Growing Infrastructure In India Construction Essay
The Indian economy is on the fast pace with rates of Gross Domestic Product average of 8.15% or the years 2004-2009. Factors which can be attributed for this on-going growth are rapidly developing services and manufacturing sectors, increasing consumer demand (largely driven by increased spending by India’s middle class) and government commitments to give a new life to the agricultural sector and improve the economic conditions of India’s rural population. Construction is the second largest economic activity in India after agriculture, and has been growing rapidly over the years. The production of goods for consumption and industrial machinery has also been on the rise. This increased flow of goods and growing population requires better rail, road, port (both air and water) traffic and power infrastructure and further improvements are critical for a sustainable growth.
During the fiscal years 2005-2008, India’s GDP grew by more than 9% every year. This robust rate of growth in the economy was initially forecasted to continue in the fiscal year 2008-2009 also. But the growing asset bubble in the Western Economies led to the Subprime Crisis. From the mid 2008 the impact of this was visible in the Indian economy also. It started with a reduced Indian consumption, a higher domestic cost of capital and reduced capital access from international capital markets. Analysts raised a concern that India’s growth rate will slow down and eventually India will also fall into a long recession. In October 2008, Mr. Manmohan Singh, the Prime Minister of India had to reassure people that even in the adverse environment India will be able to grow at a rate of 7-7.5%. Indian Government singled out infrastructure as particularly vital for continued growth of the economy and assured observers that it will take any action to support the businesses and the financial markets if deemed necessary.
Indeed, although at a reduced rate, unlike many other economies like that of US and Japan, the Indian economy is still expanding significantly, and substantial investment in infrastructure continues to be required in order to sustain India’s economic progress. The country’s capacity to absorb and benefit from new technology and industries depends on the availability, quality and efficiency of more basic forms of infrastructure including energy, water and land transportation. In some areas, roads, rail lines, ports and airports are already operating at capacity, so expansion is a necessary prerequisite to further economic growth.
The Indian Government recognizes this imperative. As per the Eleventh Five Year Plan, more than US$500 billion worth of investment is planned to flow into India’s infrastructure by 2012. Construction projects account for a substantial portion of the proposed investments, making the E&C sector one of the biggest beneficiaries of the infrastructure boom in India.
Private sector participation is integral to these plans. PPPs have been identified as the most suitable mode for the implementation of projects – and indeed, are rapidly becoming the funding norm. Their share of the total planned infrastructure improvements is projected to be around 30% (US$150 billion). Power and road projects top the list, and other transportation sectors such as railways, ports, and airports are also targeted for major investments.
Organizations looking to capitalize the Indian story need to plan their strategy carefully. It is vital to understand the local market and to select complementary local partner.
Objective, Time Frame and Scope
This paper attempts to explore the future of Indian Infrastructure and its implications for the Construction and Engineering Industry. It attempts to find out the possibilities available Indian Companies, Global Companies and other foreign companies which will prepare them for the future.
Some of the questions that led to this study are:
What is the situation of Infrastructure in India?
What is the regulatory environment in India?
Has the recession affected the Indian growth story?
What are the steps taken by the Indian government?
What are the promising sectors in Infrastructure in India?
Additionally, the matter of Infrastructure relates to large number of aspects and one of the most prominent among them is policy implications. Policies at both central government and state government level can have tremendous implications on the Infrastructure.
Also the ability of the governments in implementing the projects on schedule also adds another level of uncertainty.
The time frame of this study is next 3 years, that is, from now until the year 2013. A 3 year time frame has been chosen since the Indian government has five year plans which will be applicable till 2012. Also there are many projects underway which will be completed in next 3-5 years.
The scope of this research is limited to Infrastructure in the context of India. However, it is believed that the insights generated from this paper will benefit FDI Investors, Regulators, government, media and general public.
Reasons to invest in India
One of the world’s fastest growing economies – and growth expected to continue at 7-7.5% despite the global downturn.
Few restrictions on foreign direct investment (FDI) for infrastructure projects
Tax holidays for developers of most types of infrastructure projects, some of which are of limited duration.
Opening up of the infrastructure sector through PPPs.
