Overview

Construction Industry: an open sesame to economic progress

Any fillip imparted to India’s multi-dimensional construction industry causes a multiplier effect all-round in the economy. The construction industry that constitutes a vital part of the nation’s overall infrastructure represents the nucleus around which India’s economic growth can be structured.

Dr. Ranjit Singh

India’s construction industry presents an interesting canvas of economic activity. Employing a workforce of 32 million, its market size of Rs. 220,000 crores is simply mind-boggling – being the second largest contributor to the GDP after the agricultural sector.

According to Industry estimates, the investment needed for the infrastructure sector over the next decade to support an annual GDP growth rate of 7 to 8 per cent is around Rs. 15,000 billion.

The construction industry that constitutes a vital part of the infrastructure forms the nucleus around which India’s economic growth can be structured. At present, the industry consumes 90 million tons of cement and 18 million tons of iron and steel annually. An increase in the demand in this sector causes demand push for cement, iron & steel, wood and other materials that go into construction and also the need to transport the same.

Growth in these areas will have a multiplier effect on other segments of economy, leading to an increase in employment. With more gainful employment, comes more demand for consumer items which causes enhancement of their capacity–generation.

No wonder, the construction industry occupies a pivotal role in India’s national plans. It constitutes
40-50 per cent of the capital expenditure on various segments of infrastructure such as power, transport, ports, airports, communication, defence, urban and rural housing, environment and other aspects of the economy.

The future of this industry is quite bright. For instance, if we consider the housing sector alone – the present shortage of houses is about 30 million units: 10 million in the urban and rest in the rural areas. This shortage implies tremendous business opportunity for players in the construction industry.

Similarly, a close look at the road segment is revealing. Over the years, there has been a significant shift in transportation mode from Railways to the road sector: today, roads carry 80% of the passenger and 60% of the freight traffic yet the national highways comprise less than 2% of the Indian road network though they carry 40% of the total traffic. Growth of the road network is not commensurate with the growth of the number of vehicles: who has not experienced the daily traffic snarls while commuting between home
and office.

But there are wheels within wheels. "Indian contractors are denied work within their country and multinationals are preferred while allotting contracts for roads and highway construction by the World Bank", revealed G.V. Ramakrishna , chairman, Construction Industry Development Council (CIDC) - - an autonomous body set up by the Planning Commission in 1996 to bring about all-round improvement in the construction sector in collaboration with the Government and the industry.

The World Bank sets conditions in such a way that none of Indian contractors including L&T would qualify for bidding procedure, he said, adding this is the best way to eliminate Indian contractors before the beginning of process.

To mitigate such difficulties, last year, the government granted industry status to the construction sector, and notified ‘construction’ as another approved activity for financing by the Industrial Development Bank of India (IDBI). The move is significant for the industry, because it will smoothen the financial flow from IDBI and other institutions.

For the rest, the biggest benefit will be the introduction of professionalism in a core sector of the economy and the setting up of a more logical, regulatory framework for its operation and governance.

Earlier, the sector used to get only a meager 1.37% of the total bank lending of Rs. 300,000 crore on account of high risk involved. The government’s move will result in corporatization of the existing players leading to more professional working.

"Contractors would be able to secure bank guarantees and finances at attractive terms and conditions. This will ensure increased availability of funds, ensuring maturity of state plans for infrastructure and housing in a time-bound manner", says Ramakrishna.

One of the immediate concerns of the CIDC was to ensure that domestic construction industry derived the maximum benefit from the new thrust being given to infrastructure development in the country. "In particular, pre-qualification conditions for World Bank aided projects had to be made more flexible", remarks P.R. Swarup, Director General, CIDC.

Another concern related to huge sums of money that had been locked up in disputes between construction companies and its clientele - the estimate was that as much as Rs. 50,000 crores were locked up in the disputes, for periods up to even 20 years. CIDC has mooted setting up of an arbitration committee for speedy resolution of disputes involving contractors and government.

"CIDC is also working with the Actuarial Society of India for providing risk cover to the contractors", Swarup told this magazine (see Interview).

One of the major task that CIDC has taken up is to evolve systems and organization for training, upgradation of skills and certification of the skills already acquired by workers engaged in construction industry.

Construction Equipment Bank

KEEPING in view the flaws in the present system of acquisition of equipment, problems faced by the Financial Institutions, by the equipment owners and by the hirers of equipment, CIDC formulated the concept of Construction Equipment Bank.

Construction equipment manufacturing industry has grown at a good pace, to meet the national requirements, and it is estimated that presently, the country has an operating stock of construction equipment, valued at Rs. 35,000 crores, and a dormant stock of Rs. 70,000 crores, based on 1998 replacement level.

The bank is being set up with the objective of creating a pool of good quality; reliable construction equipment; to hire equipment to desirous construction agencies at reasonable terms; to maintain equipment and to conduct periodical life cycle assessment for evaluation of realistic hire charges; to develop a network of vendors, dealers, and service centers in association with equipment manufacturers.

