role of indian logistics industry in international trade-dissertation-ac

8/12/2019 Role of Indian Logistics Industry in International Trade-dissertation-AC

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dissertation 2014

HEISENBERG AC 2014 Do Not Copy

STUdy of The Role of indi n logiSTicSindUSTRy in inTeRn Tion l TR de

Dissertation Report


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CONTENTS

__________________________________________________________________

Executive Summary

Chapter 1 Introduction1.1Introduction1.2Role of Logistics in International Trade1.3Problem Statement

Chapter 2 Review of Literature

Chapter 3 Research Methodology

3.1 Objective3.2 Scope of research

3.3 Sources of data

Chapter 4 Trade and Logistics Analysis4.1 Trade Analysis

4.2 Logistics Analysis

Chapter 5 Infrastructure of the Indian Logistics Industry5.1 Seaports

5.2 Railways5.3 Roadways

5.4 Air cargo and Airports5.5 Warehousing

Chapter 6 Private Public Partnership Models

6.1 Challenges in PPP6.2 Key Sectors/Industries for PPP

Chapter 7 FTA, FTZ, FTP

7.1 FTA7.2 FTZ

7.3 FTP

Chapter 8 Recommendations and actions required

Chapter 9 Conclusion

References

Annexure


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EXECUTIVE SUMMARY

__________________________________________________________________

With increasing globalization, there has also been an increase in the trade volumes

between nations. Developed countries have and will continue to form trading blocks, whichmight jeopardize the developing and emerging economies, because of their lack of infrastructure,

poor policy and regulatory environment, technology, skills and manpower. Even though Asia is

said to become the trading hub in the near future, the question remains if India will play a major

trading hub in Asia.

To sustain and drive economic growth, the movement of goods associated with a mature

economy will require a vastly superior service sector as well as physical logistics infrastructure.

The transformation of Indias logistics landscape needs a clear, long-term and sustainable vision

encompassing initiatives that are proactive rather than reactive to leverage Indias economic

potential in the future.

This study proves that a countrys ability to trade globally depends on its traders access

to global freight and logistics networks. And the efficiency of a countrys supply chain (in cost,

time and reliability) depends on specific features of its domestic economy (logistics

performance). Better over-all logistics performance and trade facilitation are strongly associated

with trade expansion, export diversification, attractiveness to foreign direct investment and

economic growth.

This study analyzed the current trade and logistics scenario of India. In the trade analysis,

India is compared with the other BRIC nations, Germany and Poland, with respect to cost and

quality of trade. With the help of the Logistics Performance Index, these countries are

graphically ranked. In the logistics analysis, we study the industry characteristics, infrastructure

status, various private partnership models and other policy and regulatory concerns. Towards the

end of the study, various recommendations are provided.


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CHAPTER 1: INTRODUCTION

__________________________________________________________________

1.1 Introduction:

Economists have known that international trade is one of the most important ways in which

societies can increase their standard of living, since the time of Adam Smith and David Ricardo,

with their work on specialization and comparative advantage. The connection between

international trade and economic growth is supported by evidence from every period of human

history. The Roman Empire was rich in part because it was able to trade over long distances. The

spice trade between Europe and Asia was the first example of how trade between these two

continents could enrich both places. The 19th

century saw an unprecedented rise in trade, with a

big reduction in piracy and huge improvements in the quality and speed of shipping. Nineteenth

century clipper ships established that there really was a market for premium priced speedy

logistics, and that such a market was large. This was also the period in which modern economicgrowth first became established. Between the wars, in contrast, the rise of protectionism and the

collapse of world trade exacerbated and extended the Great Depression, bringing and extending

economic misery to millions of people. The post world war saw trade increase dramatically,

bringing with it new found and unprecedented prosperity. International trade increased the

standard of living, both for those in developed and for those in developing countries.

The modern world trades like never before. In simple weight terms, more than seven times as

many goods are traded now as fifty years ago. Even more impressively, after stripping out the

effects of inflation, the value of goods traded internationally has increased by more than 16-fold

in the last half century. That the value of international trade has been increasing more rapidlythan the weight of goods traded tells us that immediately that the types of good being traded have

changed. Although bulk cargoes such as grain and oil remain important in volume terms, today

high value added merchandize is critical to trade performance.

The increasing value of goods shipped means that, now more than ever, time matters. No longer

is trade simply concerned with low value bulk goods that can be stored on arrival until needed.

Trade today is increasingly dominated by high value, time critical goods, both as part of global

supply chains and for the final customer.

Moreover, the direction of global trade is set to change as a mega agreements like the Trans-Pacific Partnership (TPP) and Trans-Atlantic Trade and Investment Partnership (TTIP) come

into force. The TPP includes 12 of the pacific rim countries including the US and Australia,

whereas TTIP is between the US and European Union. Respectively they represent around 39%

and 60% of the world GDP. They have the potential to adversely affect excluded countries such

as India by diverting trade and investment away from them and weakening their positions in

global value chains.


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As a result of TPP and TTIP, Indias nominal GDP is expected to be reduced by more than one

per cent and the resultant negative multiplier effects on revenue ad employment generation will

be substantial. Much of this impact will not be on account of reduction in tariffs in TPP and

TTIP countries (as they are already low), but as a result of removal and/or harmonization of non-

tariff measures, particularly in respect to process and product standards, the application of

intellectual property rights and other behind-the-border trade facilitation measures.

As a result, some of the TPP and TTIP countries are expected to enhance their internal supply

potential which can further shrink their existing export markets that India enjoys with them.

Which is why, now more than ever, India needs to improve its trade scenario. And not just with

the exports and imports, but it is important to improve the countries logistics infrastructure,

regulations and policies surrounding the tariffs and non-tariff measures in order to put India on

the mark.

1.2 Role of Logistics in International Trade:

International trade does not happen by itself. Companies make conscious decisions as to where

to produce their goods, where to sell them, and how to move them from one to the other. There

are many aspects to that decision, but one important aspect is the quality and cost of logistics. It

is of no use having very low production costs in a particular place if the finished product cannot

be moved easily, cheaply and reliably to the customer.

There are two principle aspects to good logistics. The first is cost: lower costs are self-evidently

attractive to firms. The second is quality: logistic reliability is paramount for many companies.

There are clear interactions between cost and quality, but these are not straightforward. At one

level it is always possible to pay more for better quality. But it does not follow that higher costsin a country necessarily imply higher quality logistics. Some countries have higher wage rates, or

greater restrictions and regulations that increase cost without increasing quality. Other countries

have regulations and restrictions that make logistics unreliable, or poor quality infrastructure that

means that delays are common. It is therefore necessary to consider that these two aspects of

logistics separately. It is also necessary to remember that individual firms will have different

preferences over cost and over reliability. Producers of relatively low-costs goods will be willing

to take more risks on reliability in exchange for lower costs. In contrast producers of relatively

high-value goods, especially high-technology or other products with limited shelf life, will be

more willing to pay higher prices for greater reliability. The last 25 years have seen a particular

increase in the quantity of high-technology goods that are exported, often over very longdistances. For that reason we concentrate particularly on the effects of logistics quality on trade.

It is also worth noticing that it is transport and logistics cost, not tariffs that are the biggest

barrier to trade While reductions in tariffs would be extremely beneficial for particular products,

reductions in transport costs are more important for trade as a whole. These reductions can be


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achieved both by governments reducing obstacles to trade, and by private sector logistics firms

becoming more efficient.

1.3 Problem Statement:

With the increasing pace of global integration, there is a need for India to compete in terms of itsability to link with global and regional markets - competitively and effectively. This study

focuses on the status of the Indian logistics industry and the various facets of improvement

required in its trade logistics. Improving the quality of logistics and transport systems and

simultaneously reducing costs improves international market access, and leads directly to

increased trade.


