India is witnessing a construction boom as the government works to upgrade the country’s creaking infrastructure. A 10-year forecast of the global construction industry by UK-based research organisations Global Construction Perspectives and Oxford Economics, published in 2009, predicts that by 2020 India will overtake Japan to become the world's third largest construction market, below only China and the US.
The report goes on to predict that by the end of the decade, India’s construction market will be worth almost $650bn, making up 5% of the world’s total construction output. The report concludes that India will experience serious growth in every construction sector and the country will be a key market for many of the world’s largest construction companies.
The latter of these forecasts is already evident in India. Leading global construction companies are already involved in developing highways across the country. Among them are IJM and Plus Expressways of Malaysia; Oman’s Galfar; Atlantia of Italy; Egypt’s Orascom; Vinci of France; Isolux Corsan and Cintra of Spain; Sibmost and Transstron of Russia; and Leighton of Australia.
“Roads are a growth sector in India and we will continue to see an increase in traffic movement. There is long-term growth in the infrastructure sector and a healthy pipeline of EPC (engineering, procurement and construction) contracts,” says Mike Shaw, chief executive officer at Leighton Contractors India. The company has been present in India since 1995 and has in recent years participated in constructing three road projects.
Although the Indian government allows foreign ownership in the roads sector, most international construction majors still prefer to participate in such projects with local companies. Kuljit Singh, partner and transactions advisory leader for infrastructure, real estate and government at Ernst & Young, explains that foreign companies bring in technical expertise to execute large-scale projects. This is especially useful once the roads ministry issues mega projects worth nearly $1bn. Additionally, international companies bring in much-required capital, which is essential as several domestic construction companies already have working capital locked into existing road projects. The local partner on the other hand brings an understanding of India’s regulatory and business issues as well as the ability to deal with the local workforce.
This trend of international investors preferring the joint-venture route will continue for some time, according to Mr Singh, until international companies gain an understanding of local domestic business issues and the policies and procedures of executing road projects are simplified to match international norms.
The Indian government has implemented several reforms in the roads and highways sector in recent years. However, there are a few major issues that remain unresolved and have complicated road projects over the past few years. The biggest and most serious challenge facing the roads sector, says Mr Shaw, is that of land acquisition. He says: “A road, by its very nature, covers a lot of ground and goes through different villages. To increase the size of the road by introducing more lanes requires the land to be acquired from local farmers and villages but this process often gets mired in controversy leading to project delays.”
The issue of land acquisition from farmers is an emotive one, as the compensation they receive is often criticised for being insufficient. In August last year, two farmers were killed when police fired at protesters demanding more compensation for land taken to build a $2bn six-lane highway to connect Agra, the city in which the Taj Mahal is located, with New Delhi.
According to the model concession agreement, work on any road project can start only after 80% of the total land required for the project is acquired. However, it is estimated that nearly 70% of road projects in India have been delayed because of land acquisition problems. There have been instances where small patches of land not being acquired has delayed an entire project. While the National Highway Authority of India (NHAI) has land acquisition units in various states across the country, the process is still a time-consuming one.
Apart from land acquisition, local demands specific to the state where the road is being built is another major issue, such as the creation of additional underpasses and providing concessions for local users, says Lalit Jalan, CEO and director of Reliance Infrastructure, the infrastructure-focused arm of India’s Anil Ambani Group, which is developing 11 highway projects across India. He says: “In many cases, the concessionaire is left to tackle local demands and issues by himself and even if the demands are legitimate, the bureaucratic hurdles delay the implementation substantially. A proactive government and improved inter-agency coordination are essential for quick resolution of such issues.” Paucity of skilled manpower is a challenge as well, he adds
However, Mr Singh disagrees. He argues that labour shortage is an anomaly in a country such as India, which has a huge population and a high percentage of young people. The construction industry, he says, uses a large number of semi-skilled people from rural areas that receive low pay. If the pay and working conditions improve, labour will automatically gravitate towards construction projects.
As such, he points out that the recent delays in road projects being awarded have been largely down to issues within the governmental agencies. NHAI has cited reasons for this as being a shortage of consultants and experts to conduct project appraisals as well as land acquisition, but the main issue appears to be corruption. In May last year four senior officials of the NHAI were suspended on charges related to alleged favouring of a private construction firm in allocation of contracts.
Beating the backlog
As a result of these delays, a huge backlog has built up. According to estimates by HDFC Securities, there are more than 25,000 kilometres of road projects worth more than $55bn yet to be awarded if the NHAI is to meet its deadline of completing the implementation of the country’s National Highway Development Programme by the end of 2017. Assuming an average three-year construction period for road projects, the NHAI would need to award projects to cover all of these 25,000 kilometres by March 2014.
The 20km-a-day target for road construction is a distant dream at the moment, but the coming months should be exciting as the government appears to be finally speeding up the process of awarding road projects after a gap of nearly six months. It has been reported that the NHAI has already cleared eight projects totalling about 900km. The Ministry for Road Transport and Highways has also invited bids for one mega-project of 570km and announced its intention to award five such mega projects worth $3bn in the first quarter of this year. These mega projects of more than 500km and worth in excess $1bn are aimed at attracting major international construction firms.