In a bid to stimulate and strengthen the Indian economy amidst the nationwide lockdown to contain the coronavirus (Covid - 19) pandemic, the Government of India ("Central Government") rolled out an economic package named the Atmanirbhar Bharat Abhiyan ("Atmanirbhar Bharat Abhiyan"). The Atmanirbhar Bharat Abhiyan was released in 5 (five) tranches and consists of targeted relief measures for various sectors. In this alert, we have discussed measures and reforms announced for the energy and infrastructure sector. The fourth tranche of the Atmanirbhar Bharat Abhiyan, which was released on May 16, 2020, primarily dealt with structural reforms relating to the following verticals within the energy and infrastructure sector: (a) coal; (b) power; (c) civil aviation; (d) minerals; (e) social infrastructure, and (f) nuclear energy. The intent behind these reforms is to increase efficiency in these verticals and attract private sector investments in these verticals.
2. KEY ASPECTS OF THE STRUCTURAL REFORMS TO THE ENERGY AND INFRASTRUCTURE SECTOR
2.1 A brief outline of the relief measures announced for the energy and infrastructure sectors is discussed below.
The Mineral Laws (Amendment) Act, 2020, promulgated as an ordinance in January, 2020, was passed by the Parliament to amend the Coal Mines (Special Provisions) Act, 2015 and the Mines and Minerals (Development and Regulation) Act, 1957 to ease restrictions on end use and to relax the eligibility criteria for participating in coal auctions.. This was primarily done to kickstart the commercial coal mining auction process. To attract private investment in the coal sector, the Central Government has introduced the following measures:
- To reduce dependency on import of coal and increase self-reliance in coal production, the Central Government proposes to allow private players in the coal sector, and plans to introduce competition, transparency and private sector participation in the coal sector through a revenue sharing mechanism. Further, the Central Government also proposes to liberalise entry norms for private players and offer nearly 50 (fifty) blocks immediately for allocation. The liberalisation of entry norms would see the removal of the eligibility conditions apart from upfront payment with a ceiling. The Central Government proposal envisages setting up an exploration-cum-production regime for partially explored blocks, as opposed to the prevailing provision of auction of only fully-explored coal blocks. This is expected to allow and incentivise private sector participation in exploration. Additionally, the Central Government has decided to grant incentives by means of a rebate in revenue share if the production occurs earlier than scheduled. The Cabinet Committee on Economic Affairs has approved the adoption of methodology for auction of coal and lignite mines/blocks for sale of coal / lignite on revenue sharing basis, and has increased the tenure of coking coal linkage.
- To create the required infrastructure to support coal mining, the Central Government has also proposed to infuse INR 50,000 Crores (Rupees fifty thousand crores) for the evacuation of Coal India Limited's target of 1 billion tonnes of coal production by 2023-24 as well as coal to be produced from private blocks. This investment amount includes INR 18,000 Crores (Rupees eighteen thousand crores) worth of investment in mechanised transfer of coal from mines to railway sidings. The Central Government is also planning to incentivise coal gasification and liquefaction through granting rebate in revenue sharing. Both these measures will help in reducing environmental impact.
- The extraction rights of coal bed methane are proposed to be auctioned to private participants from Coal India Limited's mines. Additionally, the Government also proposes to adopt measures to ease business operations in the coal sector - such as mining plan simplification, which will allow for automatic 40% (forty percent) increase in annual production.
- To benefit the consumers of Coal India Limited, the Central Government also plans to provide relief worth INR 5,000 Crore (Rupees five thousand crore) in relation to concessions in commercial terms. The proposed measures include reduction of reserve price in auctions for non-power consumers, easing of credit terms, and enhancement of the lifting period.
In addition to the measures announced for easing the liquidity pressure on distribution companies ("DISCOMs") on May 14, 2020, the Central Government, with an aim to cut electricity losses below 12% (twelve percent) and to revive the power sector, has introduced the following reforms:
(a) Introduction of a new tariff policy
The Central Government intends to roll out a new tariff policy ("Tariff Policy") which will address the following:
- Consumer rights : The Tariff Policy will ensure that the inefficiencies faced by DISCOMs do not affect the consumers and that consumers have adequate rights. Further, the Tariff Policy will also prescribe standards of service and associated penalties for the DISCOMs. The Tariff Policy will include provisions to ensure adequate power for consumers and penalise DISCOMs for load-shedding.
- Promotion of the industry : Progressive reduction in cross-subsidies would be a fundamental aspect of the Tariff Policy. Further, it would also provide for time bound grant of open access. In order to guarantee transparency, the selection of generation and transmission project developers would happen on a competitive basis.
- Sustainability of the sector: The Tariff Policy would aim to provide better payment security to the generating companies. Introduction of direct benefit transfer for electricity subsidy and the mandatory usage of smart prepaid meters are also in consideration which will be incorporated in the Tariff Policy. Further, provisions of creation of "regulatory assets" will be excluded from the Tariff Policy.
(b) Privatisation of DISCOMs in union territories
The financial distress faced by DISCOMS and consequent payment delays have had a negative impact on the investment sentiment in the power sector. The bad financial condition of DISCOMs adversely affects their ability to buy power for supply, and the ability to invest in improving the existing distribution infrastructure, consequently impacting electricity distribution quality - past measures such as the Ujwal DISCOM Assurance Yojana have not been very successful in fixing the underlying issues faced by DISCOMs across India.
