Hit by a dismal show by almost all the core sectors, the growth of six core infrastructure industries (i.e. electricity, coal, steel, cement, crude oil and refined petroleum products) fell to 4.2% in January 2008, compared to 8.3 % in January 2007. During April-January 2007-08, the growth rate of infrastructure industries declined to 5.5%, as against 8.9% during the same period last fiscal.

This comes on the backdrop of industrial growth plunging to 5.3% in January 2008, compared to 11.6% in January 2007 and 7.7% in December 2007. Experts feel that industrial growth is getting gagged due to lack of availability of credit on account of high interest rates and slowdown in manufacturing.
During January 2008, crude oil production registered a negative growth of 0.2 %, compared to 4.7% in January 2007. Growth in coal production also declined to 4.8 % in January this year as against 9.9 % in January last year. The lower growth was also visible for electricity generation, which grew by 3.3 % in January 2008, compared with 8.3 % in January 2007, and cement production, which grew by 5.2 % in January 2008, compared to 7.2 % in January 2007.
The comparative performance of the six infrastructure industries during the financial years 2007-08 and 2006-07 are given in Figure 1. It’s evident that none of the industries are doing better than last year. Only coal at 4.8% during 2007-08, is somewhat close to the last year growth rate of 5.2%. Otherwise, deceleration is pretty marked across all the infrastructure industries. The biggest concerns are with crude oil and refined petroleum products. With imported crude oil prices shooting beyond $100 per barrel and domestic output shrinking, refiners are likely to face major difficulties in sourcing crude supplies. News is not too good on electricity generation and steel and cement as well. With these vital sectors moderating, the immediate prospects for industry and infrastructure appear somewhat sluggish.

Markets remain volatile
Oil prices struck a record high of $ 109. 20 in March 2008. This comes as a little surprise since the beginning of the year has already witnessed sharp upsurge in crude oil prices, briefly reaching $100 a barrel. Fadel Gheit, senior energy analyst for Oppenheimer & Company rightly commented that "we're starting the year with a bang."
The price of oil has been flirting with $100 for months, and there has been added price pressure in the last few weeks because of the instability in Pakistan after the assassination of former Prime Minister Benazir Bhutto on 27 December 2007.

There is no shortage of explanations for the escalation of oil prices by about 60 percent over the last year. The price of a barrel was below $25 as recently as 2003 compared to less than $11 in 1998.
Much of the current increase in demand for oil comes from fast-growing emerging market economies that are consuming higher volumes of gasoline, jet fuel and diesel. Political tensions in countries like Nigeria, Venezuela and Iran have threatened world supplies, while important fields in Mexico, the United States and other countries are aging and producing less. The Bush administration has further tightened supplies by announcing that it would add to the nation's Strategic Petroleum Reserve in the coming months, a move that some leading Democrats have urged President George W. Bush to suspend in order to ease the tight oil market.

Indo-Japan’s likely dialogue on Sakhalin gas swap                        
Large quantity of natural gas in India is produced in association with crude oil. Until the 1980s, most of this gas was flared off because there were no pipelines or processing facilities for bringing it to customers. Despite some improvements in more recent years, India’s quest for gas continues. The situation might become better with Japan likely to agree to switching gas that it sources from West Asia with the supplies obtained by India off the Russian coastline. With natural gas resources estimated at 17 trillion cubic feet (485 billion cubic meters), the three fields in the Sakhalin-1 production area can provide a large, long-term commercial supply of gas for export and also supplement regional domestic supplies in Russia. The Chayvo field alone has enough gas to produce 1 billion cubic feet per day (10 billion cubic meters per year)
for more than 25 years. With the Odoptu and Arkutun-Dagi resources, a production rate of 1 billion cubic feet per day (10 billion cubic meters per year) can be achieved for more than 40 years.
The deal, if it materializes, will also substantially reduce transportation costs and the landed price of gas for both countries. Japan Oil, Gas and Metals National Corp. (Jogmec) has agreed to explore possibilities with ONGC Videsh Ltd (OVL) for swapping or selling gas from its blocks in Sakhalin-I. Exxon Neftegas Ltd is the operator for the multinational Sakhalin-1 consortium with ExxonMobil Corp. having a 30% stake in the consortium. The other partners include Sodeco of Japan (30%), RN-Astra of Russia (8.5%), Sakhalinmorneftegas-Shelf of Russia (11.5%) and OVL (20%). In return for its $1.7 billion investment (Rs6,732 crore) in the Sakhalin-I project, OVL is expecting 2-4 million tonnes of crude oil annually and 5-8 million cu. m of gas per day.

