Stalled projects down to 7% of GDP

Govt to try various models to revive investment

The Economic Survey for 2014-15, released on Friday, showed there had been a gradual decline in the rate of stalled projects since last year.

Stalled projects, a key reason for a slide in gross fixed capital formation in the past few years, totalled Rs 8.8 lakh crore (7 per cent of gross domestic product) at the end of December 2014. But, the stalled projects were down to 7 per cent of GDP, compared with 8.3 per cent a year ago.

Of the total stalled projects, Rs 7 lakh crore worth of projects were in the private sector, and the rest in the public sector. Though the numbers might seem large, clearing only 100 of the projects will address 83 per cent of stalled projects by value, the survey notes.

Data clearly distinguish the reasons for stalling of private- and public-sector projects. While the stalled ones in the private sector are due to unfavorable market conditions, regulatory hurdles are the cause for a majority of public-sector stalled projects.

But with stalled projects severely affecting the balance sheets of companies, as well as public-sector banks, it has impaired their ability to launch fresh investments. So, the Survey notes that the burden of kick-starting the investment cycle in the short run lies on the public sector even though the private sector remains key to the rapid delivery of high-quality infrastructure, .

Thus, the Survey advocates the need to restructure the PPP framework to revive interest in infrastructure and bring pension and insurance funds on board. One proposal the survey moots is setting up a high-powered independent renegotiation committee, in line with suggestion from which many in industry.

Though some experts have suggested a new model to kick-start the investment cycle, where the public sector builds assets and transfers it to the private sector for maintenance and operation, the Survey suggests this might not be the best option, as separating construction and maintenance will provide an incentive to raise profits by cutting corners during construction. For example, in highway projects, maintenance costs depend significantly on construction quality.

The Survey suggests a more practical approach will be to experiment with different models. For one, bids for port projects could be on an annual fee basis, with full tariff flexibility. Another, for electricity generation, bids could be in two parts, with a variable charge based on normative efficiency or determined by regulators, and a capacity charge.