GAIL Awarded Oil & Gas Pipeline Transportation Company Of The Year

Gail India Ltd has informed that the Company has been adjudged the Oil and Gas Transportation Company of the Year, for the year 2006-07. The award was presented today by Shri Murli Deora, Honble Union Minister of Petroleum and Natural Gas to Dr. U. D. Choubey, Chairman and Managing Director, GAIL in Mumbai today. The award given by Petrofed carries a trophy and a citation.

GAIL owns and operates 6700 km. of natural gas transmission network which is over 82% of the total pipeline infrastructure in the country. The extensive natural gas infrastructure established over the last two decades has enabled sustained development of sizeable gas market in the country. GAIL has a track record of operating the pipelines efficiently and maintaining high safety standards. During the year 2006-07, GAIL handled around 28 BCM of Natural Gas through its Transmission Network and currently, its market share in gas transmission is 79%. The operating performance of the pipelines operated by GAIL has been excellent in 2006-07 and 100% availability of natural gas pipeline systems was maintained. GAIL has robust future plans and a road map has been developed to increase pipeline infrastructure to 11000 km by 2011-12.

In addition to gas pipeline network, GAIL owns and operates worlds longest exclusive LPG Pipeline Jamnagar-Loni pipeline (1269 km) and another one, Vizag-Secunderabad LPG pipeline (653 km). These pipelines have efficiently substituted rail/road transportation of LPG to a large extent in the respective areas and also resulted in reduction of emissions.

During the year 2006-07, GAIL added four new natural gas pipelines viz. Dahej Uran Pipeline, Vijaipur - Kota Pipeline, Kelaras - Malanpur Pipeline, Jagoti - Pithampur Pipeline to provide connectivity to consumers in various parts of the country. In the current financial year, GAIL has completed Dahej - Dabhol pipeline project which has not only revived the Dabhol power project but also provided connectivity between key locations across Gujarat and Maharashtra.

Natural Gas infrastructure being operated by GAIL is providing ready market access to domestic producers, connecting LNG terminals with demand centers, making gas available to customers including those who are remotely located, facilitating development of gas fields which are scattered and devoid of market access. Besides, pipeline network has enabled introduction of CNG/City gas in cities like Delhi, Agra-Ferozabad, Mathura, Mumbai, etc. thereby reducing alarming pollution levels in these cities.

GAIL has successfully implemented a sophisticated, centralized Gas Management System (GMS) and is effectively using it for natural gas transportation through all Trunk Pipeline networks across India. GMS integrates all the shippers, suppliers, customers, and transporter (GAIL) to provide better co-ordination and total transparency in Gas Transportation business.

GAIL is one of the leading public enterprises with a consistently excellent financial track record. Turnover and Net Profits during the last ten years has shown a compounded annual growth rate of 14 per cent. GAILs Turnover in the year 2006-07 went up by 11 per cent to Rs. 16,047 crore. The Profit After Tax during the year 2006-07 was Rs. 2,387 crore.

On the Customer Satisfaction front, the actual upliftment to minimum guaranteed offtake was121%. There was no unscheduled shut down (excluding due to force-majeure events) during FY 2006-07. (Only for one of the LPG Transmission pipelines, no unscheduled shutdown for other pipelines)

On the safety aspect, during FY 2006-07, there were no fatalities and 0.000328 man hours were lost due to accidents per million man hours. On the Environment and Occupational Health and Safety, there was full compliance of Prevention of Air Pollution Act, Prevention of Water Pollution Act, Environment Protection Act, Environment Protection Act and Factories Act.

Strengthening Ppps In Infrastructure

World-class infrastructure creates an enabling environment for growth. In India, there is now a considered response in the form of practical and creative solutions to infrastructure problems.

Over the last decade, infrastructure growth in India has been propelled by Central and State Governments and aided by a host of private investments from within and outside the country.

Today, governments have a greater need for capital for infrastructure, and private investors have a substantial amount of capital for investment.

The result has been a convergence of public need and private capital. More private capital is flowing into infrastructure, more public-private partnerships to build and operate infrastructure are being formed, and more private investment transactions in infrastructure are being finalised.

It is estimated that the infrastructure sector will require an investment of $320 billion during the next five years.

‘Facilitating PPPs for accelerated infrastructure development in India’, a report released by the Department of Economic Affairs (DEA), Ministry of Finance, and Asian Development Bank (ADB), highlights the Government’s commitment to raising the investment in infrastructure from 4.7 per cent of GDP to around 8 per cent.

Given the government’s limited resources, the emergence of Private-Public Partnerships (PPPs) is seen as a sustainable means to bridge the infrastructure funding gap. A PPP cell has been set up in the DEA to administer various proposals and coordinate activities to promote PPPs.