Railway budget 2008-09: Sops for Oil Companies
Railway Minister Mr Lalu Prasad Yadav’s railway budget has sops for oil companies. The move to slash freight rates on petrol and diesel by 5% could see oil companies save upto Rs 50 crore annually. Freight rates on fly ash have also been reduced. The Railways have also decided to spend Rs 75,000 crore in the next seven years on its bluechip programme of high-density corridors and line expansion schemes.
Interestingly, freight rates, which were brought down in the last Railway budget, were revised upward throughout the year. The railway ministry issued as many as 11 circulars raising freight rates after the Budget was tabled in Parliament in 2007.

Hindujas & ONGC invest in Iran oilfields
Ashok Leyland Project Services — a unit of Hinduja Group & OVL - have plans to invest $10 billion for developing oil and gas fields in Iran.
Both plan to sign an MoU with Naftiran Intertrade Co and Petropars.
Iran, which does not give companies a stake in its oil and gas fields, signs buyback agreements where companies hand over operations of fields after development. The companies receive payments from oil or gas production for a few years for covering their investment.

Reliance Unhappy with New Guidelines
The petroleum ministry has been accused of violating Parliament-approved norms for oil & gas exploration in the country by the Reliance Industries. India’s largest private sector energy enterprise believes that the proposed new guidelines will reduce operational flexibility.
The ministry has proposed guidelines for ‘enhancing effectiveness’ of management committee (MC), which oversees oil and gas exploration in areas or blocks awarded to companies under the landmark New Exploration Licensing Policy (NELP). Reliance has opposed the proposal of establishing a benchmark internal rate of return for declaration of commerciality of a discovery claiming that NELP gave the right for declaration of commerciality to companies as an incentive to cover for their exploration risk.

GAIL-China Gas JV: A Dragon Dream
GAIL, India’s flagship natural gas company, plans to make a huge sortie into the Chinese market through a series of investments in the natural gas sector. The lined up projects include a coal-based petrochemical plant in Yulin, a compressed natural gas (CNG) project in Beijing and a coal-bed methane (CBM) project in Mongolia. The company is expected to sign a joint venture (JV) with China Gas in March 2008 to execute these projects.

There is speculation that the two partners may also rope in Arrow Energy of Australia for the evaluation of the CBM project. China Gas Holdings is listed on Hong Kong stock exchange and GAIL has around 6.5% equity stake in the company. Other shareholders include Asian Development Bank, Sinopec and the Oman Oil Company.

Parliament Committee Discusses Issues in Civil Aviation
The Consultative Committee of the Members of Parliament attached to the Ministry of Civil Aviation met in mid-February 2008 to discuss the challenges and opportunities in the civil aviation sector. Apart from the significant growth that has been witnessed in the sector, a whole range of issues from promotion of regional connectivity to greenfield airports were discussed. It was noted that the Ministry of Civil Aviation’s consistent efforts to talk to the State Governments on various issues of civil aviation were yielding results. The Andhra Pradesh State Government had announced the reduction in the sales tax on aviation turbine fuel (ATF) from 33% to 4%.The Members raised a number of issues relating to safety and security, pilot training, on-time performances and losses of Air India, status of merger of Air India and Indian Airlines, the new airports, rules for permitting airlines to fly abroad etc.

 Indian Developers Going Global
Indian developers are making it big internationally since airports outside India offer better operating profit. With no airport project in the offing domestically, these companies are getting proactive by entering the international market. Whether it is GMR Infrastructure Ltd winning airport modernization business contract overseas, or its competitor GVK Power and Infrastructure Ltd planning to bid for similar projects in Europe and America, the Indian companies are going global.