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CHAPTER 2: REVIEW OF LITERATURE

__________________________________________________________________

As the pace of global integration continues, developing countries will compete

increasingly in terms of their ability to link with global and regional markets competitively and

efficiently (Schware and Kimberly, 1995). In making trade happen, both government and private

sector play roles, which may either improve or worse the conditions for trade (Tim Leunig, Chris

Minns and Diana Weinhold). In their study International Trade, Express Logistics and

Globalization: part and parcel of the solution to current economic problems, they explained that

those countries that create the best conditions will attract companies that are part of the global

economy. This is particularly important for developing countries for which access to world

markets is an absolutely critical part of their drive for prosperity. Although innate geographical

location and hard-to-change wage and skill levels explain a great deal of world trade, our

research sows that trade infrastructure, both physical and legal, matter a great deal in explaining

which countries are most successful in international trade

But why focus on logistics? Because reducing cost and improving the quality of logistics and

transport systems improves international market access and leads directly to increased trade, ad

through this to higher incomes and the scope for significant reductions in poverty (Robin

Carruthers, Jitendra N. Bajpai, David Hummels). In their studyTrade and Logistics : An East-

Asian Perspective, they have noted that East Asias progress on logistics has failed to keep pace

with its growth in trade. Developing countries in other regions are now catching up, and so faster

progress on logistics development will be crucial to sustaining East Asias competitive

advantages. For most countries in East Asia, including India, high logistics cost derives from

poor transport infrastructure, underdeveloped transport and logistics services, and slow

bureaucratic procedures for dealing with both exported and imported goods. The balance among

these three varies among countries, but in each country a complementary approach to address all

of them will be needed to produce a sustainable improvement in competitiveness. Recent studies

have indicated the importance of efficient ports (in terms of operational and document

facilitation) for trade competitiveness, but the arguments presented in this study shows that ports

are only one aspect of the connection between logistics and trade growth. While understanding

the total cost of getting products from producers to markets, land transport to ports accounts fora higher proportion than processing within the port or the maritime voyage itself; its

improvements in land access that offers the greatest scope for increasing trade competitiveness.

AWorld Bank Study by Wilson and others (2002) shows that APEC (Asia Pacific Economic

Cooperation) countries differ substantially in the quality of their logistics and trade facilitation

across a broad range of measures, including port infrastructure, customs clearance, regulatory

administration and e-business use. They find these differences are significantly related to


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differences in trade performance, and conclude that substantial growth in trade within their block

could be accomplished by bringing lagging countries up to media performance levels.

Logistics, organizing the movement of goods over time and space, has evolved from its

19th

century military roots to todays international supply chain. As the backbone of international

trade, logistics encompasses freight transportation, warehousing, border clearance, paymentsystems, and many other functions. These functions are performed mostly by private service

providers for private traders and owners of goods, but logistics is also important for the public

polices of national government and regional and international organizations. The improvements

in global logistics over the past two decades have been driven by innovation and a great increase

in global trade, as mentioned in Conecting to Compete: Trade Logstics in the Global Economy

(2012), a study by World Bank. According to this study, the LPI (Logistics Performance Index)

measures the on-the-ground trade logistics performance, helping national leaders, key policy

makers and private sector traders understand the challenges they and their trading partners face

in reducing logistical barriers to international commerce.

As discussed in Deloittes Knowledge paper on Intermodal and Multimodal Logistics,

India has experienced fast-paced growth over the last decade. Though the growth has primarily

come from the services sector, manufacturing and exports have also risen substantially. Logistics

as a function is being increasingly outsourced by manufacturers. However, the Indian logistics

sector I may ways still lags behind the global standards of performance. This is evident from the

fact that we are ranked as low as 46th

among 155 countries in the World Bank LPI.

Comparatively, our neighbor China got the 26th

rank. The average logistics cost in India is

around 13% of GDP. Given there is a substantial need to invest in, and improve efficiencies in,

intermodal and multimodal logistics sector so that the friction costs do not impede the desired

shifts.

Coming back to Indias trade, in the process of globalization which is escalating Indias

position in world trade, transport volume has climbed rapidly in recent years. In the study done

by DHL, Discover Logistics, it is said that a vital step in developing Indian infrastructure is

expansion of road and rail networks, and also modernizing harbors and airports. However, the

expansion of the logistics infrastructure has been incapable to keep up with this pace. For this

reason, transport capacities have already reached their limits. The transshipment times for ships

in Indian harbors are three to four times longer than the average time in the west. Logistics costs

are also very high in international comparison because of the poor infrastructure. For this reason,

India will have difficulties positioning itself as a global logistics hub in years ahead.


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CHAPTER 3: RESEARCH METHODOLOGY

__________________________________________________________________

3.1 Objective:

With increasing globalization and growth in Indias manufacturing sector, trade volumes from

and to India have been increasing. To cater to the growth in export and import, it is necessary to

step ahead and focus strongly on improving logistics and trade infrastructure. The study therefore

lies in finding out the gaps in the existing systems and revolves around the questions What India

must do to improve its logistics performance? and How India can become a major trade hub in

Asia?

3.2 Methodology:

This is a descriptive study done on the industry and trade scenario of India. The study is done

based on previous research and material. A qualitative analysis is done on the logistics industry,

and on the basis of that various facets for improvement are studied further.

3.2 Scope of research:

This study will cover analysis of logistics and trade scenario pertaining to India, with a few

references (for purpose of comparison) to the other BRIC nations, Far East Asia , Europe and

America.

The research done for the study is descriptive. This study is therefore doe on a collection of

research papers, articles, blogs and white papers to help gain an idea of the current logistics

industry and trade outlook of India. Based on the research done, both trade and logistics analysis

of the Indian industry is done.

3.3Source of data Internet Reference books Research articles White papers Blog pages


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CHAPTER 4: TRADE AND LOGISTICS ANALYSIS

__________________________________________________________________

4.1 Trade Analysis:

In this section we will concentrate on the experience of companies who trade with four important

nations: Brazil, Russia, India and China. All of these countries are large and important in

themselves, together accounting for 40% of the worlds population and 15% of the global

economy, and in addition they also serve as exemplars of the situation of other emerging

economies. Brazil is in many ways the most developed of these economies, but despite its greater

wealth it is in many senses less developed in terms of its role in world trade. Russia is notable

for the extent of its mineral wealth, and its trade position is determined to a much greater extent

by the commodity cycle. India is the least developed of the four nations, but in many ways the

export sector, with a high emphasis on services, is remarkably modern. And China, of course, is

now the workshop of the world. In order to place the experience of these four nations intocontext, we will also include two other countries in our analysis. The first country is Poland.

Poland is also an emerging economy, but one that is remarkably different because of its position

within the European Union. This matters both in general and obviously for logistics: it is very

easy to move goods from Poland to Western Europe. And finally we will consider the position of

Germany, which we use as a representative developed nation. Emerging economies increasingly

benchmark themselves not only against each other, but against developed nations such as

Germany.

4.1.1 Cost

The two most important means of transporting goods for international trade are by air and

sea. Freight sent by air express will always be more expensive than sea borne freight, but

there is no constant ratio between these two costs over time. The responsiveness of air

express supply to changes in demand is reasonably high, since additional aircraft can be

usually leased at relatively short notice. In addition, a significant proportion of air express

is carried on passenger flights, where additional capacity is usually available. The ability

of supply to respond effectively to peaks and troughs in demand is one of the attractions

of air-borne freight, and keeps the price constant year on year. Of course, the cost of air

express varies over time, with fuel prices playing an important role in determining the

charges in this sector

The cost of sea-borne freight varies more dramatically, as shipping capacity is essentially

fixed in the short run - it is hard to lease additional ships, and only little cargo can be

carried on passenger vessels. When demand rises, cargo ships take time to build, so

prices can rise substantially in the short run. And since ships, unlike planes, require

significant levels of maintenance even when not being used, shipping companies


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generally prefer to have their ships sailing even when the returns are low. This means that

when demand falls, prices can fall dramatically. The prices of sea-borne freight are also

volatile because ships built to carry one type of cargo cannot easily carry other sorts of

products. A liquefied natural gas tanker cannot carry cars, a car carrier cannot carry grain,

a grain carrier cannot carry oil, and so on. In addition, some ships are too large o be used

o some routes or in some ports : Post-Panamax freight ships for example, are too large to

pass through the panama canal, while only a handful of ports in the world are large

enough to fully laden ultra large crude carriers.

