Indian Construction 2007 and Beyond . .

Indian Construction

The period of 2007 and further is well expected to remain buoyant for India’s construction sector. Array of new infrastructure financing initiatives and new suitable project clearance and development mechanism would spur the growth. The surge would be dovetailed by the ongoing cordial approach taken by number of states for infrastructure development as well. An overview by NBM&CW’s editorial and research team.

As the beginning of the country’s 11thplan (April 2007—March 2012) draws to a close, the government is critically examining initiatives and options on financing the country’s burgeoning infrastructure requirements during the period, estimated to be $356 billion. The options are being examined to sustain the projected 9 percent GDP growth. There has been good rate of success on the options being examined and developed both at the recent past and present. This augurs well on the prospects of the country’s construction industry during the 11thplan period and beyond.

Important channels of financing infrastructure development by the government over the recent years have been through setting up of the Viability Gap Funding (VGF). The facility has been made to reduce capital cost of projects by credit enhancement and to make them viable for private investment through supplementary grant funding. Under VGF, 17 proposals have been cleared involving a cost of Rs. 3,970 crores. While 14 more proposals are in the pipeline. This apart, India Infrastructure Finance Company Limited (IIFCL) has been set up by the government to meet the long–term financing requirements of the potential investors.

Taking on the process further, the government is examining possibilities on gamut of options for debt financing, including domestic commercial banks, domestic term lending institutions, domestic bond markets, specialized infrastructure financing institutions like IIFCL, international commercial banks, and multilateral agencies among others.

Both the Reserve Bank of India and the central government are looking to enlarge the existing $18-billion ECB window for infrastructure, even as this limit has not yet been breached. On equity, the various sources of financing are being made easy.

One of the recent important successful initiatives by the government for infrastructure financing through both debt and equity has been launching of the “India infra fund initiative.” The dedicated fund initiative has been launched through a joint collaboration of Citigroup, Infrastructure Development Finance Company (IDFC), India Infrastructure Finance Company Limited (IIFCL), and Blackstone Group Holdings. The companies are coming together in an effort to pump in around $5 billion for infrastructure projects in India.

With the government emphasizing on developing commercially viable bankable projects in road, port, railway, power and other infrastructure sectors, it is well expected that the infrastructure financing pattern both through debt and equity would gather momentum both from domestic and foreign sources. A point to the instance can be cited from the reference of International Finance Corporation (IFC). IFC has an exposure of about half a billion dollars to nearly 10 power projects in India among others.

Macro Outlook Perception

Indian Construction
With finance being well tapped (from heterogeneous sources) for infrastructure development, there is a much positive sentiment by economists that the 9 percent growth figure can be well maintained during the 11thplan period. The perception dually emanates from the fact that the country’s corporate sector seems to have shed its past inhibition to infrastructure investments and is taking up large infrastructure project development in a big way.

Based on a recent observations by economists from Prime Minister’s Economic Advisory Council, it has been confirmed that there has been a remarkable turn round in investments by the private corporate sector in infrastructure development, giving an indication that the country’s 9% growth projections of the economy is sustainable.

The observation is linked taking in account the positive credit off take. As per the Council, off take of credit has been significantly large for infrastructure development and by the industry. In addition, corporates have been using the external commercial borrowing route extensively for asset creation. This has been both for expanding manufacturing facilities and for creation of infrastructure assets. There has been noticeable participation of the private sector in developing the country’s roads, airports, ports, and power infrastructure. In the modernisation of airports, private sector is being involved. Private sector developed airports at Hyderabad and Bangalore are also nearing completion.

Indian Construction
The private sector is also getting involved in the development and management of ocean ports. The instances for the same are the private sector participation in developing the greenfield Mundra and Pipavav private ports in Gujarat. More port development projects would be taken up in the coming months with emphasis on developing captive ports. Emphasis on developing the roads on BoT basis is also leading to a large scale private sector participation for developing and managing them.

Large scale private sector participation would drive infrastructure and thereby construction industry growth from the time to come.