Projected spending from FY07-FY12 in selected infrastructure segments:
Electricity: US$167 billion
Railways: US$65 billion
Road and highways: US$92 billion
Ports: US$22 billion
Airports: US$8 billion
Foreign Direct Investment and the regulatory environment
Infrastructure development projects are mostly capital intensive projects and require substantial investment. The existing policies of the Indian Government encourage investments in domestic infrastructure from both local and foreign capital. India already is a hot destination for foreign investors from all the major countries. According to the World Investment Report of the United Nations Conference on Trade and Development, India was rated the third most attractive location (after China and USA) for global FDI in 2008.
In 2007, India had FDI of about US$21 billion, well below US$30 billion which was the initial target. In 2008, FDI zoomed to a record US$42 billion even when most of the second part of the year was adversely affected by the recession. In order to increase FDI inflows, particularly with a view to catalysing investment and enhancing infrastructure, the Indian Government has introduced significant policy reforms. For example, it now permits 100% FDI under the automatic route for a broad range of sectors (see Figure 1) – only certain post investment intimation is required. For FDI in a few sectors, a prior approval is required, which takes around 6-8 weeks. As part of policy reforms, the Indian Government is constantly simplifying the approval route process, including setting up several agencies to expedite FDI approval. Further liberalization is expected as the Government continues to emphasize infrastructure investment.
In August 2008, a press report stated that Morgan Stanley (one of the world’s largest AMC and Fund house) was looking to invest up to a quarter of its US$4 billion global infrastructure fund in emerging markets, notably India and China. In India, Morgan Stanley would face competition from Australia’s Macquarie Group, JP Morgan, Goldman Sachs and Deutsche Bank, all looking to channel foreign investors’ money into Indian infrastructure. This shows the confidence of the large Investment banks in the Indian economy. While some of this planned investment may be reduced or delayed given the recession in their home economies, India is still likely to garner substantial FDI, particularly if its economy is able to maintain a fairly strong rate of growth in the face of a global recession.
From an exchange control perspective, India is moving towards full current account convertibility. Nowadays almost all the revenue transactions are freely permitted, except certain transactions like royalty, consultancy fees, etc., which are subject to certain limits. Also some transactions like Capital account transactions need prior approval, except where specifically permitted. In order to promote the infrastructure, the Indian Government has relaxed some restrictions pertaining to investments in the property and is now allowing foreign nationals/citizens to acquire immovable property in the country, subject to certain conditions, procedures and requirements.
Hurdles to investment remain. Although India’s legal system is very well-developed, the current environment sometimes acts as an obstacle to the foreign private capital interested in India’s infrastructure. Major infrastructure projects are governed by the concession agreements signed between public authorities and private entities. Tariff determination and the setting of performance standards vary somewhat by sector. In the roads and highways sector, the ministry generally sets tolls – while in major ports projects, and many of those in electricity generation, an independent regulator will decide relevant tariffs. In the airport sector, a new independent regulator plays a major role in determining tariffs in concession agreements for the segment. In some instances, ministry or regulator control over potential proceeds can act as a disincentive to the private infrastructure developer.
As is the case in many countries, there is no single regulator which formulates the policy for all infrastructure projects. There is also no standardization in the concession agreements across the different infrastructure sectors. As a result, the development of certain sectors in India may be hampered due to lack of adequate and co-ordinated planning. Projects which are approved may face difficulties if related projects are substantially delayed. One example is Bangalore’s new international airport, one of the largest PPP projects to date. The project is facing growing pains related to insufficient road and rail connections to the new facility, in part due to delays of expected high-speed rail and highway projects under the auspices of other government bodies.
Figure – FDI Routes
Opportunities in the various Sectors
Which segments present the best opportunities for Engineering and Construction companies in India? The Planning Commission of India in their 11th Five Year Plan has planned extensive expansion in the segments like ports (both sea and air), roads and highways, and power – all of which provide substantial opportunities for E&C companies.
Roads and highways
India’s roads are already congested, and getting more so. Annual growth is projected at over 12% for passenger traffic and over 15% for cargo traffic. The Indian Government estimates around US$90 billion plus investment is required over FY07-FY12 to improve the country’s road infrastructure. Plans announced by the Government to increase investments in road infrastructure would increase funds from around US$15 billion per year to over US$23 billion in 2011-12 (see Figure 2). The quantum of funds invested as part of these programs will significantly exceed that invested in recent history. Such programs would be funded via a mix of public and private initiatives (see Table 1).