GMR, along with Limak Insaat Sanayi San Ve Tic A S Turkey and Malaysia Airports Holdings Berhard, has won the contract for modernizing and managing Sabiha Gokeen International Airport (SGA) in Istanbul, Turkey. The contract, based on build-operate-transfer (BOT) model, is for 20 years.

Meanwhile, Cochin International Airport Ltd (CIAL), which developed the new international airport in Kochi - India’s first to be built by a private sector firm - is also looking at possibilities of building airports in Sri Lanka, Ghana, Angola and Papua New Guinea. In January 2008, the Sri Lankan president Mahindra Raja Paksa engaged in preliminary discussions with CIAL regarding the possibility of setting up a new airport in southern Sri Lanka on the lines of the Kochi airport.

India and China fly together
Prime Minister Manmohan Singh’s recent visit to China has resulted in major breakthroughs for the aviation industry. Now airlines of both sides can fly on to a maximum of two cities each in three regions. Ending months of suspense, both India and China lifted restrictions and allowed airlines of both sides to fly to "beyond points".
India has asked for three regions for its airlines to fly to and from with a halt in China. They are Canada-US; Australia-New Zealand and Asia. China has asked for — Africa, Middle-East (including Gulf) and Europe — as the three regions for its carriers.
China also gave the papers for its cargo airline — Great Wall — that got permission to fly to Chennai and Mumbai. In return, Jet Airways from India has got permission to operate on the Mumbai-Shanghai-San Francisco route.

The Cabinet clears new mineral policy
The new Mineral Policy was approved by the Union Cabinet in March 2008. Under the new guidelines, both foreign and domestic firms should find it easier to invest in the exploration and mining of gold, diamonds and metals like copper and zinc, with prospecting firms automatically obtaining a mining license. It is estimated that the new mineral policy will attract foreign direct investment (FDI) to the tune of $250 million annually in the mining sector in the next five years. With India producing 89 minerals, out of which 11 are metallic and 52 non-metallic, a new mineral policy was long overdue.
The approved National Mineral Policy has also proposed the setting up of an independent dispute resolution mechanism called the Mining Administrative Appellate Tribunal. The Tribunal is most likely to become fully operational in six months.

Reliance eyes Indonesia mine
RELIANCE Power has struck a deal for buying a coal mine in south Sumatra, Indonesia. The valuation of the coal mine, based on its reserves, is estimated to be around Rs 20,000 crore. The mine, which has resources of upto 2 billion tonnes, is spread over 100,000 acres. It has already been declared a discovered asset and will be the prime source of fuel for Reliance’s power project in Krishnapatnam, Andhra Pradesh. Given the capacity of the mine, the output is expected to be more than that of the largest mine in India.

JSW secures mining rights in Chile
JSW Steel Ltd., a fully integrated steel plant, secured prospecting licences through its Netherlands-based wholly owned subsidiary to explore and exploit magnetite iron ore deposits in northern Chile’s Atacama region. Mining accounts for 45% of the region’s GDP and 90% of its exports. Moreover, various geological surveys have identified new deposits. Iron ore mining is the most dynamic activity and there are numerous small-scale mines, which sell their output to ENAMI (the national mining company) for processing at its Paipote smelter.
According to JSW Steel, the company will pay $52 million (about Rs 200 crore) for mining licences over 1,200 hectares. The move is part of JSW’s efforts to augment captive sources of iron ore and coal, in India and overseas, for its Indian steelmaking operations.

The Chilean venture is JSW’s maiden acquisition of an iron ore asset. On the coking coal front, JSW has secured the Rhone block as part of a joint venture in Jharkhand as well as some licences in Africa. However, the company is still exploring for coking coal mines in Australia and Africa, as it targets steel making capacity of 30 million tonnes by 2020.

Government keen on pushing wind energy
Still a new concept in India, the wind energy sector is estimated to have a potential of over 45,000 MW. The sector, however, given its potential is seeing significant investments from foreign companies who are attracted by the market size, availability of wind farm equipment at competitive prices and favourable government policies.

