Infrastructure Projects in India Requirement, Planning, Execution, Reason for Delay
- Providing a good infrastructure has been neglected in the past in India. The realization came very late. Because of the neglect of this very important aspect, India was relegated to back waters. India was not competing well with the other world economies. Good infrastructure becomes a driver for the engine of the economic growth of the economy. This fact has dawned on the powers that be in India for sure in the past decade or so. The results are there for all to see.
- The author has travelled to a very large number of countries, both developed and developing in the last more than three decades. Countries in the Middle East, South East Asia & Africa which were far behind India became much more developed in comparison to India by thinking of & providing infrastructure at a very rapid pace. The author used to wonder when India will embark on the path to create a rapid infrastructure improvement. However, the Government of India is now creating a very robust Infrastructure. The huge investments by the Government of India on development of infrastructure in the country has resulted in a positive spiraling effect on the economy by triggering growth in other sectors like manufacturing and service sector.
- According to a study conducted by the World Bank, "Indian Road Construction Industry Capacity Issues, Constraints & Recommendations"
Growth of the EconomyThe awakening & real investment in infrastructure development has helped in sustaining India's growth rate as compared to rest of the world. The investment in creating powerful assets like infrastructure has been continuously increased over the last few years. There is allocation of equivalent to USD 37 billion in the Union Budget for the year 2010-11 for infrastructure up gradation in both rural and urban areas. This amounts to over 46% of the total plan allocation for infrastructure development in the country.
Importance of Infrastructure Construction in India
India has planned & has been successful in its economic development strategy, in part, through its Five-Year Plans. The first Five-Year Plan was unveiled by India's first Prime Minister, Pandit Jawahar Lal Nehru, for the period (FY 1951-1956). The planning of the growth & well being of the country is a reflection of the economic philosophy and thinking set after the country's independence in 1947. This thinking recognizes the role of the government in bringing about changes in various fields of the economy to improve the standard of living and overall wellbeing of the society.
India is the fourth largest economy in the world, with a GDP of US$1,242.8 billion in 2008. Between 2000 and 2008, India's GDP growth rate jumped from 5.7% in 2000 to 9.3% in 2007 before tapering to a robust 7.9% in 2008. The GDP growth in 2009 has also hovered around 8%. This level is likely to be sustained in the next few years.
India's rise, as an important economic power in recent years is a most prominent development in the world economy. India has emerged as one of the fastest growing economies in the world. India's growth, particularly in manufacturing and services sectors, has boosted the sentiments, both within the country and abroad. With an upsurge in investment and robust macroeconomic fundamentals, the future outlook for India is distinctly upbeat. According to many commentators, India could unleash its full potentials, provided it improves the infrastructure facilities, which are at present not sufficient to meet the growing demand of the economy. Failing to improve the country's infrastructure will slow down India's growth process. Therefore, the government's first priority is to rise to the challenge of maintaining and managing high growth rate through investment in infrastructure sector, among others.
Investment in infrastructure is going to increase from Rs. 20,54,000 crores (in 11th five year plan) to Rs. 40,99,000 crores (in the 12th five year plan)(2012-2017). The construction sector will become one of the most attractive for investment opportunities. The main, established players will, undoubtedly, benefit from this opportunity. The smaller construction companies shall be the biggest gainers because these are the ones who worry about their order book and project execution. They get paid progressively as the work proceeds. Their fortunes are independent of the financial closures and the success of the project. The road segment alone is going to do very well. The NHAI is planning to award about 12000 kms of highway construction this year (2010-2011). The value of the projects awarded may be about Rs. 120,000 crores.
World Construction MarketThe world's construction market was hit with the steepest decline in global construction spending in at least 20 years as activity contracted by 3.7% in 2009 (The decline in the construction market was 1.8% in the year 2008). Contractions in the world construction activity are not usual, & have occurred because of the simultaneous downturn in national economies around the globe.
According to estimates, the global construction market shrank to $5.6 trillion dollars in 2009 (the peak was in the year 2007 at $5.8 trillion). The year 2010 has seen recovery, but weak initially. It is going to do better in the year 2011.
Every region except Asia has seen declines in construction spending.
It has been reported that while 2010 will be weak, Asian dynamism and North American resilience will return to lead global construction growth near or above 5% for 2011 and 2012.
Infrastructure in IndiaAnalysts estimate poor infrastructure shaves an estimated 1 or 2 percentage points off India's annual economic growth.
Prime Minister Manmohan Singh had said that building infrastructure will be crucial for India to achieve a growth rate of 10% in the next few years.