Mechanism

In general, the term PPP broadly means a partnership between the government and the private sector to come together for undertaking a specified project. The project would involve identifying sources for funding, designing, implementing, operating and managing the project.

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In some cases, part of the financing is undertaken by providing capital subsidy for the project, and is partly arranged by the private party with the operations being run jointly or under a contractual arrangement with any other party.

And in another form of financing, the entire capital investment is mobilised by the private sector on the basis of concession agreement signed with the government and levy of user charges to pay for such investment.

Typically, enterprises specialising in different areas form a consortium to bid for projects. For the execution of a project, consortium members form a Special Purpose Vehicle (SPV) to build and operate the asset. The SPV finances the construction of the asset/infrastructure facility through a combination of debt-equity, which is serviced from the revenue flows from the operation and maintenance of such facility.

Statistics

In India, PPPs are on the rise. According to the joint DEA-ADB report, as of December 2006, as many as 86 PPPs were awarded, with road and port projects dominating in both number and size. An estimated 500 PPP projects valued at Rs 34,000 crore are ‘assumed’ to in operation in 12 States and three central agencies.

The World Bank statistics show that during the 15-year period from 1990 as much as $51 billion of public and private investments were pumped into various projects. All this could not have been possible without the Government’s commitment to this model.

For instance, of late there has been more transparency in the entire process, negotiations have been replaced by competitive bidding, model concession agreements have been drawn up at least for highways and major ports, tariffs and user fees have been restructured in some instances.

PPPs can help address both national interest and that of the private sector. The PPP model is intended to allocate risk to the party best able to manage it at least cost.

Under most PPP projects, stronger incentives are provided to the parties for timely execution of services on a continuous basis.

Advantages

Furthermore, by transferring responsibility for providing public services to the private sector, government officials act as regulators and focus upon service planning and performance monitoring instead of the management of the day-to-day delivery of public services.

In addition, by exposing public services to competition, PPPs enable the cost of public services to be benchmarked against market standards to ensure that optimum value for money is achieved. PPPs often allow the public sector to translate upfront capital expenditure into a flow of ongoing service payments. This enables projects to proceed when the availability of public capital may be constrained because of budget constraints or other issues.

While there are significant advantages, it must also be recognised that attracting private capital through the PPPs or any other route is neither easy nor is it automatic. The need of the hour is to ensure that irrational policy measures do not take a toll on the pace of acceleration of reforms.

Key challenges

There is a dire need for standardisation and coordination which is required in different stages and sectors of infrastructural growth. Projects in various sectors, such as highways, ports, water, power, etc., are spread under the management and control of several ministries. This leads to lack of coordination between them. Standardisation is also a major issue which hinders day-to-day operations, as in the case of Central and State level agencies which use different formats, bidding procedures, agreements for same type of projects, making the situation more complex.

Government agencies need to adopt the best practices which have already been evolved in other sectors or by other agencies, thereby cutting down on time and cost inefficiencies in the project preparation and bidding process.

Though 100 per cent Foreign Direct Investment (FDI) is permitted under the automatic route in various infrastructure sectors, the existing regulatory guidelines require SPVs established for infrastructure development to obtain prior approval of the Reserve Bank of India to raise External Commercial Borrowings (ECBs) to finance rupee expenditure cost of such projects. Further, corporate law requires mandatory transfer to statutory reserves before declaration of any dividend, thus resulting in cash trap for investors.

To stimulate private sector investment in infrastructure sector, a 10-year tax holiday in the block of 15-20 years has been provided to the undertaking/enterprise which develops/operates/maintains specified infrastructure facilities. However, such undertakings/enterprises are subject to Minimum Alternate Tax (MAT) on books profits adjusted for specified items, resulting in demand of higher grants from Government, lowering of IRR for the infrastructure project.

This is in contrast to non-levy of MAT on companies engaged in development of Special Economic Zone (SEZ). Accordingly, abolishment of MAT can provide further impetus to private sector investment. Also companies engaged in development of SEZs are exempted from levy of Dividend Distribution Tax (DDT). Similar exemption to infrastructure projects under the PPP model would help boost investment in this sector, as it helps in increasing the return on capital invested.

On the indirect tax front, Custom concessions have been provided in respect of power projects, roads, and ports.

Global lessons

The joint DEA-ADB Report states that India can learn lessons from Mexico, Chile, the US and the Philippines. Global lessons include: Need for detailed policy and planning; strategic planning and management which could include using external technical and financial advisers; optimum allocation of risks between parties; adequate protection to lenders against non-commercial risks relating to force majeure, regulatory changes, contract termination, etc; and avoiding renegotiations and midway changes to save costs and delays.

To encourage more PPPs in infrastructure projects the right institutional set-up must be created, best practices adopted in the project bidding and awarding process, tax inefficiencies must be removed and the regulatory structure liberalised to ensure smooth flow of international capital.