Sectoral Outlook Roads

After a slowdown during 2006, the NHAI projects are expected to be in fast lane in 2007 through better awards of contracts but with better monitoring and implementation. The process has been put in place through an inter ministerial discussion process. Pending final approval the clauses would include a model contract where the risks and rewards are properly defined, a proper model for the restructuring of the NHAI giving it the required skill sets to take on the various national highway development programmes. Added with this, a policy for operation, maintenance and tolling of already constructed highways, in the pipeline now. All these would ensure smooth development of the road sector in the future. The government has identified a total amount of Rs. 2,20,000 crores for seven phases of highway development. Phase-1 of the project is nearing completion while phase-2 is expected to be completed by 2009. Increased thrust on PPP with an increased outlay under government flagship Bharat Nirman and an increased allocation to NHAI from Rs. 9,945 crore to Rs 10,667 crore would impact the pace road projects execution.

Railways

Indian Construction
A shot in the arm is expected by the construction sector from railway projects. This would be in respect of both ongoing projects and those planned. The 2007-08 Rail Budget has drawn up a roadmap for making the country’s major mode of transport the lifeline of the country’s economy and the people in the next five years, entailing a massive investment of Rs. 2,50,000 crore. Within the investment planned for the next five years, the outlay for the Tenth Plan (2002–2007) is likely to be above Rs. 82,000 crore. The Ministry of Railways is expected to tap this fund from multiple sources. According to the ministry sources, the internal generation of railways will not be less than Rs one lakh crore. The railways market borrowing would be Rs. 40,000 crore in the next five years and the remaining Rs 1,10,000 crore consists of Rs. 60,000 crore would be met from government budgetary support, while Rs. 50,000 crore within the ratio would be met through Public-Private-Partnership (PPP) initiative sources. High revenue accruals have left the railways in recent years with a fund surplus of Rs. 20,000 crores.

With the massive investment entailed, the railways plans to enhance its passengers and freight handling capacity. In sync with this, the railway plans to construct dedicated freight corridor. According to this, the railways plans to construct dedicated freight corridor project connecting the western and eastern sea ports from the North Indian hinterland at an estimated cost of Rs. 22,000 crores. In addition to this, it also plans to undertake construction of North– South corridors. The railways would shortly be commissioning pre-feasibility study of the corridors.

For strengthening its network, the railway is presently undertaking the Golden Quadrilateral and major port–hinterland connectivity strengthening project. The construction components of the project consist of construction of bridges, doubling of line capacity, gauge conversion, tunneling, strengthening of bridges etc.

Airports

Indian Construction
India's 125 airports including designated international airports are set to expand, and modernised. As much as $33 billion may be spent in this sector, in the next 10 years from 2005. Further the investment is an inevitable consequence due to countries booming economy making air travel more and more affordable. As a result the government has placed special emphasis on the development and modernisation of airports infrastructure.

Ports

Indian Construction
Having met with success in roping in the private sector for upgrading the country’s port infrastructure as well develop private green–field ports, through the PPP route, the government is planning to streamline the process further for greater private sector participation in the sector. The government would be soon signing a model concession agreement with the prospective private port developers and operators. The concession agreement would address various tariff and operational factors. The government is in the process of upgrading the country’s 12 major port’s infrastructure to augment their capacity at an estimated cost of Rs. 55,804 crores.

Power

Private investment for financing power generation projects is well expected to grow taking further the trend of the ultra mega power projects development. Two ultra mega power projects have been recently awarded to Lanco Infratech and Tata Power worth 4,000 MW each at Sasan in Madhya Pradesh and Mundra in Gujarat. Private investments are well expected to come in for transmission projects as well. As many as, 14 transmission projects, worth between Rs 200 crore to Rs 4,000 crore, have been identified to be set up by private transmission developers. The government has recently amended its 1994 Environmental Impact Assessment notification. Environmental clearance to power projects within a stipulated deadline of 105 days, has been made easy. To draw private sector in the power sector, Government has come out with special initiatives- 100% FDI, in generation, transmission and distribution Income tax holiday for ten years, waiver of capital goods' import duties for mega projects etc.