It is clearly not feasible to show the cost of freight to and from each and every country in

the world. Therefore, I have concentrated on the four most important emerging countries,

Brazil, Russia, India and China, as well as a representative of the Eastern European EU

accession states, Poland. In some cases we also include data for Germany, as an example

of good practice. It is not that case that Germany is the best country for logistics, but it

is a good example of a country with a reasonably high performing logistics sector. In

each case data for the United States, or any other developed nation would be very similar

to that presented for Germany.

The cost of air-borne freight is relatively constant for the countries in this sample. At one

level, this is to be expected, because international air service is a relatively standardized

service, with broadly the same type of planes flying to different locations, lading at

airport with relatively similar facilities, and so on. But despite these apparent similarities,

it is worth noting the strong performance of China, which has significantly lower costs

than other competitor countries. This is due to their efficiencies and economies of scale :

if planes are full, then the cost of the plane can be divided up across more packages.

Air-bornefrieght costs

Prices are quotedregularly by all majorinternational logistics

firms

The standard cargo isgenerally small, and

measured in kilogramrather than by the

ton.

Sea-bornefreight costs

The most relaiablemeasure is the cost of

transporting a

container

The cargo aregenerally larger, andmeasured by volume


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Source : DHL

(Please check annexure for further detailstable 1)

The cost of sea-borne transport varies much more dramatically around the world. It costs,

for example, four times as much to import and export goods into the Russian Federation

as it does into China. Conventional ports for cargo vessels are not nearly as homogenous

as airports. They vary much more in terms of the sorts of vessels that they can

accommodate, and their efficiency is heterogeneous. It is also worth noting that high

wage countries such as Germany do not have the highest logistics costs: they are able to

offset much of the high cost of labor by technological and organizational efficiency.

Once again, China stands out as having exceptionally low logistics costs.

Source: http://www.cinver.cl/archivos/LogisticsPerformanceIndex2007WorldBank.

pdf - World Bank Logistics Performance Index 2007


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1. . Chance of physical inspection:It is not only the speed to pass through customs that matters to those involved in

international trade, but it is also the chance of a delay. This is particularly important for

cargoes that are time sensitive (this by definition includes all air-freight cargo). The big

question here is whether all cargo should be physically inspected. All states have the rightto ensure that the cargo entering the country is keeping with the documentation, but

effective customs procedures should be able to tell legitimate imports and exports from

those that need to be inspected without having to physically inspect a particularly high

proportion of goods entering and leaving the country

Once again, developed countries always do well on measures such as these. Their long-

standing relationships with trading partners generate good information on which cargoes

are legitimate and do not need to be physically inspected. German authorities inspect only

2% of the cargoes, and Polish only 3%. These countries are confident that they have other

ways of detecting the entry of illicit cargoes.

China leads the way among emerging economies, posting a significantly better

performance than Brazil, Russia or India. Cargoes are almost four times more likely to be

inspected by Indian authorities than the Chinese, and in total Indian authorities inspect

25% of shipments. When one in four cargoes are stopped and physically inspected it is

clear that those involved in importing and exporting have to include a time allowance to

take account of this threat. This sort of uncertainty is a particular problem for those who

intend to import or export time sensitive goods, including high-value added electronics,

and thus makes Russia and India less attractive places to produce such goods.


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2. Availability of ReviewsBoth delays in customs in general, and the inspection of cargoes are legitimate actions

that states need to take time from to prevent smuggling and to ensure that tariffs and

quotas are correctly applied. Nevertheless, there will be times when importers and

exporters feel that the rules have not been enforced in a manner that is fair and impartial,or proportionate to the likelihood that the rules have been transgressed. At such times it is

useful to be able to have the decisions reviewed.

Furthermore, the very existence of such review procedures makes it more likely that the

initial decision will be correct, since the person making the decision knows that it can be

contested. In theory, almost all countries have such procedures, but to be effective they

have to be quick, cheap and impartial.

Interestingly, international trade believes that the review of procedures is notable, more

by their absence than by their existence in many countries. Germany again stands out:

traders believe that they can cheaply and efficiently contest any decision made by

German customs agencies if it seems to be unfair. Developed countries have such review

procedures, and they are tremendously trade enhancing. Unfortunately, such review

procedures are questioned to be a reality in India and China, and are held to be non-

existent in Russia, Brazil and Poland.

3.

Lead Times

Goods have to be brought from the factory to the sea or air port, and after customs

clearance, to the customer. Efficient infrastructure makes a country appealing to

importers, exporters and those who need to move goods from one part to another. If the

ports are congested, the cargoes have to wait to be loaded; or if the road and rail systems

are slow or prone to delays, those who want fast and reliable connections may well look

elsewhere.


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Unsurprisingly, developed countries, which have far more infrastructure than developing

and emerging economies, top the poll. German infrastructure is considered to be adequate

for journeys that international traders fid necessary. Of course, in part that reflects not

only the quality of infrastructure, but also the proximity of industrial locations relative toports. In particular, locating factories near to ports and airports will reduce the time taken

to move cargoes from factory to its point of departure. Therefore, location as well as

infrastructure matter.

4.2 LOGISTICS ANALYSIS

It has been seen that globally the key driver of demand for world-class logistics services is a

critical mass of multinational corporations (MNCs), who typically require low-cost

manufacturing locations connected to highly efficient supply lines. Although India is already animportant sourcing country, the surge of business is not coming to the country on account of the

fact that some pieces of logistics hardware are not up to the global standards. At the ports, ships

have to wait long in the channel for berthing, and productivity in loading and unloading is low.

There are gaps in hinterland connectivity as well. While significant progress has been made in

improving the roads in the Golden Quadrilateral, there are deficiencies in the full network

connecting cities and production and consumption centers. Ribbon development and mixing of

motorized and non-motorized traffic slow down the movement of vehicles. In addition, there is a

lack of capabilities in some segments of the supply chain, absence of common standards for

equipment and technology, and inter-state as well as intra-state barriers. These factors lower

Indias attractiveness as an investment destination.

An effective logistics provider should have the expertise and global connectivity to manage

cargo through an integrated network from the time the cargo leaves the origin and upto the time

it reaches the destination. Expertise in freight analysis, audit, and payment, plus service-level

reporting move freight more efficiently. Transportation is an essential and a major sub-function

of logistics that creates time and place utility in goods. In fact, the backbone of the entire supply


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operating norms stipulated in the various regulations and acts, such as the Motor Vehicles

Act relating to drivers and vehicles, volume and weight restrictions, etc.

3. Due to its highly fragmented and underdeveloped nature, the Indian logistics industry ischaracterized by the absence of economies of scale. Typically, the expansion of scale and

scope of operations generate reductions in costs. Differing rates of State Value Added

Tax (VAT) are an additional disincentive for the Indian logistics service providers to

increase in size by expanding their operations across states.

4. Apart from the non-uniform tax structure, logistics providers have to face multiple checkposts and harassment by the enforcement agencies. According to one estimate, informal

taxes on account of police, check posts, and others may constitute well over 20 per cent

of the freight cost. High costs of operation and delays involved in compliance with

varying documentation requirements of different states further raise the costs of

operations.

5. Indian shippers expect 3PL providers to own quality assets, provide more value-addedservices to act as an integrated service provider, and establish world-class information

systems for greater visibility and real-time tracking of shipments. At the same time, there

is also customer pressure to keep the prices low and competitive and stagger the schedule

of payments, often resulting in inadequate working capital for the logistics operators.

Moreover, the inability of service providers to go beyond basic services and provide

value-added services such as small repair work, kitting/dekitting, packaging/labelling,

order processing, distribution, customer support, etc. has demotivated shippers from

going for outsourcing in a big way.

