Budget 2015: Plan to auction infra projects in 'plug-and-play' mode may hit clearance hurdle

NEW DELHI: The government's plan to auction projects in 'plug-and-play' mode will help woo investors back to the Indian infrastructure space but there are concerns that obtaining clearances before auction will delay award of the projects by at least two years. Finance Minister Arun Jaitely said the government will consider ‘plug-and-play projects’ in infrastructure sectors like roads, ports, rail lines and airports.

The government proposes to set up five new ultra mega power projects (UMPPs) of 4,000 Mw each worth about Rs 1 lakh crore in the mode, whereby all clearances and linkages will be in place before the projects are awarded through auction, he said on Saturday during his Budget speech.

The move was hailed by the industry as it will enable investors to start work on the projects the next day of bagging them, while limiting their risk to the construction period. Experts, however, said implementation of the model will be difficult for the government as it will take at least a year to acquire land and statutory clearances while award of the project and financial closure will take another year.

"The plug-and-play mode is easier said than done. In case of UMPPs, the government has to first decide the location, acquire land for mine and the project, get the environment impact assessment done after which it has to obtain the environment clearances and complete resettlement. It is going to be a tough task," said an expert requesting anonymity. "If the government wants to accelerate development, things which can be done parallely, should not be done sequentially," he added.

Gajendra Haldea, who authored the Electricity Act 2003 and model envibid documents for power plants, said, "It will be a big challenge to find investors and lenders who can finance UMPPs that may cost Rs 25,000 crore each. In my view, the project size should be cut to half. The greater priority should be to fix the several ongoing power projects that are fast running into NPAs."

Arvind Mahajan, head of infrastructure, KPMG, hailed the move but said the key lies in its implementation. "The government has to spend fair amount of time initially to do feasibility studies and the preparation which is being required to incubate before they put out the bids for private sector," he said. Association of Power Producers director general Ashok Khurana said the UMPPs were conceived on the plugand-play basis where a special purpose vehicle formed by the nodal agency would obtain all the clearances and transfer them to the winning company.

He said the budget announcement shows that the government is serious in implementing the model, lack of which resulted in operational issues in all four awarded UMPPs. Reliance Power's Sasan UMPP in Madhya Pradesh has sought tariff increase while Tata Power has been battling to claim additional compensation for high imported coal prices. The other two projects owned by Reliance Power at Tilaiya in Jharkhand and Krishnapatnam in Andhra Pradesh have not taken off after five years of award.

Lack of non-environmental clearances was one of the major reasons behind stalled projects that totaled.`8.8 lakh crore or seven percent of GDP till December 2014.

India Ratings & Research said the plug-and-play model will mitigate implementation risks but participation of Indian private power players could be low given that the lending and equity sentiments in the sector are sagging. "However, this could boost the foreign interest in the sector which will bring in the required equity and more technological inputs for timely implementation and enable efficient operation of these projects."

In the roads sector the plug-and-play model should help projects achieve commercial operations within the stipulated time. The current construction period for most highway projects has exceeded the stipulated construction period of three years resulting in locking up of capital that has huge accumulated interest costs.