India: Getting back on track

Following the re-election of Manmohan Singh as prime minister of India in May 2009, it looked like the country's economic growth would go from strength to strength. Despite the crushing recession elsewhere in the world, India's more inwardly-focussed economy escaped a lot of the fallout from the banking crisis. What's more, Mr Singh's strengthened mandate seemed to give the green light to even more ambitious investment in infrastructure.

And so it seemed for a time. Former minister for commerce and industry, Kamal Nath, was installed as minister for roads, where he was quick to set the target that India should complete 20 km of highways per day. Whether this is achievable or not remains a moot point, but the key to the government's announcement was the acknowledgement that reform was needed to speed up investment in infrastructure.

However, the last year or so has seen construction growth falter in India through a combination of factors. The government itself has been shaken by a series of corruption scandals, which have touched many sectors. The biggest of these has been the allegation that licences to operate mobile phone networks were sold to a few favoured companies, costing the taxpayer as much as US$ 40 billion in lost revenues.

This saw telecoms minister Andimuthu Raja resign in November, and he was subsequently arrested at the start of February for his alleged role in the scam. His trial was due to start as iC went to press.

Closer to the construction industry, evidence has emerged of public officials handing public land and mining licences to private companies at well below the market rate, most infamously in the southern state of Karnataka. Although the focus has been on coal and iron ore, the construction industry has also come under scrutiny for illegal quarrying.

The various scandals in the sector prompted the setting up of a commission to investigate the extent of illegal mining and quarrying and the granting of extended powers to revoke licences from illegal mines. The combination of this, along with the political paralysis the corruption scandals generated in government, has taken their toll on the Indian economy.

On top of this, 2010 and 2011 saw a steep rise in interest rates, as the government set out to curb inflation. A series of quarter- and half percentage point rises saw India's headline interest rate rise from 4.75% to 8.5% in the space of less than 18 months. Although this has hurt business, it seems to have had the desired effect, with consumer price inflation falling to its current 5.3%, compared to the 8% to 10% range it occupied last year.

These factors, as well as the wider global economic slowdown last year, saw GDP growth in India fall to +7.4% last year, according to the International Monetary Fund (IMF). That is strong compared to the meagre +1.6% growth in advanced economies, and well ahead of the global average of +3.8%, but it has been quite a step down from the +9.9% growth India saw in 2010.

Long term growth

While these problems may have dented the construction industry over the last year or so, there is still a strong feeling of bullishness about the Indian construction sector's long-term prospects thanks to the new five-year economic plan.

Speaking at November's Excon exhibition in Bangalore, India's minister for roads, Dr C P Joshi, said, "The document outlining the 12th five-year plan has set a target of +9% economic growth per annum for the five years from 2012 to 2017. One of the most important preconditions to achieving this growth is doubling the investment in infrastructure over the next five years. From a rough figure of US$ 500 billion in the 11th five-year plan, our aim is to raise the level of investment in infrastructure to about US$ 1 trillion for the duration of the 12th five-year plan."

Road building has been a key focus for the Indian government since the late 1990s, with the inception of the National Highways Development Plan (NHDP) and famous Golden Quadrilateral project linking Delhi, Mumbai, Chennai and Kolkata. According to Dr Joshi, this will continue under the new plan, "The portion to the highways sector is likely to be increased to US$ 185 billion," he said.

These investment plans will have a profound impact on the Indian construction sector. According to the government's own research, construction accounts for about 9% of GDP in India, a share which has grown from just 7.4% in 2005. This would put the value of the sector at about US$ 165 billion last year.

However, the government's own estimates also say that of the US$ 1 trillion to be invested in infrastructure over the next five years, about half will be pure construction spending. This is equivalent to adding US$ 50 billion - or about 30% - per year to the country's construction output.

Delivering this kind of growth will be a challenge, and the government is at least aware that its own bureaucracy and the tensions between national and state-level bodies are a cause of delays. The Approach Document for the 12th five-year plan highlighted delays in securing permits and permissions from multiple agencies and delays in land acquisitions as issues that slowed projects down and added to their costs.

