Calling India the “sleeping giant,” Graham Robinson, one of the world’s leading global construction economists, predicted that India will overtake Japan as the world’s third largest construction market by 2030. Like Chinese construction companies that are now the largest in the world, the Indian construction industry is going to experience “a complete transformation in size, scale and technical ability” over the next 15 years, he said.
Robinson, director of Global Construction Perspectives, opened the Construction World/ENR Global Leadership Summit in New Delhi Oct. 25, part of a two-day India Construction Festival that drew about 600 attendees to four events. India ranks just 63rd out of 140 countries on the quality of its infrastructure, Robinson said, identifying that factor as a key driver for construction growth along with urbanization and a growing middle class. And he notes that India’s low debt to Gross Domestic Product ratio positions it to be able to afford to finance infrastructure construction.
Expanding on those drivers, Robinson said just 32% of India’s population lived in cities in 2015, but that fraction is growing to 40% by 2030. “That doesn’t sound like a lot, but it means 200 million people moving from rural areas to urban centers,” he says, driving all kinds of work for engineers and contractors. He also sees an increase of 100 million families earning $35,000 a year by 2030, driving a boom for retail goods, healthcare and education.
Emerging Asia, including India, now accounts for “just under a quarter of all worldwide GDP,” Robinson adds, noting that the percentage moves to 30% by 2030. When you add in the contribution of developed Asia, the number rises to “40% of all global economic output generated in Asia,” he says. It’s a “big big megatrend,” Robinson pointing out that as much as 60% of all construction will be happening in emerging markets by 2030.
Elizabeth King, Mott MacDonald director for the Middle East and South Asia, said her company’s challenge has been where to focus its growth. “A few years ago, we decided to have a really good look at our business because we felt we had become too diverse. We found that 80% of the value was coming from 20% of the territory, so we adopted a strategy of a lot more focus,” she said, acknowledging that the company is still working on every continent, however.
Explosive growth in India is expected to double the size of many of its cities, creating a “boom” in construction of road, rail and other infrastructure that will link those cities, said Shailesh Pathak, CEO of Larsen & Toubro Infrastructure Development Projects Ltd. (L&T). During the Oct. 24 India Road Conference, one of the other events in the India Construction Festival, Pathak and other panelists discussed strategies to meet the country’s burgeoning infrastructure needs, which include the Indian government’s goal to double its road network to 96,000 km by 2020 – a plan that would require the completion of 45 km of roadway each day.
As the country’s largest contractor, L&T reported to ENR nearly $9.3 billion in construction volume within India during 2017. Despite the ample slate of upcoming work, it’s “surprising” that L&T remains the only firm of its size in the country, he says. “We’d love to see other Indian construction companies growing in size and scale. We'd love to see international companies coming here, maybe partnering with us. India is the next frontier,” he adds.
In a session he next day, Sunil Takyar, principal vice president and managing director of Bechtel India Pvt. Ltd., pointed out challenges on that path. The design-construction giant has worked on 100 projects over the past 24 years from its office in Gurgaon, near New Delhi where 2,000 engineers have designed global projects from oil refineries to the Riyadh Metro, but it has not worked as much in India, he says, not qualifying for its public megaprojects.
To attract international firms and to encourage local firms to bid and build responsibly, Pathak says India “desperately needs to improve” contract enforcement and dispute resolution. For example, arbitration claims languish in the courts, where “in a developed economy, those arbitration claims would have been concluded and honored in 12 months.” Many of those countries’ best practices “could be immediately implemented in India,” he adds.
P3s Less Attractive
As far as financing the flood of public projects, Pathak says issues around contract enforcement and dispute resolution make long-term public-private partnerships (PPP) look less attractive to international investors. “It’s very difficult for a private concessionaire to put money down for the next 30 years,” he says.
Recently, India’s National Highways Authority (NHAI) has turned to a variation of PPP known as the hybrid annuity model (HAM), which mixes EPC (engineer, procure construct) with the build-operate-transfer model. Under HAM, the government takes on a larger share of the project risk by footing 40% of the bill, while a private entity would raise the remaining funds through a variety of means. Developers are freed from toll collection or roadway operations, and instead receive annual payments over the term of the agreement.
But Robinson raised concerns about HAM financing. The model is “an attempt to remobilize private capital into infrastructure, but in the long-term it will not work,” he believes, at least not until India deals with systemic problems within the sector. Many of PPP investments do not generate revenue because tolls have been removed from roads by politicians wanting to please voters. The default Oct. 3 on debt repayments by the Infrastructure Leasing & Finance Services (IL&FS) which carries US$12.5 billion in debt “is one indicator that the government needs to develop a new strategy to determine how it will pay for some US$4 trillion of new infrastructure” it needs over the next 15 years.
Another challenge for the country is materials quality. Pratap Padode, president of the First Construction Council, the infrastructure think tank that produced the India Construction Festival, discussed the group’s research initiative on the quality of rebar. After a series of structural failures from a bridge in Kolkata to a garage in Mumbai, the group had 66 samples of rebar analyzed from 26 different manufacturers. The samples from 18 brands were found to have phosphorus or sulphur-phosphorus combination levels higher than allowed.