Difficult Regulatory Environment Despite Attempts To Reform
The Indian government has recently banned several Indian infrastructure companies - Gammon India, Adani Ports, IVRCL, Lanco Infratech and Punj Lloyd - from taking part in three port projects in Tamil Nadu due to security issues. We believe these disqualifications indicate that the business environment for India's port sector remains difficult and unclear despite recent attempts to address regulatory bottlenecks.
Adani, Gammon Infra and IVRCL are barred from bidding for a INR1.25bn (US$23mn) multipurpose berth and a barge jetty project at the port of Chennai, while Lanco Infratech and Punj Lloyd are barred from a INR4.2bn cargo berth project at the port of Tuticorin. Adani was also barred from bidding for a INR40bn container terminal project at the Chennai port. These companies were denied clearance due to various security implications. In particular, Gammon India was denied clearance due to its 'Chinese connections', according to a statement from India's home ministry (cited from the Economic Times).
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In our opinion, these disqualifications indicate that the business environment for India's port sector remains difficult and unclear despite recent attempts to address regulatory bottlenecks. India's port sector is plagued by red tape, where bureaucratic ineptitude and convoluted regulations within the sector have often led to delays in completing land acquisition as well as environmental and security clearances. Security clearances in particular, have been a key stumbling block for companies looking to take on Indian port projects - at one point in FY2011/12 (April - March), 12 port projects failed to move forward due to security clearances.
This issue with security clearances is due to the convoluted Indian regulatory system. Under the system, a bid submitted for a project by a port operator must obtain security clearance from the ministries of home, external affairs, finance and shipping before it is evaluated. This process could take many months as consensus could be difficult to reach among the various ministries due to conflicting interests. For example, plans to build a fifth container terminal at the port of Mumbai ( Nhava Sheva) by state-owned port operator <bibliomisc> Jawaharlal Nehru Port Trust</bibliomisc> (JNPT) have only recently moved forward. This is because a consensus could not be reached over the construction of the Mumbai Trans Harbour Link, a project supported by the Mumbai municipal government. Both government agencies had planned to construct their respective projects at the same site, and refused to change their design to accommodate the other, leading to significant delays for both projects.
Attempting To Reform
The Indian government is making some attempt to resolve these regulatory bottlenecks in recent months.
However, it remains to be seen if these reforms will be executed successfully given the decline in political strength for the governing party the United Progr essive Alliance (UPA) coalition ( see our online service, February 6 2013, 'CAG/GVK Talks Not The End Of Uncertainty') . T he UPA government is constitutionally obliged to hold parliamentary elections by 2014, and we believe that this could force the UPA government to take a more populist stance (such as the complete removal of the ADF) as the elections draws nearer.
To be sure, we have seen previous regulatory reforms in the port sector stalled due to opposition from various interest groups. A key example is the planned move to reduce sabotage regulations at the transshipment container at Vallarpadam. The announcement was made by India's Prime Minister Manmohan Singh in September 2012, but has yet to be implemented due to strong opposition from Indian shipping companies.
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It therefore remains to be seen if India is able to meet its investment targets for the port sector. India is aiming to invest US$60bn in its ports sector by 2020 as part of Prime Minister Singh's wider US$1trn investment in the country's choked transport and power networks. At present, the Indian government had set a target to award 42 port projects worth INR145bn in FY2012/13, but has only awarded 22 projects thus far. This potential failure to meet its investment targets poses a downside risk to our forecasts. We are currently forecasting real growth for India's port sector to average 7.2% per annum between FY2012/13 and FY2016/17.