The figures for the investment in construction sector, both in the public & the private sector are not readily available but one can see the spurt in the construction activity all over the country. The Government of India has planned US$ 354 billion investment in its infrastructure for the 11th five year plan (FY2007- 2012), with another US$ 150 billion expected to come from the private sector. The sector wise break up (for some of the important sectors) is as under:
- Electricity (US$ 167 billion),
- Railways (US$ 65 billion),
- Roads and highways (US$ 92 billion),
- Ports (US$ 22 billion) and
- Airports (US$ 8 billion)
India has the world's second largest road network, aggregating over 3.34 million kilometers. Being well-aware of the necessity to attract FDI in the segment, the Government of India has allowed 100 per cent FDI under the automatic route for all road development projects, in addition to offering 100 per cent income tax exemption for a period of 10 years.
Road development is considered to be of prime importance to sustain India's strong economic growth.
The Indian Railways is the backbone of the Indian transport system. The US$ 18 billion Indian Railways industry has one of the largest developed networks in the world.
India has 12 major ports and 187 minor ports. According to the Planning Commission, there is an investment opportunity of around US$ 25 billion by 2011-12 in India's ports and shipping sectors, as the country plans to double its ports capacity to 1,500 MT.
Because of strong economic recovery, air travel has made a comeback in 2009. Growth is expected to continue to remain at nine percent in 2010-11 backed by higher demand for business and leisure travel.
Good roads, ports and railways are very essential to sustain growth.
The spending on the infrastructure sector during the FY 2010-2011 may rise to $20 billion. But a total of $50 billion is [slated] to be spent on construction every year in India. This requires a capability of 2.5 times the sector's size.
For construction of highways alone, India needs to spend USD 60 billion, out of which USD 40 billion would come from the private sector. Global players are expected to bring in $10 billion for the much talked-about 20 km-a-day road building projects.
The GOI shall not face any difficulty in raising resources for the highways, almost two-thirds of which would be toll-based, raking in Rs10, 000 crore annually for the investors.
The government is also reported to be in talks with multilateral agencies for soft-funding the key infrastructure projects. Commercial borrowings are also being used by the National Highway Authority of India (NHAI).
Sixty percent of the roads are built under BOT, there is funding being provided by the World Bank and Asian Development Bank.
The MORTH had announced a target of adding 35,000 km of highways under UPA-II's regime. The NHAI has estimated its annual borrowings from the domestic and the international market at up to Rs20, 000 crore for the next 15 years.
The ministry expects that the foreign players, which are presently on the margins, would become senior partners in the construction projects in the coming years. Private equity firms are also likely to show great interest in this sector.
The per capita energy consumption in India is very low compared to other developing countries. India is facing energy & peak shortages of 10% and 14% respectively. In recent years, India's energy consumption has been increasing at one of the fastest rates in the world mainly due to economic development.
Estimates of investment requirements for updating India's power sector vary. The Ministry of Power has projected the same at US$ 100 billion for the 11th five year plan. Of the US$ 100 billion investment, US$ 60 billion (Rs. 270,000 crores) will be for generation & US$ 40 billion (Rs. 180,000 crores) will be for transmission & distribution.
The long term investments required for the power sector up to year 2030 have been pegged at US$ 1.3 trillion. The generation capacity is expected to go up by 60,000 MW from 125,000 MW. In a study of the global power sector investment requirements for the emerging markets, the World Bank and the IEA had estimated a requirement of US$ 2.3 trillion between 1990 and 2020.
The infrastructure spending is going to be doubled to $1 trillion in the 12th five year plan (2012-2017). Poor infrastructure is a long-standing roadblock to faster development in India, with choked roads and ports and inadequate power supplies acting as a brake on its economic growth.
The government has decided to allow private firms to issue infrastructure bonds, which will hopefully attract investments from big pension funds and other cash-rich firms. Issuance of these bonds, whose buyers can claim tax breaks, is currently limited to state entities.
"Our experience shows that private participation in infrastructure development is indeed a feasible proposition and can help expand infrastructure much faster than it would have relying only on public resources," the Prime Minister has said.
India had last year set a target of building 20 km of roads each day, as part of its plans to improve infrastructure but achieved only less than half of that due to problems in acquiring land and awarding contracts.
India is likely to build only 12-13 kilometres of road a day in the current fiscal year to end-March 2011 against a 20 km per day target, Union surface transport minister Kamal Nath said. Foreign investors have shied away from the sector even though the government has allowed 100-percent foreign direct investment, due to problems in land acquisition and difficulties in collection of toll tax.