Construction industry employs about 3.2 crores of people, out of which 73% are illiterate workers who have either acquired or are in the process of acquiring vocational skills on a work site. The traditional methods employed are slow and almost no institutionalized system so far for identifying training needs and none for a formal, nationally standardized system of recognition, testing and certification of the skills acquired. As a result promotional avenues for construction workers remain limited and the situations results in the time and cost overruns and shoddy quality of work.

CIDC has now entered into a Memorandum of Understanding with the Indira Gandhi National Open University to launch a Construction Trades Training program spearheaded by a Pilot project. In this scheme while IGNOU has the academic responsibility of developing training programs, modules, materials, syllabi and testing and certification procedures tailored to the requirements of the construction industry, CIDC, acting as an interface with the industry, will catalyze the setting up of regional Constituent Institutions and their Partner Institutions who will utilize their own resources for conducting the actual training based on the IGNOU curriculum.

Grading of construction agencies?

ALTHOUGH the construction sector consumes a large portion of national plan outlays, generates vast business activities and provides employment to the millions of citizens, yet this is an industry that faces several problems which have acted as an impediment to the availability of institutional finances.

"CIDC has taken up the issue with the bankers", says Swarup. To enhance the confidence in financial support to the construction sector, and thereby drawing the banks towards increased participation in construction financing, CIDC has joined hands with ICRA, to scale the construction agencies through a comprehensive, objective and highly reliable system of grading.

The grading will apply to the project owner, the contractor, the consultant and the project itself.

The contractors will be graded by CIDC-ICRA on the basis of their experience, net worth and previous record involving project completion. These grades will be used by the banks to provide working capital at attractive terms and bank guarantees.

The grading will enable a financier to decide the extent and depth of the financial support to be offered to the project owner, consultant, contractor and the project.

Another attempt in bridging the training gap was the setting up of a National Academy of Construction at Hyderabad. The academy would incorporate six Institutes, namely Construction Workmen Training Institute; National Institute of Construction Management & Research: Contractors Development Institute; Construction Methods and Materials Research Institute; Institute of Architecture Design and Housing Development Institute (HDI).

Apart from these institutes, there would be one "Construction Expo" on the lines of Pragati Maidan, New Delhi and other similar international fairs where items related to construction industry would be on permanent display.

This is the first national attempt to bring all aspects of construction related training and education under one umbrella, through the co-operative efforts of all existing organizations doing work in specific areas. Also, perhaps it is the first ever attempt of its kind to bring training and development of contractors within the ambit of an organized and structured academic program.

Weaknesses of Indian construction industry

Basically, these could be summarized as:

Inadequate ‘comprehensive-and-scientific’ study of the construction market
Lack of coordination with other sectors of the economy
Lack of financial strength in entrepreneurship leading to their inability to evolve long-term strategy
Uneducated and untrained workforce
Regulatory system not updated, which discourages FDI
Prevalence of obsolete technologies
Market tolerance for sub-optimum quality and performance.

NHDP: a bold initiative

For capacity enhancement of National Highways in qualitative and quantitative terms, a major initiative has been taken with the launching of National Highways Development Project (NHDP), which is touted as the Prime Minister’s dream project.

The main components of NHDP include: Golden Quadrilateral connecting Delhi, Calcutta, Chennai and Mumbai comprising of 5834 km of roadways scheduled for substantial completion by 2003. Another component consists of the North-South & East-West Corridors totalling 7,300 km, namely Kashmir to Kanyakumari -3948 km (with a spur to Cochin) and Silchar to Porbandar-3465 km. This is scheduled for completion by 2007. The government levied cess on petrol and diesel to raise resources for the development of National Highways Network on a lasting basis. Together, the two cesses will yield nearly Rs.2,000 crores per annum for developing national highways.

Additionally, on an average, NHAI expects to get loans of $ 200 million from ADB and $400 million from World Bank every year for the NHDP. NHAI has negotiated a $516 million loan from the World Bank for 4 laning of NH-2 connecting Agra –Calcutta. NHAI has negotiated a $180 million loan from Asian Development Bank for 4 laning & strengthening of Surat-Manor stretch on NH-8. 20 projects worth Rs.1000 crore have been awarded on BOT basis. The government also announced Policy Initiatives for Attracting Private Investment. These include: Private sector was allowed to retain toll money; 100% tax exemption for 5 years and 30 % relief for next 5 years (May be availed of in 20 years) Concession period allowed up to 30 years; Duty-free import of modern high capacity equipment for highway construction. NHAI permitted to participate in the equity of BOT projects up to 30% of the total equity.

Government to provide land at no cost and free from all encumbrances.

NHAI/Government of India to provide capital grant up to 40 % of the project cost to enhance viability on a case-to-case basis. Arbitration to be based on UNICTRAL provisions. Housing and Real Estate development, which is an integral part of the highway projects, will be treated as infrastructure and will be entitled for same tax benefits.