The development of the logistics sector in India is hampered by poor physical and

communications infrastructure. Slow movement of cargo due to bad road conditions, multiple

check posts and documentation requirements, congestion at seaports due to inadequate

infrastructure, and delay in procedural clearances, coupled with unreliable power supply and

slow banking transactions, make it difficult to meet the deadlines for international customers.

Low penetration of Information Technology (IT) and lack of proper communications

infrastructure also result in delays and lack of cargo in-transit visibility and real-time tracking

ability. The absence of a seamless flow of information among the constituents of logistics serviceproviders creates a lot of uncertainty, unnecessary paperwork and delays, and lack of

transparency in terms of cost structures and service delivery. For example, presently, there is no

real-time process by which a shipper may know about the availability of trucks and going rates at

the destination market. Therefore, since return loads cannot be ascertained, the shipper has to pay

a higher freight rate if it cannot ensure return load. With the availability of market information to

both the shipper and the service provider, the service provider can ensure return load from the


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origin itself and the shipper does not have to pay a higher rate for his shipment. This can enable

rationalization of rates as the service providers cost structure would become in line with the

actual market rate. A similar example is that of Less-than-Truck-Load (LTL) shipments costing

more than Full-Truck-Load (FTL) shipments. At present, due to the absence of shipment

tracking systems, a shipper booking a LTL shipment cannot track the status of the shipment after

it leaves the warehouse at the origin and before it reaches the warehouse at the destination. The

service provider may convert this LTL shipment into a FTL shipment at its own warehouse

before delivering at the destination. However, the shippers are placed at a disadvantage as they

end up paying LTL rates for a FTL shipment. Information availability before and during delivery

can address this problem and benefit both the shipper as well as the service provider.

Indian freight forwarders face stiff competition from multinational freight forwarders for

international freight movement. Because of their size and presence in many countries,

multinational corporations (MNCs) are able to offer low freight rates and extend credit for long

periods. Indian freight forwarders, on the other hand, because of their smaller size, lack of access

to cheap capital, and the relative infancy of the Indian logistics industry, are unable to match the

same. Moreover, clients of MNCs often want to deal with single service providers and,

especially for free-on-board (f.o.b.) shipments, specify the freight forwarders, which most of the

time happen to be the multinational freight forwarders. This is unfair for Indian freight

forwarders. However, as the Indian logistics industry develops, it will enable Indian freight

forwarders to bring down costs and improve their service and price offers.

The above features of the Indian logistics industry are reflected in varying degrees in the

characteristics of the individual industry segments. The following industry segments constitute

the overall logistics industry:

(i) Transportation infrastructure providers [through rail, road, air, waterways (sea,

coastal, and inland), etc.], carriers (rail-roads, motor carriers, parcel companies, barge lines, air

freight), and facilitators (port/airport and Customs authorities, and Central and state government

departments related to logistics activities);

(ii) Warehouses, Inland Container Depots (ICDs), and Container Freight Stations (CFSs);

(iii) Intermediaries [Freight forwarders, Non-Vessel Operating Common Carriers

(NVOCCs), Inter-modal Marketing Companies, Customs House Agents (CHAs), etc.];

(iv) Logistics providers: 3PL and 4PL providers.


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4.2.2 Porters five forces analysis of the Indian Logistics Industry

Bargaining power of customers: The logistics market in India is not regulated and prices are

market determined. The market is fragmented and competition among existing players is high.

The homogeneity of the logistics market and the ready to offer services of logistics players

make it easy for companies to shift from one logistics player to another without incurring

significant collateral costs. Moreover, players in the warehousing, trucking and 3PL segment

incur significant capital cost and hence need high volumes in order to recover the capital costs.

These factors result in high bargaining power of customers.

Bargaining power of suppliers: Suppliers to the logistics industry can be primarily classified

into infrastructure providers and services providers. Infrastructure providers include government,

truck manufactures, container suppliers and construction companies. Service providers primarily

include employees and providers of technology. Government is dominant player since it not only

sets up the policies but also actively participates in evaluation of the bids for infrastructure

projects involving public private participation. As far as other providers are concerned, there is

intense competition with no dominant player in the market. This lowers the bargaining power of

suppliers(except the government).

Threat of New Entrants: There are high barriers to entry in the sector. To offer differentiated

services such as PAN-India service/integrated service/outsourced logistics, new players need to

make significant investment to set up the infrastructure This makes the sector unattractive for

Bargaining power of customers (HIGH)

1. Prices are market driven

2. Homogeneous markets makes it easy forcompanies to change logistics providers

Bargainig power of suppliers (LOW)

1. Intense competition among the infrastructureproviders

Threat of new entrants (LOW)

1. Highly competitve market

2. Requires significant investment ininfrastructure

Threat of substitutes (LOW)

1. Trend reflects increasing share of outsourcedlogistics to total logistics.

Rivalry (HIGH)

Numerous players with notmuch differentiation. No

single player domiates themarket


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players who are unable to raise the requisite capital. There are numerous players offering basic

services in the Express cargo and courier segment. High competition will make it difficult for a

new player to grab a reasonable share of the market. Hence threat of new entrants is low.

Threat of Substitutes: The main threat faced by the logistics players in India is from their

customers opting to handle logistics in-house. However, past trend suggests that the share ofoutsourced logistics is increasing steadily. This ratio is expected to increase further as more

companies start seeing outsourced logistics and the resulting gains in efficiency in supply chain

management, as a tool to gain competitive advantage.

Rivalry between existing players: Competition between existing players is high as there are

many players (organized and in the unorganized sector) offering only one or two services such as

Express cargo and Courier services. There is not much differentiation between players, hence

there is intense rivalry leading to price wars.

The study aims to find ways to improve the competitiveness and effectiveness of Indias trade,

and that only means improving the structure of the India logistics industry and improving the

quality of regulations and policies. For this it is important to have strong financial funding also,

which the government alone may find difficult to fund for. Only through improved quality of

logistics and transport systems, which inherently should reduce costs, will help in better

international market access, leading to improved trade.

The following chapters will focus on these aspects.

ImprovedTrade

ImprovedLogistics

Infrastructure

Betterregulations

and tradepolicies Better

financingthrough PPP

models


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CHAPTER 5: INFRASTRUCTURE OF THE INDIAN LOGISTICS INDUSTRY

__________________________________________________________________

Infrastructure development is a critical enabler to economic growth of a country.

Logistics infrastructure, which covers the road, rail, waterways and air network of a country, isthe backbone on which the nation marches ahead. The need to develop infrastructure had been

realized almost a decade ago, but the task still seems daunting. The present infrastructure is

insufficient, ill-equipped and ill-designed to support the expected growth rates of 7-8% over the

next decade. And the expected 2.5 fold growth in freight traffic will further increase the pressure

on the existing infrastructure, if immediate actions for improvement are not taken. India needs to

pursue an logistics infrastructure strategy that minimizes investment, maximizes cost efficiency,

reduces losses for users and is energy efficient.

We will now focus on each of the modes that comprise logistics infrastructure in India.

5.1 Indian Sea ports

Indias ports serve as gateways to Indias international trade and facilitate 90 percent by

volume and 70 percent by value of Indias external trade via maritime traffic. The countrys long

coastline spans across 7,500 kilometers (kms) with 13 major ports governed by the Centre and

about 176 non-major ports, of which only 60 are operational, governed by respective state

governments and union territories. Of its major and non-major ports combined, 139 are along the

west coast, while the remaining 50 ports are along the east coast

The Indian port market has witnessed significant growth over the last decade, growing

from 368 MMT in 200001 to 898 MMT in 201112 at a CAGR of 8.5 percent. Following a

temporary deceleration in cargo traffic (at a CAGR of 6 percent) due to the global economic

slowdown between 200708 and 201112 cargo traffic across Indias ports is expected to

touch 1,304 MMT by 201617 at an accelerated CAGR of 8 percent.

