India@70: Fast-track Projects For Infra & Realty Sectors

As India steps into its 71st year of independence, two of its key sectors - Infrastructure and Real Estate - are crying out loud for attention and freedom to shift to higher gears. Marred by decades of indifference leading to delayed implementation of key roads, ports, rails and housing projects. While the creation of world-class network of roads, ports, airports, bridges, tunnels among others lies solely in the hands of the Central and State Governments, creation of housing projects for masses, regulation of the housing and commercial real estate developments has been torn between the central government, the state government and the developer and builder community. Corruption, red-tapism, un-holy nexus between stakeholders and lack of will to implement existing and new regulation has shamed the real estate sector in particular. Largely seen as a destination for hoarders of black money or as an easy means for converting any ill-gotten wealth, the real estate sector is grappling to solve the basic issue of timely delivery of projects, large inventory of unsold/unfinished housing units and incomplete of under-utilized malls and commercial complexes.
 
In recent years, a number of regulations and new laws have been brought in as corrective measures to free the sector of its legacy issues. The Real Estate Regulation Act or RERA, laws on curbing black money and Benami transactions and the recent Goods and Services Tax - all of whom will go a long way in making a brighter tomorrow for the housing sector. But that has to stand the test of time. What happens in the interim? Who needs to take the onus of housing projects left hanging for years where the end-consumer has paid most of the money to the developers and yet awaits the delivery of his/her dream house? RERA does not have any answers. Neither do any of the other regulations.
 
Let us take up the issues for the Real Estate Sector first and then tackle the overall Infrastructure Sector.
 
Freedom from unscrupulous builders:
The region of NOIDA and Greater NOIDA are not the isolated instances where thousands of home-buyers are left waiting for their dream homes because the builders took the money and diverted it to other projects/elsewhere as a result creating more unfinished/un-delivered projects. Take for example the recent instance of Jaypee Infratech. The National Company Law Tribunal or NCLT had on August 10 appointed the insolvency professional for Jaypee Infratech, giving thousands of buyers in Jaypee projects two weeks to raise claims related to their flats or plots as part of a court-driven attempt to put in place a revival plan for the developer's delayed housing projects. The Allahabad bench of the NCLT declared Jaypee Infratech as an insolvent company. Insolvency means a company can's pay its debt because of poor liquidity or its liabilities are bigger than its assets. The NCLT has appointed insolvency professional Anuj Jain as CEO of Jaypee Infratech. As of now the board of directors of the company has been suspended. Jain will now sit with Jaypee’s creditors to see if a resolution of the company’s debt is possible. He will be given six months to revive the company. This period can be extendable by another three months.
 
According to reports, the Jaypee Group is currently involved in the construction of around 27,000 units of residential housing across 26 projects, having taken up to 90 per cent money from the home-buyers and not delivering a large chunk of the houses due to lack of fund, growing debt among several othe reasons. While the NOIDA authorities are claiming to have urged the company to continue the construction work and deliver the units in a time-bound manner, there is no official word from the group yet. There are similar cases filed against more builders from the area and a similar outcome is expected in the future where the companies under question will be declared insolvent. This raises several questions like why did the situation reach this point? Could it have been avoided? Is the developer alone responsible? What is the role of local authorities who sanction all necessary permits? What is the role of the state government? Can the government intervene in such instances involving a private developer and citizens? What is the role of banking and financial institutions who continue to lend money to consumers in such projects? Do banks undertake a detailed scrutiny of such developers on parameters like the ability to complete projects and deliver them to the end-customer? Or the financial health of the company/group? If so, then why does the situation allowed to turn for the worse? While RERA has provided answers to these situation but it will be applicable to future projects in many instances across states?
 
Freedom to buy from completed projects?
In the post-RERA era, consumers will know for sure that the projects launched by the developers will get delivered on time, with no cost escalations or hidden costs and there won't be any post-delivery hassles like lack of connecting roads, sewage lines, electricity connections, etc. All this will be possible because for every project, the developers will be required to maintain a separate escrow account with 70 per cent money collected from home-buyers to be used for completing the project. All approvals from authorities would be required before launching any project etc. But what about having a sub-policy framework, may be perhaps within the RERA provisions, of encouraging builders and banks to join hands and complete projects first. And then bring it to the market for the home buyers like it happens in several developed countries. That way, consumers get to buy a finished product; builders get a upfront payment; bankers are secure as they have a finished and ready-to-use home as a collateral which can be leveraged in case of any eventuality etc. "In order to reach such a scenario, the banking system will need to be robust. In the current era, with mounting non-performing assets, banks cannot even explore such a possibility. But yes, its a proven concept and it works elsewhere. At some stage, may be in a few years from now, such a possibility will be a reality," says the CEO of a leading Gurugram-based developer.
 
