India: Ready to roar?

With US$ 1 trillion of infrastructure investment expected in the next five years, the Indian boom is gathering pace, but can regulation keep up with demand?

India's Twelfth Five-year Investment Plan is due to be submitted in 2012 and infrastructure is expected to be at the forefront of the government's agenda. Investment in the sector will almost double to US$ 1 trillion, compared to US$ 514 billion spent under the Eleventh Plan.

But while the Indian government is relying on the private sector to facilitate the investment - at least 50% of the investment under the new five-year plan is expected to be privately generated - a gap remains between the demand for construction and the regulatory structure necessary to support new builds.

Current policy and legal framework for the construction industry is fragmented, with non-standardised contract procedures varying from state to state and the presence of multiple agencies at both state and federal levels.

The scale of the problems facing foreign construction companies was brought home by Caterpillar India Chairman Kevin Thieneman, speaking at the 10 February Indian Earthmoving & Construction Industry Association (IECIA) conference, which coincided with the bC India exhibition in Mumbai.

"India needs to improve its business regulation. Companies that are good corporate citizens are being held hostage by regulators, in particular the environment ministry," Mr Thieneman told attendees. He warned that multinational construction companies "have choices and may be put off."

"If we can't get steel, we will go to Thailand or Indonesia. Some of my suppliers here are operating at 50% capacity because they can't get power. Equipment is sitting idle because they can't get environmental clearance," said Mr Thieneman.

Fellow speaker Ravi Shreehari, head of business development at Indian road building company IL&FS Transport Networks, agreed. "The situation is a barrier to entry for foreign contractors and we need to level the playing field by establishing an autonomous regulatory authority," he warned.

Transparency required

These senior industry figures were among many present at the conference voicing concerns over regulation in India. Major concerns are transparency in determining project terms and the delays experienced getting the go-ahead for pre-construction activities such as land acquisition and environment clearances, often resulting in spiralling costs.

For example, South Korean steel manufacturer Posco received conditional approval from the Indian Ministry of Environment and Forest to construct a US$ 12 billion steel plant in India's eastern state of Orissa in February this year - six years after plans were first submitted.

The Cochin port connectivity project at Vallarpadam is another case in point. Expansion of the port suffered such long delays due to land acquisition problems that the Indian public investment board had to approve project cost escalations from INR 3.9 billion (US$ 75 million) to INR 5.6 billion (US$ 124 million).

And in the oil and gas sector, the Indian Supreme court is due to hear a case in August 2011 concerning whether India's Petrolium Natural Gas Regulatory Board has the power to authorise companies to lay pipelines. The regulatory confusion is currently holding up several oil and gas pipeline projects for which bidding is either in process or contracts have already been awarded.

But change is afoot. In the power sector, for example, the federal government has introduced competitive bidding in an attempt to resolve a major hurdle in the way of private participation. The Ministry of Road Transport and Highways has also made amendments in the standard bidding document for engineering, procurement and construction projects by state public works departments in order to make contractors take more responsibility for maintaining projects.

And in terms of funding, the Indian Insurance Regulatory and Development Authority has agreed to amend its policy and allow insurance firms to lend to a proposed infrastructure debt fund.

State reforms

State governments are also making reforms - the Andhra Pradesh government, for example, introduced a Maritime Board Bill in 2010 to aid the rapid development of ports across the state.

Speaking at the IECIA conference, IECIA chairman and managing director of Telco Construction Equipment Ranaveer Sinha was confident that the situation would improve in future years and irregularities would be ironed out as the regulatory environment matures in line with growth in the construction market.

"There are many other issues for regulators to deal with in coming years, not least the need to improve business practices to reduce unethical behaviour," Mr Sinha concluded.