Making Construction sector Globally Competitive

Despite being the largest employer after agriculture and contributing over 5% to the GDP, India’s construction sector is a story of neglect. Recent CII-CFI sponsored Construction Summit in Delhi grappled with many fundamental issues confronting the industry, ranging from finance to technology to workforce training and development.

- Dr. Ranjit Singh

Despite being the largest employer after agriculture and contributing over 5% to the GDP, India’s construction sector is a story of neglect. Recent CII-CFI sponsored Construction Summit in Delhi grappled with many fundamental issues confronting the industry, ranging from finance to technology to workforce training and development.

WITH renewed focus on the development of infrastructure, the need to create an efficient and highly competitive domestic construction sector is gaining recognition. Both the government as well as the industry should make vigorous efforts to make the construction sector truly a globally competitive industry as the construction sector is a vital stimulator of economic growth. Thus the challenge for the Indian construction industry is to increasingly modernise and restructure itself not only to face the stiff competition from within the domestic market, but also to expand its business internationally.

The two-day summit focussed on the issues with regard to financing, competitiveness, environment and relief & rehabilitation, technology, productivity and emerging business & investment opportunities.

Construction also accounts for 60-70% of the infrastructure project cost and the quality, reliability and efficiency of infrastructure, to a large extent, is laid on the efficiency and quality of construction sector. However, despite tremendous significance, the sector has so far been neglected and there is no particular ministry responsible for the development of the sector.

Addressing the inaugural session Maj Gen B C Khanduri, Minister of State for Road Transport and Highways remarked, "The Indian construction industry must take an active part in the road development process of the country and should not perceive it just as a mere business proposition but as a factor contributing to the growth of the nation".

Maj Gen Khanduri advised that the time and cost overrun factor should be seriously looked into by the private sector and a commitment to finish a project on time should be stressed at. He also said that a penalty clause of one and a half percentage of the entire project was being imposed for delays. According to him, a scientific approach to project management, fast-track construction projects and a long term management of roads should be undertaken by the country’s private sector.

According to Maj Gen Khanduri, the Golden Quadrilateral Project of connecting the eastern, western, northern and southern regions of the country would be completed by 2003. He also said that out of the 3.3 million kilometers of roads that exist in the country, 58,138 km of roads as national highways had already been repaired and constructed by 2002 after Prime Minister’s announcement in 1998 to give a special focus on road development. However, a lot remained to be done for the rural roads which almost constitute 26 lakhs km, he said.

Suresh Prabhu, Member of Parliament contended that quality issue was crucial for the development of the construction industry. Stating that growth in the construction industry would lead to enhanced development of other sectors, Prabhu reiterated that a commitment of all stakeholders of the construction sector was required to develop the industry.

According to him, improvement in procurement practices should be brought about both by the centre and state governments. A fair and transparent procurement policy needed to be adopted to give the entire sector a boost. This would provide a scientific approach to the entire process of bidding and procurement. The government should pay special attention to the sector as it is the second largest employer and was crucial for the development of the country’s infrastructure, he added.

Adi Engineer, Managing Director, Tata Power Co Ltd, delivering the vote of thanks said that a common ground of understanding the path to success must be evolved between the government and the industry. He also said that a climate of stability and security must be ensured for private contracts.

Cyrus Mistry, Managing Director, Shapoorji Pallonji & Co Ltd pointed out that the nature of credit needs of the infra-construction sector is not understood. Its working capital needs are significantly dominated by various non-funded requirements, such as guarantees required for raising mobilization advance, purchase of machinery and equipment. The projects being spread over 3-4 years, these non-funded requirements too are of medium to long term in nature. Yet financial institutions and private sector banks, which source long-term funds and have a better risk bearing ability are not permitted by most of project authorities to provide these guarantees.

According to Hemant Kanoria, Managing Director, SREI International Finance Ltd, a separate set of parameters is needed to appraise the credit worthiness of the construction contracting companies. As the sector is a low capital base, high volume and low margins business, the debt mainly consists of advances from the client, which increases with the order book and the growth rate posted by the company. As such a higher debt : equity ratio of say 5:1 than the current applicable ratio of 2:1 should be applicable to it or advances from the client should be treated as quasi-debt having 50% debt weightage. This would help fast growing construction companies seeking credit limit enhancement.

Pradeep Singh, Chief Executive (Infrastructure), IL&FS pointed out the need for a specialized Financial Institutions for construction sector which can understand and appreciate the typical finance requirements of the construction sector. This institution can formulate proper lending and unified eligibility criteria norms for the borrowers from construction sector, which can be followed by other institutions.

CII is of the opinion that there is also a need for innovative ideas. Citing an example, NHAI is discussing the idea of creating a NHAI-sponsored mutual fund to finance highway projects. This fund will guarantee 12-15% assured return on seed capital contributed by financial institutions and would be leveraged in a flexible manner to fund highway projects in form of equity as well as debt.

The level of corporatisation in the construction industry is very low when compared with the manufacturing sector. Nasser Munje, Managing Director & CEO, IDFC Ltd suggested that the construction sector must adopt corporate culture and practices and rated by Credit Rating Agencies to build confidence to provide comfort to Banks and FI to lend to construction industry. The failure of builders to corporatise has made it difficult for banks to monitor the end use of funds. There is also a need for insurance products which can mitigate many risks to provide comfort level to financial institutions and banks. The other hindering factors involve non-adherence of accounting standards, risk of non-completion of projects and social and political risks.

An exhibition portraying innovative applications via new technologies was an interesting highlight. For example, Tata Steel showcased corrosion-resistant steel rebars that withstand the destructive effect of external factors, such as humidity caused by seawater, saline subsoil , coastal breeze, brackish groundwater which weaken and destroy concrete structures. A special thermo-mechanical treatment (TMT) results in a tempered Martensite rim around ferrite-Pearlite core (Fig. 3) which lengthens the life of the concrete structure. According to the company officials, this process introduced in India under licence from CRM, Belgium imparts high strengths to the bars, besides making them corrosion-resistant.

ACC’s Superfinish Cement shown at their stall features advantages like Stainfree floor, superior workability & crack resistance, higher durability, enhanced protection against environmental pollution and chemical attacks besides 7% higher coverage leading to major cost savings.

ECC, the construction division of Larsen & Toubro Limited-India’s largest construction organisation displayed country’s prized landmarks like Cyber Tower and Cyber Gateway of Hyderabad; ITPL, Bangalore; TIDEL Park, Chennai; Infosys, Chennai; Keonics, Hubli; Oracle Bangalore. The new Marthandavarma Bridge linking Ernakulam and Trissur, an impressive superstructure completed on 30th April 2002 by ECC was handed over to NHAI as part of the NH-47.

P R Swarup, Director General , Construction Industry Development Council remarked that the issues which are impediments to the development of the Construction Industry should not only be identified but also an action plan is to be formulated for each, and most importantly, implemented expeditiously thereafter. Speaking of Project Exports he said it is important to first gauge our capabilities so as to determine where do we stand in the international market. Specific action must follow then, with a view to increase the global market share of the Indian Construction Industry.

He highlighted that CIDC was conducting Construction Workers Training Programme through 14 training centres, Construction Cost Indices (CCIs) are being computed and published regularly, lending norms for the construction entities have been officiated and standardization & harmonization of procurement procedures in the Industry have been established with the help of Ministry of Statistics and Programme Implementation, Govt. of India.