5.1.1 Issues related to sea portsThe following shortcomings impact on the performance of Indian ports and lead

to escalation of logistics cost:

Ships have to wait long in the channel for berthing, and productivity inloading and unloading is low. The national average turnaround time of

vessels for dry bulk and containers is estimated at 5.7 days and 1.9 days,

respectively.

The ports are labour-intensive and the mechanization process is slow.Equipment used is outdated and obsolete, causing further reduction in

efficiency and productivity.


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Restrictions in navigation channels do not allow bigger vessels to beberthed. The hinterland links to ports are insufficient and need to be

improved.

Delays in co-ordination between ports and the Customs authorities delayquicker. Port-side constraints further contribute to increases in dwell time

before both incoming and outgoing cargo is cleared.

Outlook on traffic at Indian ports

Source: KPMG in India analysis

The Government of India has planned to replace the National Maritime Development

Program (NMDP) with the Maritime Agenda 2010-2020, with the objective of increasing the

port capacity. It aims at increasing the port capacity of both major and minor ports, and bring the

port performance of Indian ports at par with international standards. An estimated amount of

2,870b INR will be invested to generate port capacity of 300 MMT and cater to cargo traffic of

2,500 MMT by end of 2020.

Source: Maritime Agenda 2010-2020, Ministry of Shipping Website


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In order to develop capacity of port sector, it is important to focus:

Development of Non-major portsDevelopment of east coast portsContainerization

1.Development of Non major ports: The cargo traffic at no-major ports increased at a

CAGR of 13%, over a CAGR of 2% at major ports, during 2007-08 and 20122-12. Its

share increased to 39% from 28%, clocking 338 MMT in total traffic versus the 560

MMT at major ports. During the same period, the cargo handling capacity at non-major

ports also witnessed a higher growth than that of major ports.

The development of non-major ports was fuelled by capacity overruns at major

ports, aided by a substantial increase in the cargo traffic of fertilizers, building material

and coal. Under the Maritime Agenda, maritime states have set ambitious targets tocreate additional capacity of 1,290 MMT at an estimated investment of INR 1,680b

between 2010-11 and 2019-20. Growth of non-major ports have been primarily led by the

development of ports in Gujarat (Mundra, Pipavav, Hazira), which aimed at catering to

the north Indian industrial belt, and thereby reducing load on JNPT and Mumbai ports.

Market Share of major and non-major ports

Source : KPMG In India analysis

2. Containerization:The growth in the container market (CAGR of 12% in past five years)is expected to continue in the medium term, as a result of rising containerization levels

and growth in trade. However, at 51 % the containerization level in India continues to fall

short of that in developed countries, which have achieved significant levels of 70-80%.


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Container traffic and containerization levels

Source: Ministry of Commerce, Indian port association database, KPMG in India analysis

The following trends are expected to drive growth in containerized cargo:

Increasing containerization level for break-bulk commodities (e.g. steel, cement, rice,sugar)

Healthy growth prospects for industries contributing to container cargo (e.g. textiles,food products, machinery, paper, scrap)

Development of dedicated freight corridors (DFC) and the Delhi-Mumbai Industrialcorridor (DMIC) along the north-west corridor, is expected to drive the demand for

container logistics infrastructure.

Growing thrust on developing container terminals on the east and west coasts of India Development of dedicated logistics parks for handling container and bulk cargo.3. East Coast Ports: With their contribution to Indias total trade expected to increase

from 23 % (in 2010) to 34 % (In 2014), east coast ports are expected to significantly

drive the growth of port sector. Through the Maritime Agenda 2010-2020, he GOI plans

to create additional port capacity of 900 MMT and invest INR 1,126 b to boost cargo-

handling capacity at ports along the east coast.

East coast ports are closer to iron ore/coal deposits, power , steel or fertilizer plants, and

therefore have traditionally handled bulk commodities; whereas west coast ports have

mainly handled POL and container cargo. Container handling capacity along east coast

ports are expected to increase from 2 million TEUs(In 2009) to 10.8 million TEU (by

2020)


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Capacity at east coast ports

5.2RailwaysSpanning 64,456 km with more than 7,133 railway stations, Indias rail network is the

largest in Asia and the second largest in the world (behind the US). The Indian Railways

operates 19,000 trains daily, transporting 2.65 MMT of freight and 23 million passengers across

the country. However, Indias rail infrastructure suffers from chronic under investment, due to

which its potential for freight movement remains largely untapped. Rail freight has grown at

around 7 % over the past five years, and is expected to touch the 1 billion ton mark in 2013, with

a 31% share of total freight movement across all modes of transport. Rail has consistently lost

out to roads as the preferred mode of transport.

5.2.1 Issues related to railwaysEven though IR has made notable strides and achieved remarkable growth in freighttransportation in recent years. However, there are

Capacity constraints and freight tariffs are still higher than in the developed and advanceddeveloping countries.

Moreover, freight transportation by rail lacks reliability and trackability and is deficientin terms of quality of operations, speed, and customer orientation. For many customers,

whether manufacturers or end users, assured delivery of consignments, and the ability to

verify periodically that the delivery schedule will indeed be met, is as important as the

freight cost. Since the IR cannot provide assurance of delivery and arrangements for

tracking consignments are not in position, the shippers prefer higher cost road transport,thus increasing the logistics cost.

Absence of competition and lack of regulatory oversight further affect the quality ofservice and also keep the tariffs higher than the levels prevalent in the developed and

advanced developing countries.


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Rail freight

Furthermore, passenger traffic enjoys significant priorities over freight traffic; passenger

rates are highly subsidized by freight operations and utilize up to 60 % of network capacity but

contribute only 30% to revenue. Nonetheless, rail continues to remain the most fastest and

economical mode of transport. The capital cost of setting up rail capacity is around 40 % lower

than that of comparable modes such as expressways, when measured on a ton-kilometer basis.

Further, costs of rail transportation specifically on high traffic density corridors are considerably

lower than for other modes. Additionally, rail offers speed and capacity related benefits.

One of the important developments in the rail sector is the Dedicated Freight Corridor

(DFC),which is expected to mark at paradigm shift in the transportation scenario In India. This

will help cater to high speed movement of freight cargo, with no hindrance from passenger

traffic, and thus improve service delivery and generating additional freight-carrying capacity.

The project envisages the construction of two corridors, one each on the west and east

routes, spanning a total length of about 3,300 km. The Eastern corridor, starting from Ludhiana

in Punjab will pass through the states of Haryana, Uttar Pradesh and Bihar and terminate at

Dankuni in West Bengal. The Western corridor will run from Dadri to Mumbai, passing through

the states of Delhi, Haryana, Rajasthan, Gujarat and Maharashtra.

Timely completion of the WDFC and EDFC will result in an increase in total rail freightvolume movement along particular routes. However, given that the project is significantly behind

its original timeline, the potential increase in freight volume has been analyzed I two distinct

scenarios, such as The DFC Scenario and The No-DFC Scenario. In a No-DFC Scenario,

freight would continue to move along existing rail and road network resulting in gradual

saturation of the rail network over a period of time. This would increase the modal share of road

transport from 25% in 2016-17 to 36% in 2021-22. In a DFC Scenario, the share of rail would


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significantly increase due to added capacity and efficiency of new infrastructure. This will mark

a shift in the modal mix increasing the share of rail from 84% in 2016-17 to 87% in 20221-22,

along these routes.

5.3 Roadways

Roads continue to constitute the most significant component of Indias logistics industry,

accounting for 60% of total freight movement in the country. As the demand for goods either

for mass consumption or industrial development grows beyond the conventional demand-

supply hubs of metropolitan cities to a number of widely dispersed tier 1 and tier 2 cities, the

share of road transport can expect additional growth, give its ability to facilitate last-mile reach

and limited supporting rail infrastructure. Road freight has increased to 1,250 BTKMs in 2011-

12. Over the next five years, from 2012-13 to 2016-2017, assuming a GDP growth of 8% road

freight is expected to grow at a CAGR of 9.6% taking the total road freight opportunity to 1,700

BTKMs.