Indian Construction

Special Economic Zones

To bring in transparency in the process of setting up SEZ projects. the government is to come out with a rehabilitation policy to tackle the issues such as land acquisition, displacement of people and their rehabilitation. As of now the government has stemmed the clearance for fresh SEZ projects, until the implementation of the rehabilitation policy. SEZ projects involve a good deal of construction component as a part of supporting infrastructure in terms of roads, Bldgs services, captive power generation etc for the industrial units located within the zones.

Real Estate

Indian Construction
Encouraged by the Securities Exchange Board of India (SEBI) decision to permit high risk capital, venture capital funds to invest in real estate, several large financial firms and private equity funds have launched exclusive funds targeted at the real estate sector. This has paved the way for organized debt and equity instruments in the real estate market for the establishment of real estate funds.

According to a study made by ASSOCHAM, the size of the real estate market is expected to touch $90 billion by 2015 from the present market size of $15 billion. Funds would continue to get attracted in the real estate sector owing to high ongoing demand of commercial and residential space. This heralds well for the construction sector.

States Participation

Construction industry growth during the year 2007 and further is expected to come through projects lined up by number of states, proactive in infrastructure development and have formulated well defined policies for it and much likely that the concerned states would continue to provide thrust on infrastructure development policies. A macro level insight into the industrial and infrastructural policies put by the states in place and a dimension of development being attained by them in the present context.

Karnataka

Karnataka is keen to promote itself as the destination for domestic and foreign investment to catalyse industrial growth. The Karnataka government has been showing keen interest to encourage private investment for infrastructure development. One of the major focus areas of the state is development of power infrastructure. As per recent information, the government plans to establish a corpus called “Infrastructure Development Fund” of $21 million to primarily meet the infrastructure requirements of the industry and ensure uninterrupted and quality power. Karnataka has shown its pro–activeness in infrastructure development by participating as a development partner in developing Bangalore International Airport and also Bangalore Metro Railway Project.

Andhra Pradesh

The southern state of Andhra Pradesh is also keen in developing infrastructure for industrial growth through private participation. The government has provided recognized industrial areas with facilities such as roads, electricity' water, drainage etc. In addition, allied infrastructure such as uninterrupted power supply, telecommunication facilities have also been provided.

The government besides creating infrastructure is laying emphasis on creation and maintenance of critical infrastructure required in the industrial estates. Ongoing schemes like Industrial Infrastructure Development Fund (NDF) and Critical Infrastructure balancing Fund are to be continued by the state.

Tamil Nadu

The state has sought private participation for the development of the infrastructure sector. An ‘Infrastructure Fund’ has been set up by the state in order to facilitate public-private-partnership in this sector. The fund has been endowed with an initial corpus of $4.1 million and will finance a number of infrastructure development initiatives.

Tamil Nadu is also in line with its other southern contemporaries and keen in having industrial development as a priority for higher economic growth to achieve a growth rate of 8 percent during the tenth plan (2002-07). The state plans to have a consistent high economic growth during the 11th plan as well (2007-12). It also aims to encourage new manufacturing capacity based on improved competitiveness, thereby promoting foreign direct investment towards the manufacturing sector.

Rajasthan

At par with the South Indian states, the North Indian state of Rajasthan has also started providing adequate thrust to infrastructure development.

Rajasthan government has set up Project Development Corporation Ltd (PDCOR), a partnership venture between government of Rajasthan, HDFC, and ILFS. The mandate of PDCOR is to facilitate private sector investment in infrastructure related activities in Rajasthan.

PDCOR has developed a 25-year vision for infrastructure development in the state. The vision outlines the projects and infrastructure requirements in the sectors such as energy, transportation, water and sewerage and tourism infrastructure.