The Indian Government, via the National Highway Development Program (NHDP), is planning more than 200 projects in NHDP Phase III and V to be bid out, representing around 13,000km of roads. The average project size is expected to US$150 million-US$200 million. Larger projects are likely to reach the US$700 million-US$800 million range. About 53 projects with aggregate length of 3000km and an estimated cost of around US$8 billion are already at the pre-qualification stage. The procurement process favours players with good experience and sound financial strength.
The opportunities do not stop there. More than 10 states are also actively planning the development of their highways. While the average size of these projects is smaller than the NHDP projects, most will still be substantial, in the US$100 million-US$125 million range. All told, more than 4,500km of state highways are likely to be awarded by the end of 2010.
Table : Road Infrastructure Detailed Projections (US$ million)
State Roads (Highways, Major District Roads, Other Roads)
The Indian Government has also recognized existing infrastructure gaps and capacity constraints in the rail system, and as a consequence plans large scale investment over the five years from FY07-FY12. Projected investments total US$65 billion, of which 40% is expected to be contributed by the private sector. One major PPP programme is already in its initial phases. The Dedicated Freight Corridor project is designed to alleviate congestion on the rail routes between Delhi and Mumbai and Delhi and Kolkata by building long-distance, cargo-only rail lines, at an estimated cost of US$6 billion-7 billion.
Other proposed initiatives include the development of manufacturing plants for rolling stock with long-term committed procurement for several years, and the setting up of logistics parks. City metro systems are also in the pipeline. The first corridor of the Mumbai Metro Project has already been awarded to Reliance Infrastructure and the Government has asked the final shortlisted companies to submit detailed financial bids for the second phase of the Mumbai Metro. Indian Railways is also looking for private partners to help modernize railway stations to world-class levels, and for projects focused on increasing connectivity with ports.
Ports and airports
Increasing connectivity with inland transport networks is just one of many challenges currently facing India’s ports, which have seen massive swells in the amount of goods transported. Traffic is estimated to reach 877 million tonnes by 2011-12, and containerized cargo is expected to grow at 15.5% (CAGR) over the next 7 years. India’s existing ports infrastructure is not sufficient to handle the increased loads – cargo unloading at many ports is currently inadequate, even where ports have already been modernized. An estimated investment of around US$22 billion is targeted for port projects in the five year period from FY07- FY12. The National Maritime Development Programme includes 276 projects, with a required investment of about US$15 billion over the next ten years, with private investment targeted at around US$8 billion. In addition to improving road and rail connections, projects related to port development (construction of jetties, berths, container terminals, deepening of channels to improve draft, etc.), will provide major opportunities for E&C companies. Recent deregulation of the sector now permits 100% FDI, and an independent tariff regulatory authority has been set up to facilitate projects at major ports.
Air traffic had increased rapidly until 2007 but since then the growth has slowed. In 2008 there was a decline in number of passengers flying but it has picked up again in 2009. All the Indian airlines have faced challenging market conditions in 2008, and the rate of growth is likely to be significantly less than initially projected, Indians are still flying in much greater numbers. Estimates made in 2007 by the Indian Government’s Committee on Infrastructure suggest that passenger traffic will grow at a CAGR of over 15% in the next 5 years. Indian manufacturers are also looking to the skies – the same source anticipates that cargo traffic will grow at over 20% p.a. over the next five years.
Even if these estimates prove somewhat optimistic, the growth already achieved has put tremendous pressure on airport infrastructure. The Indian Government has projected that an investment of around US$8 billion in the five year period from FY07-12 will be needed to help cope with additional demand, and private sector participation is expected to play a key role. The private sector has already stepped up to the challenge of airport infrastructure development in several cases, with private participation in recent years at Delhi, Mumbai, Hyderabad, Cochin and Bangalore supplementing the efforts of the Airports Authority of India.
The Government has proposed the establishment of an Airport Economic Regulatory Authority (AERA) to promote efficiency, competitive pricing and a customer-focused service. State governments are also getting involved and looking to facilitate the development of new airports. The total investment on new airports has been proposed at about US$10 billion by 2012. Greenfield airport projects are planned in resort destinations and emerging metros such as Goa, Pune, Navi Mumbai, Greater Noida and Kannur. Further, 35 non-metro airports are proposed for development. Prequalification of bidders for development of Amritsar and Udaipur airport has already been completed, and bids for 10 non-metro airports are scheduled to be invited shortly.