The length of district, rural and other roads is 4,455,511 km, followed by 163,898 km of state

highways and only 70,934 km of national highways. Of this, approximately, half of the total road

length is paved. Consequently, road networks continue to lag behind world averages, with road

density at 2.83 km per 1,000 people and 770 km of road length per 1,000 sq. km as compared to

6.7 km and 840 km, respectively, globally. Indias low average trucking speed of 30-40 km per

hour (kmph) as against the global average of 60-80 km per hour (kmph) can thus, be attributed to

the constrained and poor quality of the countrys road networks.

However, the completion of the National Highways Development Programme (NHDP),

which is aimed at developing 50,000km of national highways by 2015 in seven phases with aninvestment of INR 3,000 billion and modernization of the road cargo transport community will

be game changers for the road transport sector. (Annexuretable 4 and 5)

5.3.1 Issues related to road freight

The existing Indian road freight transport industry is highly fragmented, with 70-75% of truck owners operating a maximum of five trucks each, while operators owning

more than 20 trucks constitute about 9-11 % of the ownership pie. This disaggregated

ownership has resulted in fierce competition amongst operators resulting in truck

owners resorting to overloading to recover investments which in turn impacts service

quality and overall economics of road transportation, as a result of increased incidents

of accidents, breakdowns, spoilage and pilferage. Also due to the limited investment

capacity, operators have been unable to high average age of trucks at 10 years and

limited adoption of technology for tracking and fleet management.

High delays caused at border crossings/checkpoints. This happens when there isphysical inspection of the freight or also because of overloading of freight, because of

which freight does not get clearance immediately.


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5.4 Air Cargo and Airports

Air cargo serves as a vital link between domestic and international markets. The

contribution of air cargo, thus needs to be adequately and appropriately focused upon, so that

Indias fast growing international and domestic trade by air is facilitated, integrated and

expanded. While the total volume of air cargo traffic currently constitutes about 1% of totaltrade, it accounts for close to 29% of total trade value.

Over the next decade, total air cargo traffic is expected to grow at a CAGR of 10.3% to

reach 5.9 MMT, with domestic and international cargo expected to grow at CAGRs of 11.6%

and 9.5% respectively, and contributing 2.4 MMT and 3.5MMT, respectively by 2020.

5.4.1 Issues related to air cargo and airports

Although the air traffic growth in recent years has surpassed industry expectations and is in fact

expected to rise further, air freight has remained neglected for many years. Certain issues have resulted

in hindering the smooth movement of cargo and the expectations of the customers for timely and

prompt delivery have remained unfulfilled. These include:

The absence of integrated cargo infrastructure Inadequacies in gateway and hinterland connectivity through rail and road; Need for streamlining of Customs procedures in air cargo; Need of technological upgradation of cargo handling processes Formulation of performance based service

Air cargo throughput for all Indian airports


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Three trends are expected to cater to the growth of air cargo industry:

Emergence of tier-II cities, as new cargo centersWhile metros have led the initial charge, opportunities in the air cargo sector now extend

to tier-II cities, which constitute the majority of the countrys population. Against a

CAGR of 10.5 % at metro (tier I) cities between 2006-2011-when volumes increasedfrom 1.3MMT to 2.1MMT- the tier II cities witnessed increased growth of 14.5% during

the same period, with volumes increasing from 0.13 MMT to 0.26MMT.

Among the relatively large micro-markets, Pune, Kochi and Kozhikode showed

significant growths of around 14-16% between 2006 and 2011. In markets that handled

sub 10,000 tonne cargo, Amritsar and Nagpur, catering to Indias regional pockets,

displayed CAGR of over 25% over the same period. While Jaipur with a growth rate of

27.3% is expected to be the next crucial destination catering to increasing freight demand

in north-western India. In the north-eastern region, Guwahati (CAGR 13.1%) and

Agartala (CAGR 19.2%) have been the traditional leaders.

Increasing participation of service providersOpportunity attractiveness for 3PL players and freight forwarders

Source: KPMG in India Analysis

Improved air cargo infrastructure at airportsA comparison of air cargo infrastructure at India airports with global practices highlights

the prevailing lack of focus on air cargo infrastructure:


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Global best practices Cargo operations in India

Segregated facilities for different types of

cargo

Most terminals do not offer separate facilities,

except cold rooms

Dedicated perishables handling facilities that

cater to supply chain requirements

Investment in cold storage infrastructure

(trucks and warehouses) to handle agriculture,

pharma and other perishables is inadequatePromotes transshipment handling/huboperations

Cargo terminal operators need to have separatelicense area for transshipment operations

Suitable waiting area for trucks Cargo terminal landsides are used asparking/holding area for trucks, which leads to

congestion.

Agent warehouses, office areas and other

facilities situated near terminals

Agent warehouses are often located within

cities

Dedicated facilities for air-express operations,

with air-side and city-side access, multiple

freighter parking bays

There is no fixed model, and cargo handlers

are dependent on decision of individual airport

operators. Very few dedicated freighter parking

bays exist at present.Source: Air cargo logisitics in India AI-SATS, MoCA

An increase in the spending in airport infrastructure through various airport projects is expected

to improve air cargo infrastructure across the country. Investment in airport infrastructure has

grown substantially over the last three Five-year plans. The twelfth Five year plan (2012-17)

outlines investments worth INR 675 billion, an increase of 86% over the eleventh Five year plan

allocation.

5.5Warehousing

In recent times, the Indian warehousing segment has evolved significantly, resulting in a

gradual metamorphosis from the traditional concept of godowns to modern formats. Further,

interest and traction in the potential advantages that free trade warehousing zones (FTWZs) offer

has increased.

The market in India consists of industrial and agricultural warehousing, with both segments

expected to witness a significant evolution in their shares (by value) over the next 5 years. The

share of the industrial segment, which includes both bulk and non-bulk commodities, is expected

to increase from about 86 % in 2010-11 to around 90% in 2015-16. This is likely to be at the cost

of a corresponding decrease in the share of agricultural warehousing in contrast to the industrialwarehousing segment, which is highly fragmented. The agricultural warehousing segment is

dominated to the extent of two-thirds by government entities such as Food Corporation of India,

The Central Warehousing cooperation and all State Warehousing cooperations. This trend is

likely to vary relatively less in the next few years.


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Warehousing market size

Source: CRISIL report on warehousing industry, November 29, 2011; KPMG in India analysis

Factors influencing warehousing market

Inhibitors Drivers

Difficulty in access to capital Increasing outsourcing/demand for modern

assets

Low level of customization Rising share of organized retail

Issues in land acquisition/project

implementation

Expected rollout of GST

Overall production and consumption growth

The share of modern warehousing is anticipated to grow from 15% (62 million sq.ft) in

2010 to 30% (178 million sq.ft) by 201548. This sharp growth is expected to be driven by risingdomestic and EXIM freight volumes, increased outsourcing to 3PL players, strengthened

investment in infrastructure, organized retail and the impending implementation of Goods and

Services Tax (GST). However, several challenges may hamper the warehousing sectors wider

growth potential. High price sensitivity among customers and infrastructure issues tend to limit

the ability of service providers to offer world-class services; their usually underdeveloped

capabilities to offer industry specific solutions, the asset heavy nature of their business, the need

for substantial capital and concerns related to land acquisition make operations increasingly

difficult.

Apart from the significance of location in the modern warehousing era, industrystakeholders need to be wary of two crucial aspects customers key buying criteriaand critical

service factors. Price sensitivity, strategic location and manpower availability rank as leading

buying criteria; however, service providers need to offer high-quality, industry specific value

added solutions, skilled manpower-both management and operational- and IT/technology

solutions such as ERP, put-to-light, and GPS. Focus must also be on developing strong


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relationships with customers, as well as facilitating long-term contracts and, thus, regular and

predictable volumes.