Speaking at Excon, Glenville da Silva, general manager of Volvo Construction Equipment India and chairman of the Indian Earthmoving & Construction Industry Association Ltd. (IECAL) said, "What the industry needs today is a boost through governmental reform and faster decision making."

Private funds

Funding has also been an issue in the past, and India has embraced various Public Private Partnership (PPP) models to help deliver its investment plans. The government says 1017 PPP projects have been executed in India, with a total investment value of INR 486,603 crore (US$ 98 billion), and that transport is the dominant sector. Nearly 300 of these schemes have been national or state highways.

But at Excon, Dr Joshi indicated that PPP might have its limits. "It is necessary to explore new avenues for financing our infrastructure needs. The government has put policies in place to allow PPP projects. However, there is a need for alternative sources of funding to bridge the financing gap for infrastructure projects."

Despite this statement, there is clearly a going to be a strong reliance on PPP to deliver infrastructure in India. Last month's budget statement confirmed the target of investing US$ 1 trillion in infrastructure over the next five years, but added that about half of this would be paid for by private funds. That means a target of US$ 500 billion of PPPs in the next five years - more than five times the total value of such projects executed in India to date.

This is certainly ambitious, but it is an area where Dr Joshi is bullish. "Indian infrastructure today represents an attractive infrastructure opportunity to the global financial community," he said.

However, achieving this level of private investment is an area where some have expressed scepticism. Anand Sundaresan, managing director of Schwing Stetter India, said, "50% of this [US$ 1 trillion infrastructure investment] has to come through Public Private Partnership projects as against 30% in the 11th five-year plan. We have not achieved the PPP target of the 11th five-year plan, therefore, if the government wants to attract private investors for the PPP projects, the necessary reforms and policy changes should be brought in immediately."

In terms of the projects it pays for itself, the government says it plans to move away from traditional procurement, which it feels is prone to delays and cost over-runs, to engineering procurement contracts (EPC), or a more turnkey approach. Indeed, part of the new five-year plan includes plans to upgrade 20000 km of two-lane roads on an EPC basis.

Labour issues

Besides land acquisition and funding, another famous bottleneck in India is labour. At the moment construction is estimated to employ about 35 million people in India, or just over 7% of the workforce. However, the government thinks this figure will rise to 92 million people by 2022.

With a workforce estimated by the CIA World Factbook of 487 million people and an unemployment rate of almost 10%, finding enough workers for this expansion of the industry is not going to be a huge hurdle. However, one of the issues raised time and again in India is not so much a shortage of people, but the lack of skilled workers.

Indeed, this will become more pressing as a result of the government's desire to modernise the industry. "More and more infrastructure projects are being planned, and there is pressure to mechanise to speed up their implementation and improve quality," said Mr Joshi.

One initiative the government has set up to tackle the skills shortage is the Sectoral Skills Council for the construction sector, an off-shoot of the National Skills Development Corporation. This body has been set the ambitious target of training and certifying 35 million construction workers over the next ten years, and this will go hand-in-hand with setting up an institutional framework to run training courses, as well as recruiting and certifying the trainers themselves.

Even so, of the 92 million workers the Indian government thinks the industry will need by 2022, more than 60% are expected to be unskilled or semi-skilled workers. That still leaves 23.4 million skilled workers, 4.3 million technicians and 3.7 million engineers to find, along with 3.7 million support staff. However, it indicates that the move to a mechanised, highly skilled Indian construction industry is still a distant prospect.

Ambitious targets

No one could doubt the Indian government's ambitions in infrastructure investment. For example it hopes to award
8800 km of National Highway Development Programme contracts in 2012-13, with a value of INR 25360 crore (US$ 5.1 billion), a +14% increase on the previous year.

Part of the challenge it will face is funding this work, but there are still bureaucratic hurdles to overcome in the system as well as building the capacity in the workforce to execute its plans.