Haryana

The state has been making rapid strides in setting up of IT parks, industrial establishments, real estate etc. The state proposes to adopt an integrated approach to develop industrial and supportive infrastructure and aims to introduce an industrial promotion act and formulate rules to make it mandatory on part of various departments and authorities to provide clearances within a fixed time frame.

Apart from public sector investment, investment in the private sector and public-private-partnership, are being encouraged in setting up technology parks and other supportive infrastructure and services.

Maharashtra

The West Indian state has always been much proactive in development of the physical infrastructure of the state to support the state’s ongoing steady economic growth. The state government is planning to set up ‘Industrial Township authorities’ which will be autonomous bodies responsible for managing the common infrastructure with active participation from industrial units located in the area. They will also collect taxes and revenue for various services. In the first phase, 12 such industrial township authorities will be set up.

The government is also planning to develop industrial parks in the state through private sector participation.

Maharashtra State Road Development Corporation (MRSDC) has been constituted by the state government to accelerate development of transport infrastructure in the state. Several key projects under various phases of implementation by MSRDC include, Bandra-Worli Sea Link and Trans Harbor Link, among others. MSRDC has been assigned responsibility for carry out a to feasible study of Mass Rapid Light Rail System at Pune, Nagpur and Thane cities to develope an air cargo hub at Nagpur.

On a macro level, Maharashtra would continue to lay thrust on development of physical infrastructure, include, special economic zones, tourism, biotech etc.

Gujarat

The discovery of gas reserves in the state has presented the state of Gujarat with a wide array of business opportunities. The state is keen to become a preferred destination for FDI and has been, over the recent years, developing cost effectiveness and cost effective destination for investment. It plans to develop the new industries through developing an ideal support system by upgrading its existing infrastructure.

Exhibiting a greater thrust towards getting industrialized, the state has recently signed 104 Memorands of Understand between the Indian investors and the state government to the tune of Rs.2,51,967 crore. In the MoU signed, pertaining to development of SEZ’s. 26 MoUs to the tune of investment of Rs. 1,42,685 crore for SEZs development, 11 MoU’s for the development of the states power sector for Rs 55,139 crore and for the oil and gas sector 10 MoUs worth Rs. 19,488 crore have been signed.

As per the infrastructure policy of the state goes, Gujarat has been showing its initiation to privatize infrastructure development and has built a number of roads and ports through public-private-partnership.

The state plans to enhance its port infrastructure to handle a gross capacity of 100 million tonnes of cargo in the coming years. The state plans to develop Ahmedabad and Surat as international airports for transporting high volumes of cargo. Airports at Vadodara and Jamnagar are to operate as spokes attracting and disseminating local cargo.

In the ports related sector, Gujarat signed 10 MoUs entailing an investment of Rs. 10,474 crore.

The state would be developing two projects related to rail transport in Bharauch and Kutch districts at a total investment of Rs. 400 crores. In the urban development sector an investment of Rs. 6,985 crore would be invested.

While the states mentioned above would be developing their physical infrastructure in order to catalyse industrial and thereby economic growth, there are also other emerging states comprising Uttaranchal, Chtattisgarh, Madhya Pradesh, and Himachal Pradesh. The new emerging states have been able to draw in investors, through their industrial and infrastructural policies. This would require infrastructure development in terms of roads, power addition urban infrastructure capacity by them. Eastern states like West Bengal and Orissa are also fast catching up with industrial development with West Bengal being the destination of investment by the Tata’s for its new car plant and also by the Indonesian Salim group. While Korean steel giant is setting up a 12 million tonne steel plant in Orissa.Even Bihar is catching up on a modest pace. Mahindra and Mahindra group is planning to set up food processing plant in the state. While Sonalika tractors are all set to invest Rs.130 crore in a tractor plant.

All these would require infrastructure development on a large scale for the time to come enabling the construction industry grow at a steady pace of 15 percent and above as per government's estimates.

"Drumbeats of infrastructure are gradually getting louder and in the next few years their rumble will be felt all over," aptly state this year budget documents.

Indian Construction

BAUMA SUPPLIMENT 2007

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