Infrastructure Projects in India are Infamous for Delays and Cost OverrunsThe unfortunate part is that very few projects get delivered in time and on cost. The quarterly reports of the Ministry of Statistics and Programme Implementation (MOSPI) clearly point out the reasons for this poor performance. The delays and cost overruns have become the hallmark of infrastructure projects in India. However, the extent and causes behind these time and cost overruns remain understudied. Therefore, the types of policy interventions required to rectify the malady also remain unidentified. Delays and cost overruns have signifi cant implications from an economic as well as political point of view. Due to delays in project implementation, the public has to wait for the provision of public goods and services longer than is necessary. Services provided by infrastructure projects serve as input for other sectors. The result is that the cost overrun in these projects has a spiraling effect on the entire economy. In nut shell, delays and cost overruns reduce the efficiency of available economic resources, limit the growth potential and reduce the competitiveness of the economy.
Till recently, as is well known, most infrastructure projects in India were funded by taxpayers' money. Therefore, taxpayers have the right to know how effi ciently their money is being utilised by the government while providing for public goods and services. Delays and cost overruns are generic to infrastructure projects globally, and India is not an exception.
According to a study conducted by ASSOCHAM and E & Y, delays in getting approvals and a complex regulatory environment are major factors hindering PE flows in the infrastructure sector. Challenges faced by PE investors while investing in Indian infrastructure still comprise delay in getting approvals, complex regulatory environment, delay in financial closure of projects, long gestation period of the infrastructure projects, non-transparent bidding process and prevalence of single asset investments.
PEs investors also view delays in completing land acquisition as an additional factor that hinders PE investments as delay in it leads to execution delays and thus in turn, results in escalation in project costs in impacting investments from private sector.
On the future outlook of PE investments, the study, however, adds that despite credit crisis, PE investors could be positive about returns expected from their investments in infrastructure projects as India assures lot of prospects in it as it is its focused area for development.
The construction process can be quite complex, with dozens or even hundreds of different elements involved. These include materials, equipment, subcontractors, clients and inspectors who must interact as a cohesive unit to complete the job. The individual responsible for overseeing this process and facilitating coordination and communication is the project manager. The project manager not only ensures that the project is completed according to the designs & drawings, but that it is delivered on schedule and within a specified budget. To manage these tasks successfully, he must rely on project management techniques and systems that aid in the planning & control of the project.
One of the most difficult elements to control is the project budget. Even with careful planning and estimating, hidden construction issues or mistakes can add unexpected costs to the job. To keep costs under control, it's important to find a tracking system that works for both the project manager and the contractor's accounting office
To improve the odds that the project will be completed on time, it's important to take the time to develop a schedule before contracts are awarded to subcontractors. It is often worth paying a bit extra to hire a contractor, who has the manpower and resources to complete the project on time, rather than simply hiring the lowest bidder and hoping for the best. During construction, the project manager should stay abreast of progress, and provide written notice of changes or additions to the time line.
"It's unwise to pay too much, but it's worse to pay too little. When you pay too much, all you lose is a little money - that is all. When you pay too little, you sometime lose everything because the thing you bought was incapable of doing the thing it was bought to do. The common law of business balance prohibits paying a little and getting a lot-'-it can't be done. If you deal with the lowest bidder, it is well to add something for the risk you run, and if you do that, you will have enough to pay for something better" John Ruskin.
One major cause of headaches on the job site is poor communication between trades. This is often caused by poorly defined scopes of work, which leads to confusion over who is responsible for certain tasks. These various tasks are known as scope items. To minimize confusion, the project manager should take the time to carefully review the building plans during bidding, and use this information to create scopes of work. By taking the time to write thorough scopes before the project starts, chances of having the job run smoothly are improved.
Construction Delay CausesThe following factors have been traced to be the construction time influencing factors, with different weights assigned to them by each individual planner.
- Build-ability of design
- Provision for ease of communication
- Previous working relationships
- Priority on construction time
Factors pertinent to Clients
- Financial ability/ financial arrangement for the project
- Previous working relationship
- Category ( Public, private)
- Priority on construction time
- Specified sequence of completion
- Possible changes to initial design
Factors pertinent to Consultants
- Completeness and timeliness of project information
Factors pertinent to contractors
- Availability of suitable management team taking into account the firm's current work load
- Programming construction work
- Previous performance of site management team
- Number & type of sub-contractors
Factors pertinent to Contract Form
- Suitability to project time
- Use of standard form of contract
Factors pertinent to project conditions
- Function or end use (office, residential, industrial,etc.)
