GS-3, Indian Economy, Uncategorized

Government plans 27,000km economic corridors

The government is planning to make 44 highway stretches totalling 27,000 km to be developed as “economic corridors” for seamless movement of cargo vehicles, cut delays, deepen economic activities and create jobs.

  • This will be the biggest highway expansion plan since the rolling out of Golden Quadrilateral and North South East West Corridor, totalling 13,000 km during the Vajpayee regime.

Details:

  • The new stretches pass through and connect major hubs of economic activities such as manufacturing clusters and ports.
  • It will help in decongesting 30 top cities in the country by building ring roads and logistics hubs along these corridors.
  • The new plan is expected to be completed in six years. The government is exploring several funding options, including road development cess, loans from agencies and also private investment.
  • The government is also planning to develop another 15,000 km as feeder routes to these economic corridors. 40 interconnecting corridors will also be developed to link 44 economic corridors and the Golden Quadrilateral. This network will carry 80% of the country’s freight.
  • The government will also rebrand national highways as national corridors, economic corridors and feeder roads, a move aimed at helping in navigation and identifying the roads. The corridors have been identified using satellite imagery.
Editorials, GS-3, Uncategorized

Power cuts in a time of surplus

India has, for the first time in history, declared that it will not have a power deficit this year. The country will have a surplus of 3.1% during peak hours and 1.1% during non-peak hours during 2016-17, latest data from the Central Electricity Authority shows.

  • This is the first time that the country has declared a year of no shortage though many regions have had power surplus for shorter periods. In 2015-16, the peak hour deficit stood at -3.2% while non-peak hour deficit was at -2.1%. The deficit was as high as 13% about a decade ago.

Regional variations:

  • Data shows that states in southern India will have surplus power to the tune of 3.3% after being power starved for almost a decade.
  • Western India will have surplus electricity at 6.9%.
  • Eastern region will have the maximum shortage of 10.3% and northeastern region at 8.3%.
  • The northern states will have a deficit of 1.8% during the year.

Reasons behind surplus power:

  • Highest ever conventional power capacity of 46,453 MW has been added during the last two years.
  • About 11,000 MW of gas plants have been revived and coal shortages to power plants are removed.
  • The government has launched revival scheme for distribution companies and many states have joined it.

What’s the issue now?

India now generates more power than it needs and has surplus power. And yet, the practical experience of Indians is that scheduled and unscheduled power cuts are the norm in cities, and the situation in most rural areas is worse. India lags far behind other countries in per capita consumption of power.

What’s causing this?

  • While capacity addition has peaked, industrial and commercial offtake remains low. Growth in industrial and commercial consumption—the highest-paying segment under the telescopic tariff structure followed—was only around 4.57%. Only the domestic consumer segment, which puts additional cost burden on the distribution utilities given lower tariffs, saw decent demand growth of 8.9%.
  • Cost of supply has increased, as have aggregate technical and commercial (AT&C) losses. Domestic consumers do not have the capacity to absorb all the incremental power produced, or pay higher cost. Distribution companies, or discoms, typically incur higher cost on supplies to this segment and earn lower revenues.
  • The state of the state-owned power distribution companies, or discoms, which are responsible for buying electricity from the generation companies and selling them to consumers, is also responsible for this. The discoms suffer massive transmission and distribution (T&D) losses. Almost 25% of the power is lost, and never gets billed for — double the global average of about 12%.
  • Worse, the remaining 75% is sold at prices that are much lower than the discoms’ procurement costs. In every state, the tariff is set by a group of largely political appointees, who avoid increasing rates because of the associated political costs. Political unwillingness is at the heart of the T&D losses as well.

What’s the solution?

To help these discoms, government announced a new scheme — UDAY, or Ujwal Discom Assurance Yojna- in November 2015. Under UDAY, participating state governments would take over 75% of discom debt over two years — 50% in 2015-16 and 25% in 2016-17. The idea is to make the state governments formally responsible for the losses of state-owned discoms.