Foreign players that have entered India’s wind energy sector include Roaring 40s (an equal joint venture between China Light & Power (CLP) and Hydro Tasmania), which is setting up a 50-MW wind farm in Maharashtra. Hong Kong-based CLP is setting up 100 MW and 82 MW wind farms in Gujarat and Karnataka respectively. In addition, Epuron Energy, a subsidiary of Coenergy of Germany, is planning to set up a 550-MW wind farm in the next 3-4 years. Other multinational renewable energy companies such as Westwind of Australia and Axiona of Spain are also planning to invest in wind farms.
  
With less than a fifth of the wind energy potential of the country (7,660 MW) realized so far, a great deal of work is required in this sector of energy. The Ministry of New and Renewable Energy (MNRE) is keen to ensure that energy from renewables equals that from conventional sources over a period of time.

Power sector sulks over special countervailing duty on imports
While a national fund for power transmission and distribution (T&D), a coal regulator along with a coal distribution policy, and increased budget allocation for rural electrification are developments in the right direction, the imposition of a 4% special countervailing duty on imports for power plants less than 1,000 MW is causing a lot of anguish. The Finance Minister announced this new duty even as he was cutting duties on imports for other projects to 5% from 7.5%. The industry believes that the move increases their cost at a time when the country desperately needs investment in the sector.

Industry analysts view the proposed national fund for T&D as aiming to bridge the huge investment gap in the sector. The new fund outlay will clearly accelerate the setting up of distribution and transmission backbones in many villages. The proposal for a coal regulator also might spell relief for generation companies hit by rising fuel prices. This is one of the recommendations of the Hyderabad-based Administrative Staff College and the Shankar Committee on larger coal sector reforms, currently under consideration of the central government.

However, there is one proposal which is unlikely to cheer the power sector. The Finance Minister has amended service tax rules, which could adversely affect T&D turnkey contractors. The service tax applicable on works contracts under the composition scheme for payment has been doubled to 4%. This could affect all engineering, procurement and construction (EPC) players in the industry.

China may overtake India in alternative energy sector
The wind power industry is witnessing the two Asian giants—India and China - vying for the top spot.  While India clearly has been the vanguard, China is fast catching up. The Indian side of the story is atypical with “local issues”, or interference at all levels posing as serious threats to wind power development. The problems also vary from State to State.
According to the Global Wind Energy Council (an international forum for the wind energy sector) Report, over 20,000 MW of wind power was added in the world in 2007 led by the US, China and Spain. China added 3,449 MW during the year and now ranks fifth in installed wind energy capacity with over 6,000 MW at the end of 2007. In comparison, India added 1,730 MW during 2007 taking its total installed capacity to about 8,000 MW, enough to retain its fourth position globally in terms of total installed capacity.

A status report on its wind power industry released by the Chinese Renewable Energy Industry Association clearly identifies the goals set by the country and the roadmap ahead. “China has chosen wind power as an important alternative source in order to rebalance the energy mix, combat global warming and ensure energy security”. Also “supportive measures have been introduced. In order to encourage technical innovation, market expansion and commercialisation, development targets have been established for 2010 and 2020, concession projects offered and policies introduced to encourage domestic production,” says the China Wind Power Report 2007.

UPA widens FDI windows
After prolonged wavering, the UPA government in January 2008 liberalised further the norms for Foreign Direct Investment (FDI) in sectors where billions are expected to flow in almost immediately. These are civil aviation, titanium mining and production and credit information companies. The Cabinet cleared the changes in FDI rules after deferring it in seven earlier meetings.

What has changed?
 
• Blanket cap of 49% FDI in all air transport services revoked
• While 49% cap for domestic passenger airline stays, FDI up to 74% okayed in cargo airlines and ground handling services
• FDI up to 100% for maintenance, repair and overhaul organisations, technical training and helicopter services
• For PSUs in petroleum refining, FDI cap hiked from 26% to 49%. Compulsory divestment condition in favour of Indian partner or public dropped
• 100% FDI in iluminite mining and titanium production, value addition must be done within India and technology fully transferred

Sovereign wealth fund: A necessity for overseas energy assets

The government of India is planning to create a multi-billion-dollar sovereign wealth fund, a first of its kind in India, which aims to invest in energy assets such as oil, gas and coal across the world. This proposed fund would result in higher returns as compared to those investing in domestic projects. Though creating sovereign wealth funds is a common practice in countries worldwide, the proposal is the first of its kind in India.