FTWZ: The Free Trade Warehousing Zone model offers significant potential to overhaul the

supply chain. Given the high level of fragmentation associated with the transportation and

logistics segments, the quality of warehousing in particular and, service levels in general, aregrossly sub-optimal. These hindrances ultimately lead to unreasonably high logistics costs.

Against this backdrop, the FWTZ concept plays a pivotal role by offering world-class, single-

window solution for multiple logistics activities, with special focus on EXIM flow. It is widely

believed by industry experts that with excellent infrastructure, mechanization and regulatory

incentives, the FTWZ model offers significant potential to save costs in the overall supply chain.

Key

Parameters

Dubai Singapore China India Time

frame for

evolution

(years)

Brief insights

Well

developedport infra

Yes Yes Yes No 5-10 Development of mega terminalsat major ports (JNPT, Chennai)

Additional capacities at majorports(Ennore, Vizag)

Development of large privateports (Gangavaram, Dhamra)

Development of transshipmenthubs (Vallarpadam)

Strong

hinterland

connectivity

Yes No Yes No 10 Development of DFCs Development of expressways and

NHAI-led highways(GQ, EW_NSfed routes)

Favorable

positioningon trade

lines

Yes Yes No No N/A Indian ports are not on key internationaltrade lanes.

Strong

manufacturi

ng support

Yes No Yes No N/A India scores low on manufacturingsupport for FTWZ demand

High export

potentialNo Yes Yes Yes 5-10 Over the next 5-10 years India is expected

to evolve as a moderate-sized export hubfor key sectors such as automotive,engineering goods, pharmaceuticals and

processed foods.

High import

potentialNo No Yes Yes 2-3 Consumption led economic growth is

likely to continue supporting imports

Well defined

regulationsYes Yes Yes No 2-3 Policies in India are still evolving to

support FTWZs (e.g. 2011 Budget

treatment of MAT)Processing

cost

arbitrage/

pricing

flexibility

No No Yes Yes 2-3 Like China, India offers a significant costof arbitrage opportunity when comparedwith other regions.


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CHAPTER 6: PUBLIC PRIVATE PARTNERSHIP MODELS

__________________________________________________________________

A public private partnership is an agreement between the government and the private

sector for the purpose of provisioning of public services or infrastructure. With a common visionin place the public and private sector brig to their table their own experiences and strengths

resulting in accomplishment of mutual objectives. The PPP model is increasingly seen as a

means of harnessing private sector investment and seeking operational efficiencies in the

provision of public assets and services.

While the preferred form of PPP models is the one in which the ownership of the

underlying asset is lying with the public entity during the contract period and the project gets

transferred back to public entity on contract termination, the final decision on the form of PPP is

determined using the Value for Money Analysis.

The following are the PPP models supported by the government:

Modified design-build(Turnkey) contracts

The designbuild contracts yieldbenefits in the form of time andcost savings, efficient risksharing and improved quality.

The Turnkey approach withmilestone-linked payments orpenalties or incentives can belinked to such kind of contracts.

BOT (Build-Operate-transfer) model

The BOT form of models and itsvariants are the most commonform of PPP models in India,accounting for almost 2/3rds of

the PPP models in the country.The 2 types of this model are:

User-fee based BOT model(roads, ports, airports)

Annuity Based BOT model (rural,urban, health, education)

Performance basedmanagement/maintenancecontracts

The PPP models that lead to anincreased efficiency areencouraged in an enviromet that

is constrained by the ability ofecconomin resources.

The sectors meant such form ofPPP models include watersupply, sanitation, solid wastemanagement, road maintenanceetc.


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The PPP process should comprise of 4 phases:

PPP identification

stage

Development Stage Procurement stage PPP contract

management and

monitoring stage

Consists of strategicplanning, project pre-

feasibility analysis,

Value for moneyanalysis, PPP

suitability checks and

internal clearances toproceed with PPP

development

Consists of projectpreparation (technical

feasibility and

financial viabilityanalysis), project

structuring,

preparation ofcontractual documents

and obtaining of

project clearances and

approvals.

Consists ofprocurement and

project reward

Consists of projectimplementation and

monitoring over the

life of the PPPproject.

GOI is likely to establish MIS for the continuous monitoring of the performance of PPPprojects.

The development of a sustainable PPP program requires a strong and well definedinstitutional structure:

Supporting the creation of nodal agencies such as PPP cells at the state or sector level Laying down of appraisal mechanism for PPP projects by the PPP Appraisal

Committee (PPPAC)

6.1 Challenges of PPP in India:

Regulatoryenvironment

There is no independent PPP regulator as of now. In order to attract more domesticand international private funding of the infrastructure, a more robust regulatoryenvironment, with an independent regulator is essential.

Lack ofinformation

The PPP program lacks a comprehesive database regarding the projects/studies to beawarded under PPP. An online database, consisting of all the project documentsincluding feasibility reports, concession agreements and the status of variousclearances and land acquisitions will be helpful to all bidders.

Projectdevelopment

The absense of adequate project development by authorities leads to reducedinterest by the private sector, mispricing and many times delays at the time ofexecution.


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While most of the above challenges are being worked upon by the GOI, the limited availability

of sources of funding is the biggest bottleneck for success of the PPP model.

6.2 Key Industries/Sectors for PPP:

1. HighwaysPPP format Project Value (in INR billion)

BOT - Toll 48 93.3

BOT- annuity 8 23.5

Special Purpose Vehicle

Projects

24 46.8

Source: Ministry of Road Transport and Highways

Several GOI initiatives to include private sector participation in road sector:

Viability Gap Funding in the form of capital grant subsidy of up to 40% of projectcost

100% tax exemption in any consecutive 10 years out of 20 years Duty-free import of certain identified high quality construction plants and

equipments

Allowing FDI up to 100% in this sector and relaxed ECB norms Long concession period of up to 30 years Right to collect and retain toll Model concession agreements for state highways Standardizing model bidding documents

Investments required: The national highways constitute just 2% of the entire road

network, but carry approximately 40% of the total road traffic indicating existence of

significant potential to be unleashed. Investments worth INR 4,902 billion had been

planned as planned as part of 12th

five year plan. The contribution of private sector is

likely to range from INR 1,667 billon to INR 2,451 billion, for the same period.

Lack ofinstituional

capacity

The limited instituitional capacity to undertake large and complex projects at variouscentral ministies and especially state and local body levels, hinder the traslation oftargets into projects.

Financingavailability

The private sector is dependent upon commercial banks to raise debt for PPP projects.With commercial banks reaching sectoral exposure limits, and large Indianinfrastructure companies being highly leveraged, funding the PPP projects is gettingdifficult.


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2. RailwaysThe Railways sector just experienced 4 PPP contracts valued at 15.7 billion. The projects

have been contracted either through domestic competitive biddings or through negotiated

MOUs. Due to the large size of the projects, the PPP projects in railways have to be

supplementary or an extension to an existing large railway network.

The Recent PPP data indicates around nine projects being contracted so far in Gujarat (4),

Orissa (2), Haryana(1), Karnataka(1) and Andhra Pradesh (1). The nine projects have

BOT (or its variants) format (including one on DBFOT) PPP as the preferred BOT

model. The PPP experience in railways has proved to be a mixed bag so far. In projects

with clear cut demarcations of responsibilities, the model has proven successful in the

case of last mile connectivity (for instance, the last mile connectivity to mundra port with

the pallanpur-ghandhidham railway line). On the other hand, the railways have been

facing problems in using the PPP route for manufacturing rolling stock and locomotives.

Some of the PPP project initiatives taken by the railway sector include:

Container Corporation of India Limited (CONCOR) for developing multimodaltransport logistics infrastructure to support domestic container traffic.

Pipavav Railway Corporation Limited (PRCL) to provide broad gauge rail linkfor Pipava port in Gujarat.

Rail Vikas Nigam Limited (RVNL) for port connectivity works andimprovement of the Golden Quadrilateral to meet future transportation needs.