As the density of airports increases in various regions, increased competition is likely to bring new issues into focus, such as corporate performance management. Airports will look to diversify their revenue sources through the development of city-side infrastructure. Airlines will also be looking for new technology solutions to maximize revenues and reduce costs. MRO (Maintenance, Repair & Overhaul) facilities could therefore also present new business opportunities.
The need for improved aviation infrastructure extends beyond the construction of new airports – existing metro airports also require significant modernization and upgrading. EPC contractors are expected to be sought for Chennai and Kolkata airports in the immediate future.
Increased manufacturing activities and a growing population are also causing a surge in power usage. India has the fifth largest electricity grid in the world with 135 GW capacity, and the world’s third largest transmission and distribution (T&D) network. Large investments are needed to meet growing demand and provide universal access. The policy and regulatory framework is pro-investment – shifting away from ‘negotiated and guaranteed’ to ‘open and market competition’. Given the increased competition, diversity, and number of opportunities, project and collaboration risk must be more carefully assessed and managed.
An investment of US$167 billion is projected for electricity projects in the five year period from FY07-FY12. The massive number and scope of potential projects has attracted a number of new investors, lenders and operators. All new awards are through open, competitive bidding. A rush is on to develop new assets, harness natural resources, and attract global finance – but an industry focus and strategy is necessary to properly tap into this opportunity.
E&C companies may want to consider involvement in the construction of power stations, and T&D networks, particularly if sustainable building and generation technologies can be leveraged. The Indian Government is also looking to encourage the generation of wind and solar power by providing generation-based incentives to those companies who do not claim accelerated depreciation, so E&C companies with experience in building these types of alternative energy projects may find excellent opportunities.
Public private partnerships
Funding India’s wide-ranging, US$500 billion programme of infrastructure expansion over a five-year period is likely to be beyond the means of total government funding, so policies have been designed to facilitate private investment to the maximum level possible.
If the Indian Government’s targeted level of private sector involvement and investment are met (approximately 30%), the quantum of funding required would be around US$150 billion – dwarfing the investment achieved over the past decade by comparison. Achieving this level of investment is ambitious. Several frameworks and plans are already in place, however, that may facilitate reaching these goals.
The PPP/PFI market in India is still at a relatively early stage. However, over the past decade or so, there has been an increasing trend at the central as well as state government level to use PPPs for meeting critical infrastructure gaps. The results have been quite encouraging. Establishing a PPP is now considered to be the default option for major infrastructure projects in sectors such as roads, railways, airports, ports and other transport segments. First preference will be given to the PPP model, and only in cases where projects are expected to fail to attract private sector interest will more traditional models be considered.
Most infrastructure sectors have an overall long-term plan and programme that provides guidance on the projects that are likely to come up for development. Key policy frameworks for procurement of projects through PPPs have also been drafted. For example, the NHDP discussed earlier in this paper details a long-term plan for the roads and highways segment, with seven defined phases and largely clearly identified projects (along with project costs) and an agreed timeframe. The roads and highways segment also has a generally successful PPP model concession framework. The NHDP is mandated to a dedicated agency that also has clearly earmarked source of funding coming in to support the programme. Almost all the other sectors have similar plans.
Over the last 3-4 years, there has been a push towards expanding the scope of PPPs for the provision of urban infrastructure through establishment of another government programme for urban renewal across the country. This is likely to further increase the scope, scale and number of PPPs in the country.
Not surprisingly, international interest in Indian PPPs has soared in 2008, with over 50 international players showing interest in a variety of types of projects in the first three quarters of the year. Local players are also increasing their interest. Until recently, only a very limited number of large domestic players were fully conversant with PPP models and had the capability to deliver on them. However, local developers and contractors are catching up fast and domestic capacity has increased substantially in recent months.
E&C companies looking to participate in this burgeoning segment do face certain hurdles. The typical PPP project design and preparation process is still largely technically-oriented, with limited appreciation of the overall financial and commercial risk issues involved. Often information distortions in the market have led to large variations in the bids/offers received during the procurement process. Further, the procurement process is often highly prescriptive, rather than participative. The emphasis is on conforming to public sector requirements, which may not offer value for money and does not encourage innovative solutions, rather than evolving the project configuration to be delivered over the long-term in a partnership approach.
