Fast Growth Propels India to the Top of the World’s Hot Markets
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| Symbol. Local contractors see New Delhi’s Baha’i Temple as an early indicator of Indian construction prowess. |
Large Indian contractors are reporting annual sales rising over 30%, and margins are fatter than those in the West. "Less than 6 to 7% [after tax] may not be acceptable in future," says K.V. Rangaswami, senior vice president of the main construction unit of In- dia’s largest contractor, Larsen & Toubro Ltd., Chennai.
With growth of the $75-billion-a-year industry based on modest state investment, the future looks bright. Government indications last year of raising infrastructure spending to 4% of gross national product "shows there is a recognition that we have to grow to 6 to 7%," says Ajit Gulabchand, chairman and managing director of Hindustan Construction Co. Ltd., Mumbai.
While China in 2003 spent over 10% of GDP on core infrastructure, India invested just 3.1%, report economists at Morgan Stanley, Mumbai. They forecast Indian infrastructure investment rising to 4.7% in 2009, but advise it should climb to 8%, or $100 billion, by 2010.
Building better roads has been India’s main infrastructure route to economic growth. The National Highways Authority of India (NHAI) is immersed in a vast program to upgrade arterial highways from two to four lanes. "The government is planning [road] investment of about $37 billion over the next seven years," says NHAI board member H.C. Gupta.
NHAI launched its widening program for nearly 6,000 kilometers of highways on the "Golden Quadrilateral" between Delhi, Mumbai, Chennai and Kolkatta six years ago. With 85% of work done, its target completion has shifted from this year to next March, says Gupta.
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Around one-third of the second phase, for over 7,000 km of roads, has yet to be procured. The total value of the first two phases is well over $12 billion. Roughly the same is going to the 4,000-km phase three, launched last year. For phases two and three, NHAI aims to maximize private financing through build-operate-transfer contracts, says Gupta.
Money also is flowing into other sectors. The government is close to privatizing Mumbai’s and Delhi’s airports to attract investment. Others are expected while construction is beginning on privately financed, greenfield airports at Bangalore and Hyderabad. And upgrades of 26 smaller airports are planned.
About 20,000 MW of new electricity generation capacity also is needed in the next five years, says N. Raghavan, T&L’s head of hydro and nuclear energy. As well as new nuclear and thermal plants, 50,000 MW of hydro are planned for the next 25 years.
To attract new investment, ports are being privatized. L&T, for example, will likely bid for three of 12 major ports now on the market. The biggest, at Mumbai, calls for a $265-million investment.
At the same time, India’s burgeoning information technology industry is driving demand for building construction, says R. Anbalagan, L&T’s regional manager in Chennai. "The market potential is not less than $660 million a year," he adds. In Mumbai, demand for malls, hotels and offices in "doubling and trebling," says another manager.
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| Crowded and Bustling. Infrastructure projects like Delhi Metro, roads and highways are key to unclogging crowded streets of Indian cities. |
Going Up
Prospects for high-rise construction seem uncertain. Major office buildings will rise in Mumbai "if global companies will have their headquarters here, which is unlikely," says Vikas Oberoi, managing director of Oberoi Construction Pvt. Ltd. a leading local developer. "They see it as an outsourcing hub," he says.
Nevertheless, Oberoi is developing a 90-floor, rocket-shaped residential tower in Mumbai. The circular building will have raking external columns buttressing lower levels. All apartments will have sea views and access to swimming pools on each floor, says chief architect Rajendra Chandorkar.
"We are about through with the development stage...we should hit the ground between January and March," says Oberoi. Elsewhere in Mumbai, "we will see eight or 10 signature [high-rise] buildings in the next three to five years," says Oberoi. These buildings will be largely residential.
Across the construction sector "there is high demand but the capacity to spend the funding...is more of a brake on development," says Kevin Stovell, a director of U.K.-based Mott MacDonald Group. But the public sector’s ability to manage large programs seems to be improving.
Economic liberalization of the 1990s triggered profound reforms in infrastructure procurement, says HCC’s Gulabchand. Previously, "lethargic" government agencies would cause projects to "take forever," he says.
NHAI’s emergence 10 years ago "changed the way we are going to build infrastructure in this country," says Gulabchand. Acting purely as a procurement agency, it outsources all activities, increasingly through BOT contracts, and has done "a wonderful job," he adds.
Similar relatively autonomous bodies also are at work. Maharashtra state has a development corporation procuring some of India’s most prominent highways. And Delhi created a company for its metro construction, to avoid mistakes of Kolkatta’s long-suffering project.
 Margins of less than 6 to 7% may not be acceptable in the future.– K.V. Rangaswami, Senior V.P. Larsen & Toubro |
On the delivery side, India’s construction industry is vast and second only to agriculture in size. The Builder’s Association of India claims some 30,000 corporate affiliates. But most are small and local, leaving around 10 national players, says Rangaswami.
Among these, his company, L&T, is several times larger than the next biggest and is in more sectors than any other. While foreign contractors are evident, they are niche players in complex or privately financed highways.
Beijing-based China Harbour Engineering Co., for example, is helping with segmental viaduct construction in Mumbai and is bidding for more projects in local joint ventures. Other East Asian firms also are active, but western contractors are scarce.
Germany’s Bilfinger Berger AG twice studied and rejected India as a market, says outgoing international director Carlos Möller. And though Sweden’s Skanska is active in international BOTs, it is not bidding in India.
"Some of the foreign companies can join hands with some of the lesser known [Indian] contractors to provide a few project management people and good systems," says Rangaswami. "But [construction] will be done by local firms." However, "there is a dearth of good consultants and of independent project management consultants," he adds.
Among foreign design firms, Mott MacDonald is operating as local company. Managing Director Peter Lee is its only expatriate. With 600 staff, subsidiary Dalal Mott MacDonald will grow to 1,000 in the next few years and reach 5,000 later, says group Chairman Mike Blackburn.
U.S. developer Tishman Speyer has set up an office in Bangalore, with ICICI Bank, India’s second largest. It wants to take advantage of liberalized laws governing foreign land ownership, targeting development of mixed-use projects in Bangalore, Mumbai, New Delhi and elsewhere. It expects growth of 5 to 6% over the next five years.
The Mumbai-based unit of U.S. engineer Jacobs Engineering Group. Inc. has operated in India since 1962 as a branch office of a U.K. engineer that Jacobs bought in 1993. Jacobs H&G Private Ltd. is almost entirely focused on India’s industrial process market. "The company in India is a miniature replica of Jacobs in that it caters to a large variety of businesses," says Arun Dravid, Jacobs H&G vice chairman. He says two-thirds of the firm’s annual revenue comes from its own domestic construction or foreign work. One-third is from outsourced work from its U.S. parent. "Our unit is not an outsourcing company," says Dravid.
Human resources are the main constraints facing Indian construction, says L&T’s Rangaswami. With a worker costing as little as $5 a day, contractors use five to six times more than European or U.S. counterparts, he notes.
Construction employs some 30 million people, or 17% of the able-bodied population, estimates P.R. Swarup, director general of the Construction Industry Development Council. Over 80% of the work force has no structured training.
Mandatory minimum training standards are being discussed, and CIDC has developed certification procedures. But the impact so far has been minimal, concedes Swarup. While there is pressure for more government action, training is being left to the goodwill of contractors.
Indian contractors say finding engineers is more manageable, but offshoring may threaten them.
As first-year graduates earn around $380 a month, there is good business in attracting foreign design work. But there is a twist. With off-shorers competing on international pay rates, they are outbidding locals and, effectively, exporting engineering jobs.
(Photos by Peter Reina for ENR)