The project proposed for PPP format include:

High speed rail corridor Dedicated freight corridor Locomotive and coach factories Multi-modal logistics hubs

Investment Requirement: The Railways needed INR 5.2 trillion public investment

during the Twelfth five year plan (2012-17), of which the Indian railway corporation will

raise 1 trillion and the balance needs to be raised internally or though PPP. The IR

announced its plans of restructuring to attract funding of INR 500 billion to meet its

expansion targets proposed in the twelfth five year plan. To carry this out, the railways iscurrently working out strategies to design and award PPP projects.


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CHAPTER 7: FREE TRADE AGREEMENTS (FTA), FREE TRADE

ZONES(FTZ) AND FOREIGN TRADE POLICIES(FTP)

__________________________________________________________________

7.1 Free Trade Agreement (FTA):

All countries, including the poorest have resourceshuman, natural, financialwhich they can

employ to produce goods and services for their domestic markets or to compete overseas.

Economics tells us that we can benefit when these goods and services are traded. Simply put, the

principle of comparative advantage says that countries prosper by concentrating their resources

in on what they can produce best, and then trading these products for products that other

countries produce best. In other words, liberal trade policiespolicies that allow the unrestricted

flow of goods and services sharpen competition, motivate innovation and breed success. Theimportance of global free trade can be grasped by the fact that there are currently 153 countries

that are members of the World Trade Organization (WTO) the international organization

whose main function is to ensure that trade flows smoothly, predictably and freely as possible.

Free trade, in its purest form, refers to the unfettered export and import of goods and

services between one country and another, with no government intervention on either countrys

side. However, barriers to free trade are an observed phenomenon and manifest themselves as:

Tariff barriers: A tax on imports that are invoked by counties mainly to protectthe domestic industries from the possible consequences of greater competition.

Non-tariff barriers: These can be in form of quantitative restrictions onimports/exports or existing government regulations governing technical and safety

standards for products that can have the effect of restricting imports. Another

form of non-tariff barrier to free trade is found in Domestic Content

Requirements that are regulations wherein importers are forced to import goods

that contain minimum prescribed amounts of domestically produced components.

Such restrictions are commonly imposed on the domestic operations of foreign

firms that engage in foreign direct investment in production facilities in the

regulating country.

Given the existence of trade barriers (regardless of origin) at any point in time, the question often

arises as to what countries can do to lower or eliminate trade barriers among themselves. Efforts

to do so are broadly referred to as trade liberalization and can take several forms. Markusen et

al., state that trade liberalization often occurs in the form of a multilateral agreement such as the

various trade negotiation rounds of the General Agreement on Tariffs and Trade (GATT), or an

agreement among smaller set of countries, typically with some geographically proximity. This


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latter type of agreement is called a preferential trade agreement (PTA). A Free Trade Area is

the least restrictive of PTAs and consists of a number of countries that agree to eliminate all

trade barriers among themselves while keeping intact their existing tariffs with non-member

countries. The North American Free Trade Agreement (NAFTA) signed by the United States,

Canada and Mexico is an example in this regard.

7.1.1 Beneficial Effects of FTAs:

Increase in Incomes/Growth: An FTA expands trade volumes among member countriesand tends to increase incomes/growth of the members. Intuitively, starting from a

situation of tariff-distorted trade, the elimination of tariffs allows each member to

specialize in the production of the goods in which it has a comparative advantage and

trade those goods in exchange for imports of other goods from fellow members.

Achievement of Economies of Scale: An FTA, by eliminating tariffs, expands a membercountrys export market thereby allowing it to expand its scale of operations and lower its

average cost of production.

Reduction of Monopoly Inefficiencies: If inefficient monopolies exist in the domesticmarket, then increased competition from foreign products dampen domestic monopolyinefficiencies, if not eliminate them altogether.

Availability of Greater Product Variety:The opening up of free trade increases tradeflows and expands the variety of products available to consumers in the home country.

7.1.2 FTAs in Asia:

Market driven forces of cross border trade, FDI flows and finance as a result of

multilateral and unilateral trade liberalization processes has deepened the economic ties in the

Asian region. The last twenty years have witnessed an upsurge of bilateral trade agreementsbeing convened in this part of the world. Asia is thus considered to be at the forefront of FTA

activity.

India has bilateral agreements with the following countries and blocks:

SAFTA (Bangladesh, Bhutan, The Maldives, Nepal, Pakistan, Sri Lanka andAfghanistan)

ASEAN (ASEAN-India Free Trade Area) European Union (final stage)

Sri Lanka Singapore Thailand (separate from FTA agreement with ASEAN) Malaysia (separate from FTA agreement with ASEAN) Japan European Free Trade Association (EFTA) (negotiation ongoing) Canada (negotiation ongoing)


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South Korea (India-Korea CEPA)7.2 Free Trade Zones (FTZ):

Liberalized conditions for cross border trade, as signaled by free trade agreements, have

been an important factor in the development of international trade flows. Such agreements arecritical, however within regions, additional measures have been proven to be important in

encouraging cross-border trade and capital flows. Many governments have established so-called

special economic zones or free trade zones. Governments typically subsidize companies which

relocate inside the zones, making them particularly attractive for manufacturing and exporting

companies.

Companies who move to free trade zones are rewarded with tax and customs exemptions

and in some cases with streamlined procedures which reduce red tape. Some free trade zones are

also specifically designed to serve the needs of particular industries, such as chemicals or

pharmaceuticals. Often such areas create economies of scale in terms of transport, as thepresence of multiple producers facilitate better capacity utilization. Free trade zones may also

feature superior infrastructure, such as excellent connections to export facilities and ports.

The main objective of free trade zones is to attract foreign direct investments by

facilitating market entry for foreign investors. Foreign direct investment inflows may provide

capital either directly or through other related enterprises. Foreign direct investment represents

the most important source of capital for emerging markets. Free trade zones stimulate foreign

direct investment inflows to a country, since companies looking to invest will benefit from better

accessibility and reduced transport cost. Historically, the establishment of free trade zones has

fostered the industrialization and economic growth of countries ( like Taiwan, South Korea andSingapore, which are some of todays most important industrialized economies).

In the emerging markets, the number of free trade zones and similar arrangements is

expanding rapidly. Currently 600 special economic zones are in the approval process in India.

Free trade zones alone are no guarantee for obtaining higher growth rates or attracting foreign

direct investments, however certain factors significantly increase the likelihood of success, such

as:

Quality infrastructure, a supportive government, lighter regulation, strong export focusand large warehousing and handling capacities.

Free Trade zones will facilitate opening markets for international trading partners,providing benefits especially for those economies that are strong in export.

In addition, free trade zones can support further globalization if strategically locatedinventory buffers are established, allowing exporters to respond with quicker lead times

to demand from the destinations which they serve.


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In India, the following Free Trade Zones exist:

Madras Export Processing Zone Noida Export Processing Zone Falta Export Processing Zone Navi Mumbai Special Economic Zone Kandla Free Trade Zone Santa Cruz Electronics Export Processing Zone Vishakapatnam Export Processing Zone Cochin Export Processing Zone AP Special Economic Zone Surat Special Economic Zone

7.3 Foreign Trade Policies (FTP):

While India has gradually opened up its economy, its tariffs continue to be high when

compared with other countries, and its speculation norms are still restrictive. This leads some to

see India as a rapid globalize while others see it as a highly protectionist economy.

Nevertheless, in modern years, the governments stand on trade and investment policy has

demonstrated a marked shift from protecting producers to benefitting consumers. This is

revealed in its foreign trade policy of 2004-09 according to which, For India to become a major

player in world trade we have to also make possible those imports which are required to

stimulate our economy.

Along with economic transformations, globalization of the Indian economy has been the

leading factor in devising trade policies. The reform procedures pioneered in the subsequent

policies have focused on liberalization, ingenuousness and lucidity. They have given export

friendly surroundings by simplifying the procedures for trade facilitation. In the present Foreign

Trade Policy 2009-14, the focus lies in reversing the declining trend of exports and to provide

additional support to those sectors which have been hi

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