According to the latest data available with the Reserve Bank of India, the country’s foreign exchange reserves stand at about $290.8 billion for the week-ended February 8. In the previous week, the reserves had surged to $292.67 billion.

A sovereign wealth fund comprises assets such as stocks, bonds and other financial instruments, which is owned and managed by the government. The funds are deployed overseas for higher returns.

Give fiscal support to brownfield airport projects

Jayakrishnan

   AIRPORTS are regarded as a basis for future development and growth of Indian economy. There are as many as 449 airports/airstrips in India, of which only 82 are currently operational and the rest are unutilised or at best being used for occasional aircraft operations. Export by air accounts for 35% of the total value of export from India. Further, 97% of foreign tourists arrive in India by air.
   Air cargo accounts for a major chunk in the total value of exports from India and for the tourism sector and it is the second largest foreign exchange earner in the country. In other words, the sector contributes directly to India’s international competitiveness and the flow of foreign investment. In this context, a huge impetus has been given to it in the eleventh Plan. However, a policy flaw in respect of fiscal concessions to airport projects may hamper private investment in this sector.
   Section 80-IA of the Income Tax Act, 1961 provides for a tax holiday for a period of ten years to enterprises engaged in certain infrastructure projects, including airports. As per the nomenclature of this section, only “new infrastructure facility” is qualified for tax holidays. The concept of new facility is incorporated as a negative test in law by ruling out modernisation and redevelopment of existing projects for tax holiday, as they do not meet the test of “new infrastructure facility”. However, it is also specifically extended to reconstruction/ revival of power generation plants, renovation and modernisation of power transmission and distribution network. But, brownfield projects in airport sector are yet to receive such a positive grace from policymakers. This disparity in the eligibility parametres for tax holiday may be an impediment in meeting the target of Rs 20,27,169-crore investment projected by the planning commission in the infrastructure sector during the eleventh plan period.

The policy flaw may have a negative impact on attracting private investments in the airport sector. Air passenger traffic in India has shown exponential growth during the last few years. As per the Mid Year Review 2007-08 of the finance ministry, passenger traffic during the first half of 2007-08 at domestic terminals and international terminals have shown a growth of 26.5% and 12.3% respectively. This boom in passenger traffic is expected to continue during the Eleventh Plan period. This probable potential in the volume of passengers will inevitably result in corresponding growth in aircraft movements. The number of aircraft is expected to increase by about five times during the period, which warrants substantial augmentation in airport infrastructure. In order to match the growth projections, the eleventh plan envisages an investment of about Rs 40,880 crore for the airport sector, a major portion of which is meant for modernisation and redevelopment of airports. Therefore, enhancement of private investment in airport infrastructure is crucial, which is expected to constitute more than 65% of the total investment in the sector. A minimum guarantee of financial viability is the basic pre-requisite for attracting any investment. That is the case with airport projects also. Factors such as ambiguity on risk allocation, long gestation period etc make brownfield airport projects financially unviable for the initial period. However, financial viability can be corrected by way of government support through fiscal concessions. In the absence of any such government support, attracting private investment in brownfield airport projects seems to be very challenging. Therefore, it is highly necessary to do away with the disparity in the eligibility parametres for tax holidays under Section 80-IA and to treat brownfield airport projects in par with brownfield power projects.
   Infrastructure inadequacies in the airport sector will constitute a significant constraint in realising the development potential of the country. The growth rate aimed by the eleventh plan may not be achieved without attracting huge private investment in brownfield airport projects, for which a rational and enlarged fiscal incentive in the form of a tax holiday is crucial.
   (The author is partner, Corporate Law Group)

The article was published in the Economic Times on 18 February 2008