In recent years, there have been a number of positives too in the realty sector that should find mention here. For example: the Canada Pension Plan Investment Board, the Canadian pension asset manager, entered into a non-binding agreement with Island Star Mall Developers (ISML), a subsidiary of Phoenix Mills, to acquire up to 49 per cent in ISML recently. Then Altico Capital, a non-banking finance company teamed up with American PE firm KKR to invest Rs 435 crore in a 66-acre residential township being developed by SARE Homes in Gurugram. Or Macquarie Infrastructure and Real Assets and Tata Housing having entered into a 70:30 partnership to invest Rs 1,400 crore and Rs 600 crore respectively in high-end residential property projects, starting with four major cities of Mumbai, NCR, Bengaluru and Pune. Or Indiabulls Housing Finance has raised over Rs 1,300 crore (US$ 195 million) by selling masala bonds to foreign investors, which would be used partly for its affordable housing segment. And PE firm Warburg Pincus having invested Rs 1,800 crore in Piramal Realty for a minority stake in the company. There are several more such positive indications that those involved in propogating transparent business practices in the real estate market, are doing robust business even in today's market conditions.
 
INFRASTRUCTURE SPACE: Freedom to Move on a Faster Track
Time-bound completion of infrastructure projects is perhaps the single biggest challenge from which India needs to be freed. Take for example the roads sector. India has the second largest road network across the world at 4.7 million km that is used to transport more than 60 per cent of all goods in the country and 85 per cent of India’s total passenger traffic. Rapid urbanization coupled with growing sales of automobiles and movement of freight by roads is forcing the authorities to create an adequate road network to cater to the increased traffic and movement of goods. While the construction of highways reached 8,142 km during FY 2016-17, with an all-time high average pace of 22.3 km per day, much more needs to be done in quick time.
 
According to J Bhattacharya, an expert on infrastructure sector, allocation of budgets for infra development in one aspect. The efficiency to spend from an outcome perspective in a time-bound manner is quite a different thing altogether. "In 2016, out of a total 1702 transport infrastructure projects under implementation stage, 832 were reported to be grappling with either time or cost overruns with time delay of as high as 100 months for some of them. Hence, regulatory measures are essential to avoid delays at each stage – from project approval to awarding of the contract, to its implementation such as online and single window clearances for starting an infrastructure project, improving the routine procedures required for obtaining work permits and the process of land acquisition is the call of the hour," he says adding that in the Budget 2017-18, along with an increase in budgetary allocation for the infrastructure sector, it is crucial to establish regulatory mechanisms in infrastructure creation, which enables private investment in infrastructure funds such as National Investment and Infrastructure Fund (NIIF).
 
Some of the other experts we spoke to agree with Dr Bhattacharya. One such expert said: "Provisions for attracting global funds such as pension funds and sovereign wealth funds, would go a long way in facilitating infrastructure development." In addition, a more aggressive adoption of asset recycling is desirable, as it would free up a very significant amount of funds which can be further invested into more infrastructure, with the government developing such infrastructure and addressing the associated risks that the government is best placed to address, while providing low risk assets to the global funds, and making very significant returns on the investments made, says Bhattacharya.
 
Infrastructure experts are united in backing the proven Public-Private-Partnership (PPP) route. "It needs to be further strengthened as it has been able to deliver world class infrastructure in sectors such as airports. In 2015, the Kelkar Committee suggested overhauling of the PPP framework in India through measures such as funding through hybrid models, adoption of international best practices, allowing for the renegotiation of contracts and discouraging Swiss challenge method in the procurement process should be re-examined," says AK Agarwal, another infrastructure and PPP expert from EY.
 
Bhattacharya says the government aggressively adopted the Hybrid Annuity Model (HAM) in highway construction and for Namame Gange, in order to strike a balance between EPC based contracts and PPP based contracts, where risk sharing between the government and the private sector are at extremes. "The government should follow up with additional action by adopting alternative risk-sharing arrangements with the private sector, issuing clear guidelines for renegotiation of PPP contracts and ensure a robust regulatory environment for domestic and international funding of infrastructure by introducing an independent PPP regulator in India," he adds.
 
Railways: The modernization of Indian Railways has been one of the top priority of the central government. Therefore, announcements of allocation of funds have been made at regular intervals. Railways raising funds from LIC has also made headlines. But what ails this sector? According to Agarwal of EY, funds have never been the concern, it’s about debt servicing. While the overall GBS has gone up, railways has been losing traffic — both passenger and freight. There is no detailing on how railways will increase its throughput by 10 per cent. How will railways increase its speed? Which lines will get promoted? Where will the upgradation happen? There are no detailing on these important issues even today,” says Agarwal. Additionally, railways have large land banks. They need to monetise them in a manner that they generate a long-term annuity income. Experts hope these key issues will be addressed during the course of time.
 
Shipping: The Shipping Ministry has invested around Rs 80,000 crores in the past two and a half years for building world class highways and shipping infrastructure in the country. The Government of India is expected to invest highly in the infrastructure sector, mainly highways, renewable energy and urban transport, prior to the general elections in 2019. The Ministry of Shipping plans to undertake development of 37 national waterways (NWs), out of the 111 NWs declared under the National Waterways Act 2016, in the next three years, which would have positive impact on reduction of overall logistics cost. Till these projects are actually ready to use and the benefits of using them are evident, such projects and those announced by every central government in the past two-decades will not have any realistic meaning. Let us, all Indians, hope and pray that as we move towards completing 100 years of independence in 2047, India would by then have emerged as a developed country complete with all modern and updated infrastructure and an example for the world to see.