This is expected to have two effects. One, it will relieve debt-ridden discoms, who can push power distribution in right earnest instead of being a roadblock to economic growth. Two, the more overt acceptance of debts on their books will push states to align tariffs to costs, and make it possible for discoms to run on a sustainable basis.
uday-scheme

Challenges before UDAY:

  • Electricity is not a central subject, and states cannot be made to participate in the programme. Also, the Centre is not providing any monetary assistance. The Centre’s carrot, in this case, is actually its stick. As such, willing states will be provided subsidised funding from the central government’s power schemes, as well as priority in the supply of coal.
  • State governments are expected to convert the discom debt into bonds. However, apart from the banks that had lent the money in the first place, finding buyers for such bonds might prove difficult — especially since these would not enjoy SLR status.
  • Besides, there is nothing in the scheme to fix the perverse political incentive that leads to T&D losses and debts in the first place.

Way ahead:

The present surplus may not be adequate when industrial demand starts to pick up, or even to meet exigencies such as unscheduled generator shutdown or extreme weather event. Also, a truer, holistic gauge would be 24×7 reliable power supply to all at an affordable price.

  • To achieve that objective, states will have to show strong resolve to reduce AT&C losses, invest in infrastructure development, ensure efficient commercial operation of discoms, make timely tariff revisions, and reduce the cross-subsidization that’s impacting the competitiveness of the industry and services sectors.
  • The time is also right, perhaps, to provide direct, targeted subsidies to electricity consumers who can’t pay much—if at all. The learnings from the LPG direct subsidy transfer project would be very handy here.
GS-3, Indian Economy, Uncategorized

India set to seize big opportunity in logistic costs saving through Sagarmala

A new report by Ministry of Shipping has said that Sagarmala project can save up to Rs 35,000-40,000 crore by 2025 per annum for India by optimizing logistics flows for key commodities. The study says that augmenting operational efficiency of ports and optimizing logistics evacuation can be a big boost to Indian trade.

What else the report says?

  • Citing the example of maritime nations such as China, South Korea and Japan, the report says that ‘port-led development’ can be effectively used to save money.
  • The project can give boost to Indian trade and help seize the big opportunity of growth in Indian cargo traffic at ports which is estimated to increase to 2.5 bn MMTPA by 2025.
  • The study estimates the potential to save around Rs 35,000-40,000 crore per annum by optimizing logistics flows for key commodities by 2025.
    sagarmala

Sagarmala:

The Sagarmala is a series of projects to leverage the country’s coastline and inland waterways to drive industrial development. Sagarmala, integrated with the development of inland waterways, is expected to reduce cost and time for transporting goods, benefiting industries and export/import trade.

The project is mammoth with 150 initiatives with a total outlay of ₹4 lakh crore, spread across four broad areas:

  • One, modernise port infrastructure, add up to six new ports and enhance capacity.
  • Two, improve port connectivity through rail corridors, freight-friendly expressways and inland waterways.
  • Three, create 14 coastal economic zones or CEZs and a special economic zone at Jawaharlal Nehru Port Trust in Mumbai with manufacturing clusters to enable port-led industrialisation.
  • Four, develop skills of fishermen and other coastal and island communities.

Implementation:

  • To implement this, State governments would set up State Sagarmala committees, headed by the chief minister or the minister in charge of ports.
  • At the central level, a Sagarmala Development Company (SDC) will be set upto provide equity support to assist various special purpose vehicles (SPVs) set up for various projects
Editorials, GS-3, Indian Economy, Uncategorized

With connectivity comes growth

Livemint

Issue:

  • The paramount measure of power in the 21st century is connectivity, specifically to global infrastructure networks, trade flows, capital markets and the digital economy.
  • India is now getting connected in each of these arenas and is thus taken much more seriously as a long-term pillar of the global system.