- Availability of local materials
- Law & order issues
Analyzing the Causes of Construction DelaysThere are four basic ways to categorize delays:
- Critical or Non-Critical
- Excusable or Non-Excusable
- Concurrent or Non-Concurrent
- Compensable or Non-Compensable
Evolution of Project Management in Construction ProjectsProject Management and Projects are not new concepts. Throughout history, vast projects of different magnitudes have been successfully undertaken across generations. Project management first emerged in the early fifties in USA on large defense projects (Peters 1981). Gradually smaller organizations took to adapting the idea and currently the smallest construction firms are known to operate project management in some way. A great deal of project management involves avoiding problems, tackling new ground, managing a group of people and trying to achieve very clear objectives quickly and efficiently (Reiss 1995).
"Construction Project Management is the planning, control and coordination of a project from conception to completion (including commissioning) on behalf of a client. It is concerned with the identification of the client's objectives in terms of utility, function, quality, time and cost, and the establishment of relationships between resources. The integration, monitoring and control of the contributions to the project and their output, and the evaluation and selection of alternatives in pursuit of the client's satisfaction with the project outcome are fundamental aspects of Project Management." Walker (1984)
Project management can also be defined as "discipline of planning, organizing, and managing resources to bring about the successful completion of specific project goals and objectives. It is sometimes conflated with program management, however technically a program is actually a higher level construct: a group of related and somehow interdependent projects".
The primary challenge of project management is to achieve all of the project goals and objectives while honoring the preconceived project constraints. Typical constraints are scope, time, and budget. The secondary—and more ambitious—challenge is to optimize the allocation and integration of inputs necessary to meet pre-defined objectives.
The 1950s marked the beginning of the modern Project Management era. Project management became recognized as a distinct discipline arising from the management discipline.
Delays in Project CompletionMany studies have been conducted on capital intensive projects, bringing out a host of factors that cause delay at different stages of projects starting from pre-commissioning to implementation. Some of the points mentioned below are typical reasons why we see delay in capital intensive infrastructure projects in India:
- problems in land acquisition and rehabilitation,
- changes in scope,
- alterations in design & drawings,
- delay in procurement of equipment,
- shortage of materials like cement, steel, bitumen, etc.,
- difficulties in transporting equipments to site,
- shortage of key personnel during the execution stage,
- shortage of trained engineers, skilled man power,
- cash flow issues,
- inadequacies in planning,
- climatic and environmental factors,
- lack of monitoring,
- contractual problems,
- poor performance of both DPR & Construction Supervision consultants, vendors and contractors,
- law and order problems,
- risk assessment at the stage of project implementation,
- Lack of team work, the client, the contractor & the supervision consultants not having mutual trust,
- inadequate infrastructure support, etc
"The delays in pre-construction activities are a recurring problem across all road construction contracts. On average for national highway projects it takes 50% more time than scheduled to hand over encumbrance free land to the contractors. Often, encumbrances such as the extent of land acquisition, utilities to be shifted and trees to be removed are not clearly identified and dealt with in a timely manner. These activities are also hampered by cumbersome procedures for obtaining the necessary clearances, unclear laws and regulations and a lack of coordination between the various government departments and levels.
There is a distinct lack of a 'spirit of partnership' between the contractor and the employer. This is critical to effective project execution, as evidenced in other countries. The result is time and cost overruns and related disputes that invariably end up in litigation."
How to Manage Delays in Construction Projects
- The project manager, the consultant & the contractor must work as a team. As soon as the contract comes into being, these players shall cease to be adversaries & should handle the project to achieve the common goal.
- The client must ensure availability of encumbrance free land for execution of the project in the stipulated time frame.
- Various statutory approvals for the project must be obtained in a fixed time frame. A single window clearance may be tried out.
- The Project Manager must be able to analyse the reasons for delay & take well-in-time appropriate corrective measures.
- The client must freeze design changes at a certain point to allow for procurement lead times, approvals etc.
- The client/ project manager must monitor the work done by the earlier contractor or contractors carefully - and make sure delays outside his control are recognised and documented.
- Timely shifting of utilities is very crucial for completion of the project
- The leader of the construction team must keep his eyes open & not blindly follow the drawings provided by the DPR consultant
- Variation orders for the extra/substituted/deviated items must be issued within a reasonable time
- The contractor must keep an eye on what his team is doing that might cause delays - typical examples include starting late, late submission of drawings, mistakes in his drawings.
- The contractor must "Mitigate" the impact of the delays - accelerate work, use up his "float" and redefine the Critical Path
- Negative cash flow is a very major cause for delays. The verification of the contractor's invoices must be done in a time bound manner & the payments released on time.
- There should be timely approvals for the submissions by the contractor for the RFIs.