To undertake structural reforms in functioning of DISCOMs, the Ministry of Power has been considering the privatisation of DISCOMs across the country. Privatisation of DISCOMs has been tested in some places in India, such as Delhi, Mumbai, Ahmedabad and Odisha. Under the Atmanirbhar Bharat Abhiyan, the Central Government has proposed to privatise the DISCOMs in all of India's union territories ("UTs"). DISCOMs in UTs are administered by the Central Government, whereas the ones in the States are not. Accordingly, while the Central Government will privatise DISCOMs in the UTs, it is exploring the option of public-private partnerships ("PPP") for DISCOMs in States.
It is anticipated that the privatisation of DISCOMs will be a significant step towards resolving the structural issues faced by the power sector, and is expected to lead to better service to consumers and is also likely to bring about improvement in operational and financial efficiency in power distribution.
In relation to the minerals sector, the following measures were announced:
(a) Private investments in the mineral sector
The Central Government has introduced structural reforms aimed at the mineral sector to boost growth, employment and promote use of state of the art technology. These reforms are intended to bring about greater private investments in the sector and are expected to benefit companies involved in the business associated with aluminum, iron ore and limestone.
Primarily, the Central Government has planned to introduce a seamless composite explorationcum-mining-cum-production regime - under the proposed new regime, 500 (five hundred) mining blocks would be offered through an open and transparent auction process. Further, to enhance the competitiveness of the aluminum sector, the Central Government has resolved to conduct joint auctions of bauxite and coal mineral blocks.
(b) Policy reforms
The distinction between captive and non-captive mines is set to be removed to permit the transfer of mining leases and sale of excess unused minerals - this is a very welcome step which is expected to cause better efficiency in mining and production. The Ministry of Mines has been tasked with the responsibility to develop a mineral index for different minerals. Further, the stamp duty payable at the time of award of mining leases is proposed to be rationalised.
2.1.4 Nuclear Energy
Under the Atmanirbhar Bharat Abhiyan, the Centre intends to establish a research reactor under the PPP model for the production of medical isotopes. The Central Government also intends to establish facilities to use irradiation technology for food preservation, which would also be implemented under the PPP model. Additionally, the Central Government intends to set up Technology Development-cum-Incubation Centers to foster synergy between research facilities and tech-entrepreneurs.
2.1.5 Civil Aviation
The civil aviation sector has been one of the hardest hit sectors by the ongoing coronavirus pandemic and the nationwide lockdown. Consequently, the airline revenues have plummeted and the sector is unable to service its fixed costs and other liabilities. Further, despite falling aviation turbine fuel prices internationally, high taxes on fuel have been a pain point for airlines. As a response to the crisis in the aviation sector, the Central Government has proposed the following measures to revive the sector:
(a) Efficient airspace management
Currently, only 60% (sixty percent) of the Indian air space is available for usage by the civil aviation sector. Consequently, airlines have been forced to ply on longer routes. Since 2014, the Airports Authority of India ("AAI") had recommended the flexible usage of airspace as a measure to promote sustainability. Subsequently, the Ministry of Civil Aviation has also espoused this view.
The restrictions on the utilisation of Indian air space are proposed to be eased in order to make civilian flying more efficient. By encouraging efficient air space management for civil aviation, the Central Government intends to bring about optimal utilisation of the airspace and a total benefit of about INR 1,000 Crore (Rupees one thousand crore) per year for the aviation sector. This measure is also expected to have a positive impact on the environment and reduce fuel usage and flight time - it is anticipated that subsequent cost benefits will trickle down to consumers.
(b) More airports through PPP
The Central Government intends to develop world-class airports in India under PPP in three rounds - adoption of PPP-model for more airports will enable AAI to develop smaller airports.
Under the first round, which is already underway, the AAI had awarded 3 (three) airports out of 6 (six) bids for operation and maintenance on a PPP basis. In this first round, the annual revenue is expected to be INR 1,000 Crore (Rupees one thousand crore) per year and AAI is also expected to receive a down payment of INR 2,300 Crores (Rupees two thousand three hundred crore).
With regard to the second round, the Central Government has identified 6 (six) more airports. The bid process for the second round is slated to commence immediately. The Central Government expects that additional investment by private players will gather around INR 13,000 Crores (Rupees thirteen thousand crores). Another 6 (six) airports will be put out for the third round of bidding - the announcement from the Central Government does not mention the names of the identified cities for any of these rounds.
(c) Making India a hub for MRO
The aircraft maintenance, repair and overhaul ("MRO") industry, which forms a core component of the aviation ecosystem, was in focus in the Union Budget. India has a limited MRO industry, which has been disadvantaged by the fact that Indian airlines usually avail MRO services from overseas players.
As a measure to uplift the domestic MRO industry, the Central Government has promised to take steps to position India as a hub for MRO activities. The Central Government has rationalised the tax regime in respect of MRO. The Government anticipates that aircraft component repair and airframe maintenance segment, which is worth INR 800 crore (Rupees eight hundred crore), is expected to increase to INR 2,000 crore (Rupees two thousand crore) in the next 3 (three) years. The Government anticipates that convergence between the defence sector and the civil MROs will create economies of scale. If India becomes a hub for MRO activities, it will result in savings of precious foreign exchange and will also enable Indian airlines to service their aircraft locally.
2.1.6 Social Infrastructure
To boost private sector investments in the social infrastructure projects, the Government of India has allocated INR 8,100 Crores (Rupees eight thousand one hundred crore). The Central Government will enhance the quantum of Viability Gap Funding ("VGF") up to 30% (thirty percent) each of the total project cost as VGF by the Centre and State/Statutory Bodies in respect of social infrastructure projects. For other sectors, VGF support of 20% (twenty percent) each from Central and States/Statutory Bodies shall continue.
2.1.7 Apart from the measures across sectors mentioned above, the Central Government also proposes to introduce incentive schemes for promotion of new 'champion sectors' such as solar PV manufacturing and advanced cell battery storage.
Originally published May 2020.
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