And while the public sector is dictating the terms, it is quite often not willing to shoulder concomitant risk. The current concession structure is highly asset oriented, rather than focusing on service delivery. Private sector participants are often required to assume considerable risk, including demand risk, and the apportionment of risk is in some cases quite inefficient.
Financing for PPP/PFI projects can also be a key constraint, as long-term financing and instruments have been in scarce supply. PPP projects have so far been largely financed domestically using plain vanilla debt with relatively low gearing. Commercial banks are the major source of debt with generally short tenor (being about 50% of concession period). At the current time, it is difficult to predict how the financing situation will evolve over the short-term. Certainly, access to credit has become far more restrictive on a global basis, however if India’s growth continues to outperform most other economies, it could emerge as a preferred destination for investment.
India has become an attractive PPP market and its attractiveness is likely increase in the future. Contractors able to negotiate and partner with the relevant ministries should find excellent opportunities, particularly companies with a longer-term view.
Challenges for players looking to enter the market
Without doubt then, there is huge opportunity in the Indian infrastructure space in the short- and medium-terms at least. The policies of the Indian Government, which have been evolving very rapidly in recent years, continue to encourage the private sector in taking on a larger and more diverse role – from being an infrastructure builder (under a publicly financed arrangement) to an infrastructure developer (under PPP structures which include private finance). These developments have led to a large number of infrastructure projects open up as opportunities for the private sector.
Considering the liberal FDI guidelines, these lucrative projects present both an opportunity and a threat to local players. In many cases, foreign players are believed to have greater technological expertise, deeper pockets and more extensive experience compared to domestic companies. These advantages could mean overseas companies winning work at the expense of local players, or partnering with them. Domestic E&C companies may therefore look at foreign entrants in the market as tough competitors – or as strong potential partners.
If most of the forecasted projects go ahead as planned, there should be more than enough work for everyone. Wharton Business School’s 2007 analysis of India’s construction boom pointed out that the proposed US$50 billion infrastructure spend per year in India is nearly two and half times the current turnover of the entire existing domestic construction industry (US$15 billion and growing fast), and that many of the major E&C companies have massive order backlogs. Wharton also flagged talent shortages as an issue in key skilled trades such as fitting, welding, masonry and plumbing – so drawing on the talent pool of foreign partners may help in supplementing and training local tradesmen. India is also facing shortages of construction equipment and machinery.
Domestic production of equipment and machinery is ramping up fast, but in the short term, a foreign partner may be able to help fill in any gaps. There are many factors that influence the role of the local players vis-à-vis foreign players – for example, the criteria used for the selection of developers is an important influencer on what role the foreign players will take. Risk-sharing on a PPP project also needs to be carefully considered. The revenues of most infrastructure projects in India will be denominated in the local currency. Foreign players will need to consider the currency and tax issues already mentioned in some detail, particularly on a PPP project where significant private investment is also sought.
International EPC contractors, including Toyo Engineering, Jacobs H&G, Uhde, Tecnimont and Aker Kvaerner, are already leading players in India. At the same time, many Indian companies e.g. Larsen & Toubro (L&T), Gammon, Bharat Heavy Electrical Limited (‘BHEL’), Engineers India Ltd and Thermax have either scaled up their skill sets or extended their operations to overseas projects.
India has a very well established infrastructure developer market. Local firms have evolved in recent times into fully-fledged national players (and in some cases international players). In certain sectors, such as highways, power and water, the local firms also have significantly progressed on the technological front.
Some of the India-based companies such as L&T, Punj Lloyd, Reliance, GMR, Suzlon, Tata Power, etc. are very active in the international markets and thus, can no more be deemed ‘local’ E&C companies. Indeed, they are global organisations based out of India. These and other large firms clearly look at foreign players as both partners and competitors. However, smaller and medium-sized infrastructure construction companies and developers (such as KMC, Nagarjuna, IVRCL, Gammon, etc.) are often happy to partner with foreign players without necessarily considering them as competitors.