India in its neighbourhood:

  • India and Pakistan should move forward with the Most Favoured Nation trade agreement, Iran-Pakistan-India (IPI) gas pipeline from Iran, and even by revitalizing and upgrading the railway connections between Delhi and Lahore, and Karachi and Mumbai.
  • The ancient Grand Trunk (GT) Road from Kabul to Kolkata should be actively resurrected as a Central to South-East Asian trade artery which will enable Indian commercial leadership across this high-growth region in ways traditional moribund groups such as South Asian Association for Regional Cooperation never could.
  • Indians must remember that India’s neighbours are not waiting for it to take a leadership role in leveraging connectivity for influence.
  • The Chinese-led Asian Infrastructure and Investment Bank will strengthen China’s connectivity with Central and West Asia, while the China-Pakistan Economic Corridor reaching Karachi and the port of Gwadar will effectively make China an Indian Ocean power through its client partner Pakistan.
  • To not connect to Pakistan and beyond is to further cede strategic ground along the 21st century’s new Silk Roads.

In South-East Asia:

  • Despite the long border India shares with Myanmar, trade relations and airline connections are minimal.
  • The country still depends on China for most of its exports and most of its inbound investment.
  • Not only should the future GT Road extend through Bangladesh all the way to Yangon, but the three governments should accelerate efforts to construct a gas pipeline stretching from Sittwe on the Bay of Bengal through India’s northeastern states of Mizoram and Tripura and across central Bangladesh to Kolkata.
  • The BCIM (Bangladesh, China, India, Myanmar) trade corridor along the old Stilwell Road should also be upgraded more rapidly in order to facilitate trade connectivity between India, Bangladesh, Myanmar and China, uplifting the neglected populations along the route.
  • The Association of Southeast Asian Nations region has half the population of India but a larger gross domestic product, and now attracts more foreign direct investment (FDI) year on year than China does. South-East Asia is now the world’s factory floor.
  • India too is expected to surpass China in inward FDI this year, complementing its now higher growth rate as well.
  • The combination of fast growth and rising FDI are mutually reinforcing, with global markets bearish on China and favourable towards India’s long-term demographic fundamentals, opening economy and long overdue focus on infrastructure.

Ties with China:

  • Ties with China is also essential to any grand strategy premised on connectedness.
  • China ranks as the top trade partner of more than 120 countries in the world, double the number for the US (56), and far higher than for India (only one).
  • Even as India seeks to boost trade relations with countries along the Indian Ocean periphery, it must remain focused on improving its trade balance with China through higher value-added exports, while also attracting ever more FDI from China into power, transportation and other sectors.

What government can do?

  • So long as commodities’ prices remain low, Current government can keep inflation in check and continue its major commitments to roads and railways, ports and airports, and modernizing dozens of cities across the nation.
  • All of these are investments in making India more connected both internally and externally so that its population can reach its full potential.

Beyond transportation and energy, the third category of connectivity is, communications:

  • India and China represent the two largest online populations in the world—but as a percentage of the total population, only about half of Indians have functional Internet access.
  • And yet, developing countries gain a 1-2% increase in GDP with every 10% of the population that gets online.
  • The Indian government and major telecom firms may not want Facebook to be the agent of digital connectivity, but then they should step up and fulfil the responsibility themselves.
  • The Digital India initiative, which aims to boost 4G coverage and deliver last-mile Internet connectivity, is a good step in this regard, but India still ranks 44 on Huawei’s most recent 2016 Global Connectivity Index.

Conclusion:

  • The 21st century will be permanently multi-polar, with the US, Europe, China, India, Russia and other powers all playing crucial roles.
  • But it will also feature an intense tug-of-war over global financial flows and industrial supply chains.
  • Make in India is a strong example of how India can become more relevant by becoming more intertwined with global production networks in the manner that the Indian software industry has already achieved.
  • Ultimately, it is this commercial and technological connectivity with the rest of the world that will enable India to earn—and retain—a commanding position on the world stage.
GS-3, Indian Economy, Uncategorized

Govt. targets 120 mn tonne capacity addition in ports

The Hindu

News:

  • Union Shipping Minister has set an ambitious target of capacity addition at 12 major ports by 120 million tonnes in 2016-17.
  • These ports had added the highest-ever capacity of 94 million tonnes in 2015-16.
  • Minister has asked shipping ministry officials to aim for awarding new projects to add capacity of 180 million tonnes in the major ports over 2016-17, and ensure that new capacities for 120 million tonnes become operational during the year.

Operating margins

  • As per the targets, the operating margin for the major ports is set to increase to 44 per cent, compared to 39 per cent during 2015-16.
  • The Minister has also directed officials to ensure that that overall operating margins increase by five percentage points compared to the previous fiscal, with the condition that no major port reports an improvement of less than one percentage one.
  • An increase in the capacity addition comes despite the government lowering its freight target for ports this year compared to the previous fiscal year’s targets. As per global standards, ports should utilise 70 per cent of their capacity, with the remaining capacity being idle to drive efficient operations and to avoid delays in turnaround time or evacuation of cargo.

Cargo targets

  • The cargo handled by the major ports increased by 4.3 per cent to 606 million tonnes in 2015-16 compared to 581 million tonnes a year ago.
  • The major ports failed to achieve the target of 695 million tonnes set by the Shipping Ministry for 2015-16 prompting a scale down of targets for 2016-17 to 644 million tonnes.
  • The 12 major ports—Kandla, Mumbai, JNPT, Marmugao, New Managlore, Cochin, Chennai, Ennore, VO Chidambaranar, Visakhapatnam, Paradip and Kolkata (including Haldia) — handle more than 60 per cent of the country’s cargo traffic.
  • The targets are fixed keeping in view the global trends and past performance of ports in previous years.
  • The views of the port (officials) are also taken into consideration while deciding the targets.
  • The Minister said that four ports could not meet cargo handling targets due to various reasons such as an embargo on handling dusty cargo, reduction in exports and an economic slowdown.

Road ahead:

  • The government also plans to award projects worth at least Rs 2,000 crore towards inland waterways development, known as Jal Marg Vikas programme, in 2016-17.
  • Projects in the inland waterways have not picked up and to set a target ensuring that all projects in waterways development programme are awarded sounds ambitious.
GS-3, Indian Economy, Pub admin 1, Uncategorized

INFRACON, ePACE and up-Scaled INAM PRO launched

The government has launched ePACE, INFRACON and an updated version of INAMPRO, three innovative IT initiatives of the Ministry of Road Transport & Highways, developed in house by NHIDCL(National Highways and Infrastructure Development Corporation Ltd.)

Details:

ePACE (Projects Appraisal & Continuing Enhancements) is an online integrated Management Information System that brings projects from all wings of the Ministry under a common platform, ensuring their effective and real time tracking. More than 2000 projects being executed by multiple agencies are currently listed on the portal and it is possible to get any information about their real time status, fund utilization etc. The portal also allows for validation checks to prevent wrongful entries, making it difficult to fudge figures. It has also been provided with GIS interface to enable easy geo-tracking of the projects. ePACE as a platform is amenable to be used for monitoring projects pertaining to any ministry in the country and can improve governance of such projects.

INFRACON is the National Portal for Infrastructure Consultancy Firms and Key Personnel. This portal acts as a kind of bridge between consultancy firms working in the road engineering and construction sector and domain experts and key personnel who are deployed both for project preparation and supervision. The portal hosts the credentials of consultancy firms and key personnel and has linkages to Aadhar and Digi-locker for data validation and purity.

INAM PRO has been developed as a web-based application for Infrastructure and Material Providers. It is a kind of a web based market place that brings together the material providers and the prospective buyers on a common platform. The platform was launched in March 2015 to facilitate contractors and cement buyers engaged in executing central/state funded roads and highways and bridge construction projects to place cement orders online with the registered cement companies offering cement at competitive rates in the vicinity of project execution locations. Using INAM Pro, companies can track orders, add more products, add cement offerings, view listed buyers, and submit their complaints or suggestions to Ministry. With the help of INAM Pro, the Ministry of Road Transport and Highways will be able to track and monitor the activities of buyers and suppliers, and remove impediments of both the parties.

Editorials, GS-3, Indian Economy, Uncategorized

The turnaround in infrastructure

The government has achieved a breakthrough, unblocking previously stuck road projects, while also accelerating the initiation of new projects. Of the total number of stuck projects worth Rs 3.8 lakh crore, this government has already unblocked Rs 3.5 lakh crore worth of projects. Consequently, road construction has risen from 8.5 kilometres a day during the last two years of the previous government to 11.9 kilometres in 2014-15 and 16.5 kilometres in 2015-16. The construction of national highway projects awarded has risen from 3,500 kilometres in 2013-14 to 8,000 kilometres in 2014-15 and 10,000 kilometres in 2015-16.

In railways, the average rate of expansion of tracks has risen to 7 kilometres per day during 2015-16 from 4.3 kilometres per day during the previous six years. Investment in railways during 2015-16 has been double the average during the preceding five years. The government has approved the construction of the first high-speed rail between Ahmedabad and Mumbai, the modernisation of 400 major railway stations, the construction of dedicated eastern and western freight corridors of 1,305 km and 1,499 kilometres, respectively, and laying down of 1,875 kilometres of new railway lines. Connectivity of the north-eastern region with the rest of India has received particular attention.

In domestic civil aviation, the total number of passengers carried has jumped from 66.4 million in 2014 to 80.8 million in 2015. Internationally, the figure has increased from 16.9 million in 2014 to 18.4 million in 2015. Freight shows a more mixed picture, with domestic freight carried rising from 435,339 tonnes in 2014 to 456,894 tonnes in 2015 and international freight carried marginally declining from 251,561 tonnes in 2014 to 247,415 tonnes in 2015.

Efficiency at major ports has improved, with operating profits shooting up 43 per cent in 2014-15 over that of 2013-14 and 16.2 per cent in 2015-16. In 2015-16, addition of 93 million tonnes to port capacity was the highest ever. Imparting high priority to port-led development, the prime minister launched the Sagarmala project aimed at modernising existing ports; improving port connectivity to roads, railways and inland waterways; and developing coastal economic zones. Under the National Waterways Bill, 2015, cleared by the Cabinet, 106 waterways will be declared national waterways compared with just five in the last 30 years.

Turning to energy, when the government came to office, there was near-crisis in coal supply. The government quickly passed an ordinance (later replaced by an Act) and auctioned coal blocks to alleviate the shortages. It transferred Rs 3.44 lakh crore of revenues over the lifetime of the blocks to the states containing those blocks; Rs 1,396 crore has already been transferred to these states.

Coal production has now acquired momentum, with the output rising by 32 million tonnes in 2014-15 against the increase of 31 million tonnes in the previous four years taken together. Growth during 2015-16 is reported to be nine per cent. The government is also making steady progress towards underground coal gasification, with three lignite blocks identified as candidates.

In power, the government has already electrified 6,816 villages in the last two years compared with 5,189 villages in the three years before that. The prime minister has now announced his intention to bring electricity to the 12,000 villages or so that are yet to be electrified, by May 1, 2018. As of March 15, the outstanding debt of electricity distribution companies (discoms) was Rs 4.3 lakh crore. Discoms in such deep debt are not credible buyers of electricity and this undermines electricity generation. Therefore, the government has launched the Ujwal Discom Assurance Yojana to transfer 75 per cent of the debt to state budgets, while leaving the rest for the banks to convert into loans or bonds. By March 2016, 18 states had given in-principle consent and nine had even signed memoranda of understanding with the central government.

The government has launched the Integrated Power Development Scheme to arrest future distribution losses. As part of it, underground cabling, end-to-end metering and IT-enabled energy accounting are envisaged. An amendment to the Electricity Act, 2003, approved by the Cabinet, will give consumers the option to choose from multiple suppliers of electricity. Expansion of transmission lines has been accelerated 30 per cent more in 2014-15 than in 2013-14.

Solar power has received a major boost under the present government. Installed capacity until the end of March 2015 was 3.7 Gw. During 2015-16, 1.5 Gw was added. The process has gained more momentum recently, with 32 solar parks of 20 Gw capacity approved in 20 states. Land has been identified in all cases and the projects are predicted to be complete by 2019-20.

After one and a half decades of stagnation, there are hopes of revival in oil and gas, too. The recently adopted Hydrocarbon Exploration and Licensing Policy introduces a uniform and open acreage licensing policy. It also provides for marketing and pricing freedom for gas from deep, high-pressure and high-temperature fields. There is enthusiasm among oil majors not seen in years.

GS-3, Indian Economy, Uncategorized

Sagarmala project to be completed in 5 years

The government has decided to halve the previously estimated 10-year timeframe to complete the Sagarmala port development project.

  • The project targets to provide one crore employment. Port-led development has potential for direct employment generation for 40 lakh persons and for 60 lakh persons indirectly.

About Sagarmala:

The Sagarmala project seeks to develop a string of ports around India’s coast. The objective of this initiative is to promote “Port-led development” along India’s 7500 km long coastline.

  • It aims to develop access to new development regions with intermodal solutions and promotion of the optimum modal split, enhanced connectivity with main economic centres and beyond through expansion of rail, inland water, coastal and road services.
  • The Union Ministry of Shipping has been appointed as the nodal ministry for this initiative.

The Sagarmala initiative will address challenges by focusing on three pillars of development, namely:

  • Supporting and enabling Port-led Development through appropriate policy and institutional interventions and providing for an institutional framework for ensuring inter-agency and ministries/departments/states’ collaboration for integrated development.
  • Port Infrastructure Enhancement, including modernization and setting up of new ports.
  • Efficient Evacuation to and from hinterland.

Other objectives:

  • In addition to strengthening port and evacuation infrastructure, it also aims at simplifying procedures used at ports for cargo movement and promotes usage of electronic channels for information exchange leading to quick, efficient, hassle-free and seamless cargo movement.
  • It also strives to ensure sustainable development of the population living in the Coastal Economic Zone (CEZ). This would be done by synergising and coordinating with State Governments and line Ministries of Central Government through their existing schemes and programmes such as those related to community and rural development, tribal development and employment generation, fisheries, skill development, tourism promotion etc.
GS-3, Indian Economy, Uncategorized

Steel firms may get NIIF funding support

The Hindu

Issue

Government is looking at creating a fund under India’s first sovereign wealth fund, NIIF, which will address capital requirements of domestic steel companies.

NIIF

  • National Investment and Infrastructure Fund (NIIF) is a fund created by the Government of India for enhancing infrastructure financing in the country.
  • NIIF, proposed to be set up as a Trust, would raise debt to invest in the equity of infrastructure finance companies such as Indian Rail Finance Corporation (IRFC) and National Housing Bank (NHB). The idea is that these infrastructure finance companies can then leverage this extra equity, manifold. In that sense, NIIF is a banker of the banker of the banker.
  • Its creation was announced in the Union Budget 2015-16
  • The objective of NIIF would be to maximize economic impact mainly through infrastructure development in commercially viable projects, both greenfield and brownfield, including stalled projects. It could also consider other nationally important projects, for example, in manufacturing, if commercially viable.

This is different from the National Investment Fund

  • The cabinet Committee on Economic Affairs (CCEA) on 27th January, 2005 had approved the constitution of a National Investment Fund (NIF). The Purpose of the fund was to receive disinvestment proceeds of central public sector enterprises and to invest the same to generate earnings without depleting the corpus. The earnings of the Fund were to be used for selected Central social welfare Schemes. This fund was kept outside the consolidated fund of India.

Green field and Brown Field Investment?

  • Green-field and brown-field investments are two different types of foreign direct investment, or FDI. Green-field investments occur when a parent company begins a new venture by constructing new facilities in a country outside of where the company is headquartered. Brown-field investments occur when a company or government purchases an existing facility to begin new production.

Green field

  • There are several reasons why a company opts to build its own new facility rather than purchase or lease an existing one. The primary reason is that a new facility offers the maximum design flexibility and efficiency to meet the project’s needs. An existing facility forces the company to adjust based on the present design.
  • Additionally, all capital equipment needs to be maintained. New facilities are typically much less costly to maintain than used facilities. If the company wants to advertise its new operation or attract employees, new facilities also tend to be more favorable.

Brown field

  • The clear advantage of a brown-field investment strategy is that the building is already constructed. The costs of starting up may be greatly reduced. The time devoted to construction can be avoided as well.

Analysis

  • Government is also working on operationalising National Infrastructure Fund, the sovereign fund, and that is envisaged as a mother fund and within that there will be specific sectoral funds.
  • The Finance Ministry had signed an MoU with Abu Dhabi and Russian nano-technology company and is also having discussions with some funds with the UK for investments in NIIF.
  • While the government will invest Rs.20,000 crore in NIIF, the remaining amount will come from private investors.
  • If the existing national or municipal government requires licenses or approvals, the brown-field facility may already be “up to code.” In cases where the facility previously supported a similar production process, brown-field investments can be a real coup for the right company.
  • Brown-field investments run the risk of leading to buyer’s remorse. It is rare that a company looking to engage in FDI finds a facility with the type of capital equipment and technology to suit its purposes completely. If the property is leased, there may be limitations on what kinds of improvements can be made.

Reasons that affect the competitiveness of Indian steel industries

High capital cost is one of the major reasons

Government is working on a two pronged strategy to deal with that

  1. i) Government is looking at developing long-term funding for sectors like steel.
  2. ii) RBI has brought our the 5/25 format, where there is a recognition that it cannot be expected from industries like steel to repay their loans in short spans of 5-7 years.

5/25 scheme

  • The 5:25 scheme allows banks to extend loans for a longer period of time for infrastructure projects, typically 20-25 years, in a bid to match cash flow of these projects. It can refinance them every 5 or 7 years.

Major Challenges

The stressed assets are a major challenge. Lenders today are unable to get capital at lower costs as their credit ratings are impacted due to the stressed assets and it is being recognised that some of this stress is not coming because of mismanagement, a lot of stress is due to global factors that are beyond the control of individual firms.

The RBI, Department of Financial Services and the banks are working to see how government can help clean up the balance sheets so that banks can get capital at lower costs.

GS-3, Indian Economy, Uncategorized

Carriers can choose regional route

The Hindu

Issue

  • Reforms in the aviation sector to boost regional connectivity.

What is the plan?

  • The civil aviation ministry has planned to give domestic carriers the choice of regional airports that they may find viable to fly to.
  • Taking a cue from the ‘Swiss Challenge’ model, the airlines will submit their proposals for operating on any regional route they wish to fly, along with the proposed viability gap funding they would seek from the government.
  • The airline’s proposal would be put in the public domain and other airlines will be allowed to reverse bid on the subsidy proposal.
  • The airline seeking the least financial support to fly on the regional route will get the subsidy amount.
  • On routes where a proposal comes from only one airline, the government will give the subsidy based on normative pricing, meaning it will calculate the subsidy amount based on various parameters.
  • In the draft civil aviation policy, the government has proposed a cap of airfares at Rs.2,500 for an hour’s flight as part of its regional connectivity scheme.
  • The airlines will recover the possible losses incurred on such routes by way of viability gap funding from the government.

What is Swiss challenge model?

  • A Swiss challenge is a form of public procurement in some (usually lesser developed) jurisdictions which requires a public authority (usually an agency of government) which has received an unsolicited bid for a public project (such as a port, road or railway) or services to be provided to government, to publish the bid and invite third parties to match or exceed it.
  • Under the Swiss challenge model, any bidder can offer to improve upon a project proposal submitted by another player.
  • However, the project developer, who had originally submitted the plan, is given an opportunity to match the bid amount.
  • To keep the ticket prices affordable, the Viability Gap Funding is also being looked at. It will be a variant of the Swiss challenge model.
  • Here, airlines will not develop the airport infrastructure but only bid for subsidy to recover operational losses.

Demand-driven

  • Airports should be demand driven.
  • Regional airports need to be developed based on techno-commercial feasibility analysis considering the local economy, per capita incomes, growth projections, distance from nearby airports and the feedback from airlines.

Central subsidy

  • The Centre will provide 80 per cent of the subsidy to airlines by setting up a regional connectivity fund (RCF).