannot be sustainably accomplished without significantly scaling up both the share and the impact of investments of state governments. It is pertinent to note that the cumulative development spending and capital expenditure of states have consistently exceeded that of the Centre for nearly a decade. The skew towards states is only going to increase. We examine this in greater detail inside, and identify measures that states ought to adopt to unlock their potential. The yearbook also has an update of the CRISIL InfraInvex scores, which factor in the drivers and drags to private investment emerging across sectors. CRISIL is committed to being a leader in shaping India’s infrastructure development. And as always, I look forward to your feedback. Ashu Suyash Managing Director & CEO CRISIL Ltd 5 Infrastructure Advisory 6 Foreword I am delighted to present the third edition of the CRISIL Infrastructure Yearbook, which has become a very important reference document for stakeholders in India’s infrastructure development. It’s been a privilege to steer the call-for-action on some of the imperatives of this sector. We welcome the government’s plan to step up infrastructure investments in the country to Rs 100 lakh crore over the next five fiscals – or twice the minimum spending estimated as necessary by CRISIL in 2017. A sustained gross domestic product (GDP) growth of 7.5% and more over the next decade, along with scaling up of infrastructure spending to ~6% of GDP from 5.5% or lower now, should be o India is facing immediate-term headwinds of slowing economic growth, financial sector stress and pressure in the fiscal space because of subdued government revenue. There is also a crying need for corrective policy action in several infrastructure sectors. A look at CRISIL’s InfraInvex, the one-of-its kind yardstick of investability attractiveness in India, vouchers this – InfraInvex scores of most sectors have declined. Airports and railways are the only sectors that saw some positive action at the start of this fiscal, with the successful award of contracts for modernisation of six airports and increased outlay and cost recovery in railways. Conversely, the renewable energy sector – which was among the leaders of CRISIL InfraInvex last time – has seen a substantial decline in its score this year. Ports continue to face the brunt of the flux in global trade and slowing exports. Persistent weakness in power distribution, including increased gap in tariff recovery and institutional bottlenecks to investments in urban infrastructure have kept scores low for these segments. The call-out to the policy makers is to address these headwinds on mission-mode, and to revive investor interest and confidence. Infrastructure development needs all three cylinders – central government, private capital and state investments – to fire simultaneously, and for an extended period of time. The role of states becomes absolutely central to this cause and, accordingly, forms the thematic focus of this third edition of our CRISIL Infrastructure Yearbook. We trace the steady growth in capital spending by states on infrastructure over the past few years and the constraints to the next scale-up. We emphasise the need to not just crank up this spending, but also to improve efficiency through institutional strengthening and capacity building to tap commercial financing and private investment. We remain deeply engaged with stakeholders and committed to bringing out insights to propel India’s infrastructure development. I am sure you will find the insights in this edition of the yearbook incisive enough to catalyse action. Sameer Bhatia President CRISIL Infrastructure Advisory 7 Infrastructure Advisory 8 Contents Executive summary .........................................................................................................................................................................................11 The ‘centre’ of gravity is shifting .......................................................................................................................................................................14 Sector scorecard .............................................................................................................................................................................................31 Power .................................................................................................................................................................................................34 Roads & highways ..............................................................................................................................................................................54 Railways ............................................................................................................................................................................................64 Airport ...............................................................................................................................................................................................80 Ports & shipping ................................................................................................................................................................................92 Urban .................................................................................................................................................................................................106 9 Infrastructure Advisory 10 financing entities set up by Kerala and Tamil Nadu to raise resources – Executive summary are cases in point. Despite these strides, three factors constrain sustained improvement in infrastructure investment: (i) fiscal squeeze, as seen in persistent For decades, infrastructure development hinged on policy facilitation revenue deficits, debt surge and high fiscal deficits in several large and public spending by the central government, with the role of private- states; (ii) weak institutional capacity, reflected in mounting losses and sector investments restricted to covering gaps in spending. operational deficiencies of utilities in power, water and urban transport That ‘centre’ of gravity is now shifting to states, especially facilitated sectors; and (iii) inadequate reforms and programmatic impetus to scale by two seminal developments: a big leap – of a full 1,000 basis points commercial financing and PPPs. (bps) – in vertical tax devolution afforded by the Fourteenth Finance States need to address these constraints urgently if India is to have Commission; and, the onus of the factor markets – labour, land and world-class infrastructure. taxation – increasingly falling on states as competitive and cooperative federalism take root. Without cardinal contribution from states, it will be tough for India’s GDP growth to rebound and sustain above 7.5%, and infrastructure spending That’s reflected in the trends in capital expenditure1 (capex) and