The recent guidelines issued by the Indian Government for the selection of PPP developers have also led to a slightly distorted behaviour in the local marketplace. The guidelines favour larger players, even when the project investments and execution can be easily carried out by mid-sized companies. This has led to situations where many of the small/medium-sized local players are looking at partnering with the foreign players primarily for the purpose of getting qualified and winning the job, rather than to actually bring in investment or expertise. It is expected that such behaviour will soon change as the guidelines become more reflective of market dynamics and mid-sized Indian companies mature.
Foreign players looking to enter into the Indian marketplace and team with local players need to evaluate carefully the cost competitiveness of their prospective participation. India has witnessed huge interest from a number of foreign infrastructure companies in the past, but not many have really been able to offer a cost-competitive proposal. Since India has evolved its own model of cost competitive delivery in many sectors (for example, in telecoms), local players have an incentive to work with foreign companies only if the partnering offers a competitive edge over other bidders. There have been few such success stories so far where the foreign player has offered a particularly cost-competitive product or service. In instances where we have seen the successful entry of foreign players (such as in the port sector), foreign companies have often been able to bring technology or management advantages. And in some cases expanded reach into international markets, to supplement the capabilities of local partners.
Building a sustainable future in India
Whilst the need for greater infrastructure investment is clear, equally important is the need to sustainably manage such investments. The Indian Government’s success in infrastructure provision will be measured not by the quantum of funds invested, but on how infrastructure contributes to the achievement of India’s economic, social and environmental objectives. Importantly, infrastructure investment should be considered as a means to an end, not an end in itself.
Challenges in infrastructure provision are not unique to India. Uncertainty, scarcity of available funds for investment, and competing priorities present challenges to all governments in infrastructure planning and delivery. Sustainability requires that future generations are not compromised by the investment decisions of current generations. Sustainably managing infrastructure through the appropriate pricing, funding and prioritization frameworks is important to ensure the benefits that accrue from the significant investment that India is currently making in key social and economic infrastructure are maximised.
Global climate change creates further challenges. New infrastructure must not only support social and economic goals, it must also do so within acceptable environmental parameters. In our analysis The World in 2050: Implications of global growth for carbon emissions and climate change policy, we set out a number of possible scenarios for climate change based on projected growth rates. In only one of the scenarios, ‘Green growth + Carbon capture and storage (CCS)’, were emissions held to levels that are broadly considered to be ‘acceptable’ by climatologists.
Given that India’s growth rate is likely to continue at high levels, it is important that considerations of issues such as fuel mix, encouraging more fuel efficient modes of transport such as rail, and the possible use of CCS technology, come fully into discussion and are implemented whenever possible.
In our view, it is imperative that debate on the issue of sustainability in infrastructure provision is heightened and that the challenge that it presents is effectively met. Government and infrastructure agencies will also need to retain sufficient focus on issues of feasibility and prioritisation when the primary focus shifts to delivery.
E&C companies looking to bid on major projects need to ensure that they are taking a holistic approach which incorporates sustainability issues into the design of the project, both in the planning and the delivery stages. Those that do so have a unique opportunity to make a major difference in a growing economy while enhancing their own bottom line.
Although it may not always be easy to navigate the plethora of views, opinions and perceptions expressed by various local stakeholders, a vast opportunity exists for foreign contracting companies looking to invest in Indian infrastructure. Already, a number of contractors from Europe, Australia, China, Malaysia and Korea have made their presence felt in India. Further, many E&C companies, particularly from Japan, Spain, France and UK are also now aggressively looking out for opportunities to enter India for business.
Overall, the opportunities to develop a significant business in India are extremely promising for E&C companies, if they have carefully selected strong local partners, structured contracts sensibly to maximize tax benefits where appropriate, and taken a long-term, sustainable perspective. Foreign companies who do not acknowledge the opportunity in good time may miss out on a critical opportunity to establish a long-term presence in one of the world’s largest growth markets.
If you are the original writer of this essay and no longer wish to have the essay published on the UK Essays website then please click on the link below to request removal:
More from UK Essays
- Free Essays Index - Return to the FREE Essays Index
- More Construction Essays - More Free Construction Essays (submitted by students)
- Construction Essay Writing Service -find out more about how we can help you
- Example Construction Essays - See examples of Construction Essays (written by our in-house experts)
Need help with your essay?
We offer a bespoke essay writing service and can produce an essay to your exact requirements, written by one of our expert academic writing team. Simply click on the button below to order your essay, you will see an instant price based on your specific needs before the order is processed: