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India’s Infra Story

Business

Man power and cost management – perhaps the two most important factors to get right today. How are infrastructure companies resolving these two issues? Niranjan Mudholkar reports

In terms of its infrastructure, India ranked 72 (amongst 134 nations) this year on the Global Competitive Index published by the World Economic Forum. That is 10 places down from  last year’s rankings. The fall clearly indicates that the infrastructure development in the country is not moving at the pace it should be.

Obviously, there are challenges that need to be addressed on a priority basis. “The main challenges we face today are the rising material costs and unavailability of sufficient skilled workers,” says PK Madhav, CEO, Maytas Infra.

 Raw material prices have continued to bother the sector for several years. “Based on the survey we conducted for our latest report ‘India’s Leading Infrastructure Companies 2008’, a majority of the respondents in the construction sector indicated that raw material costs were a big cause for concern,” says Yashika Singh, head, economic analysis, Dun & Bradstreet India.

The current financial scenario may have brought some relief on this front as Singh says: “This concern may have mitigated to some degree in recent months, given the recent cooling in global commodity prices.” But the industry will have to wait to see if there will be any long-term impact.

Rise in cost of raw material for infra companies
Period               On CAGR basis
FY04-FY08       47.3%
Last fiscal        58.6%

Contribution of raw material to total expenses of infra companies
Period                       Percentage

FY04                          23.9%
FY08                          34.0%
Source: Dun & Bradstreet India

The other issue mentioned by Maytas CEO – lack of adequate skilled man power – is a concern that is plaguing almost every industry in the country. True, the last few years have seen brisk mechanisation but the industry also needs people to operate the advanced machines and equipment.

  

“The demand for skilled labour required to make efficient use of these technologies far outstrips supply in India. Again, this has a direct impact on turnaround times and costs for a project,” says Singh. Harsh Shrivastava, senior vice president, Feedback Ventures, also agrees that Indian infrastructure companies are facing a manpower crunch.

Despite this, there have also been talks about layoffs and salary cuts due to the financial crisis. We spoke to some people on the ground and found out a different story. A project engineer working for a flyover project on the Western Express Highway in Mumbai told us on conditions of anonymity that there indeed has been a problem finding the right people for many projects. He added that the situation was quite similar in many other parts of the country where he had been involved.

Measures are being taken at various levels to address the man power issue. The National Skill Development Centre (NSDC) has been one of the biggest steps in this direction. NSDC will help finance training for young people looking to join the industry. Most leading industry bodies (including those representing the construction sector) are supporting this initiative.

The National Institute of Construction Management and Research (NICMAR) has also been helping to train and recruit people into the industry. Many leading companies including Subhash Projects & Marketing Ltd (SPML) and Simplex Infrastructure Pvt Ltd source their manpower requirements from NICMAR. Some companies have also tried campus sourcing at various institutes though they haven’t been as successful as IT companies.

“Generally, it is not considered as a very effective method in our industry,” says the recruitment incharge of a Pune-based firm.

Infrastructure companies have also been taking initiatives to tackle the problem at their end and are training present as well as potential employees. For example, L&T, the nation’s leading construction company has established its Construction Skills Training Institutes and is getting good results.

Maytas Infra has tied up with the renowned BITS Pilani to form MBITS. “The primary objective of this collaboration is to build world-class infrastructure technology professionals who would eventually become industry leaders,” says Madhav.

According to this tie-up, diploma engineers from Maytas will enrol for a B.S in Infrastructure Technology which will be awarded by BITS-Pilani. Maytas has also started the Maytas Construction Skills Training Institute (MCSTI). “MCSTI was formed precisely to address the shortage of skilled construction manpower. The clear mandate of MCSTI is to provide quality training to candidates as per the requirement of projects,” Madhav says.

MCSTI trains unskilled rural and semi-urban youth on construction trades, and places them Maytas Infra projects spread across India. “With over three years of experience in training in construction trades, we have placed more than 800 skilled professionals at Maytas Infra,” he adds.

Shrivastava is optimistic about the man power situation going forward. He says: “The demand for people is creating its own supply in terms of more people becoming civil engineers and them joining infrastructure companies rather than IT companies.”

Also, many Indian professionals working in foreign countries have now started to return back to India because of the boom in the construction sector. Pratap Yellapu, a virtual design & construction specialist, is one such professional who has come back. With an architecture degree, he moved to the United States where he graduated from Stevens Institute of Technology and joined Bovis Lend Lease, New York as a project Manager.

“After my 5 years stint in New York construction, I recently moved back to India. I was motivated by the fact that the country is growing rapidly on the fronts of real-estate and infrastructure,” he says. Hopefully, there will be more following Yellapu.

The growth is obviously attracting a lot of players and so the competition is also rising. Thus, margins are likely to fall as concession periods are getting shorter whereas bids are becoming more competitive. So how are infrastructure companies tackling this issue?

Madhav of Maytas suggests that it is important to be a process-driven organisation for dealing with such challenges. Subhash Sethi, vice chairman, SPML, feels that having a strong customer focused approach also helps.

“We believe in managing our fundamentals well and that has kept us ahead. Added to it, is our banker’s unstinted faith and support in all our endeavours,” he says.

Although the gestation period of a typical infrastructure project is considerably long, the sector hasn’t remained completely unaffected by the ongoing financial crisis, particularly when it comes to funding.

“Verticals such as airports and metros that depend directly on real estate have been hurt the most with the economic meltdown. However, sectors such as power have remained unaffected. The easing of the ECB norms has also helped the sector in this turmoil,” says Shrivastava.

“Fundamentally, companies which have their basics in place, will be able to tide over economic slowdowns, therefore such companies will be able to sustain growth and maintain their margins from a long-term perspective,” Sethi says.

Sethi also adds that the economic slowdown has given his company the opportunity to introspect, optimise and emerge stronger. The government as well as financial institutions like the Asian Development Bank have been pumping in funds to keep the sector running. “The Government would need to continue investing in infrastructure projects,” says Singh.

Sethi also has two very important suggestions, particularly taking into consideration the present scenario of the infrastructure sector. “The budget allocated for this sector should not be reduced. Companies in this sector should focus more on how to manage their funds rather than depending on external borrowings,” he says.

Companies that have a diversified presence even within the infrastructure sector are doing fine despite the financial downturn. These include most of the leading companies that have a strong presence in a range of segments such as airports, seaports, rail, rail based systems, oil & gas, refineries & petro chemicals, water & water treatment, power generation, transmission & distribution and industrial construction.

“We are present in almost all the segments of the infrastructure space. Even if there is slow down in some parts, the whole is growing at a healthy pace,” says Madhav of Maytas, a market leader. SPML has been one of the top emerging firms that have shown the wisdom of diversifying. From being a water specialist, it has now presence in various other segments including airports and power.

The Confederation of Indian Industry has recently suggested the creation of a Special Window for Refinancing Infrastructure Projects with the India Infrastructure Finance Co Ltd. (IIFCL). Accordingly, IIFCL will work as the official nodal development financial institution for the infrastructure sector. It will provide refinance and give interest subsidies to all infrastructure commercial lenders. The idea is to pool in funds lying unutilised for various infrastructure projects and make them available through IIFCL. The mandate would be to provide interest gap funding, to compensate banks for extending loans to infrastructure projects at a special interest rate; and to extend direct lending at a special interest rate.

Public private participation (PPP) has been emerging as a significant way of taking up infrastructure projects when it comes to funding. “In the current global scenario, India should continue to focus on the PPP modules, which will help standardise the pattern,” says Sethi. However, PPP may also have some drawbacks going ahead.

As per the new Model Concession Agreement (MCA), the selection criteria for PPP projects considers invitation of financial offers from a limited number of pre-qualified applicants (being around five) at the end of the Request for Qualification (RFQ) Stage. There is a fear that this would actually work in the favour of foreign players.

“The pre qualification norms have been eased but such a step may have a negative impact on many Indian firms as foreign companies are more likely to get an edge,” says Shrivastava.

With regards to PPP projects, Maytas has set a new example with the revenue model adopted for the Hyderabad Metro Rail project. As per this model, the Maytas Infra-led consortium has offered to build the project without taking any grant from the government and instead promised to pay back the government a substantial sum over the next 35 years.

“The model offered by us was so compelling and innovative that the Planning Commission took a note of it and plans to make it a benchmark for others to follow,” says Madhav.

The Andhra Pradesh chief minister Dr YS Rajasekhara Reddy too has appreciated the model, while the Prime Minister Manmohan Singh and Planning Commission vice-chairman Montek Singh Ahluwalia have urged other states to follow suit. James S Simpson, administrator of the Federal Transit Administration (US) has described the model adopted for the Hyderabad Metro rail project as one of the world’s best and largest.

Historically, India has been rather infamous for its long and frustrating bureaucratic processes. The infrastructure sector hasn’t been an exception. This has perhaps been the biggest challenge faced by most infrastructure firms.

Things have definitely started to improve in the recent times but there’s still a long way to go. “One of the biggest challenges is getting the state and local clearances for any new project,” says Shrivastava.

A recent example of a project severely delayed due to clearance issues is the Bandra Worli Sealink (pic on cover page) constructed by HCC. Shrivastava also points out that many projects are still stuck at the state level. “Hence, a major concern lies in the capacity of the states to bid out projects transparently and quickly,” Shrivastava adds.

At any given time, there is a huge pipeline of projects stuck with various ministries. Noteworthy in this context is CII’s suggestion of setting up a National Infrastructure Facilitation & Monitoring Agency to facilitate and monitor implementation of prominent Infrastructure projects. If implemented, this would indeed be a welcome step.

It is essential that all involved elements continue to focus on India’s infrastructure story. It is equally important that they all have a strong support from the government. As Singh of D&B India says, “Economic growth is highly dependent on the quality of infrastructure. Sustained infrastructural spending would ensure long-term sustainability of economic growth and will also create incremental economic opportunities.”

For the sector itself there is nothing but growth ahead. Infrastructure companies are in fact all set to do so. “In the coming 8-10 years, there is a huge opportunity that lies in the infra space and we are gearing up to leverage this opportunity. Maytas Infra is looking at expanding its presence geographically and growing at a consistent pace,” says Madhav.

The key companies also need to realise that they will be playing an important role in many ways other than actually building the infrastructure through their wide geographical reach. For example, a company like Feedback Ventures that has pan-India presence and whose scope ranges from advocating the right policies at the centre and state levels to developing innovative models for infrastructure development (such as Triple-I), can set the right examples.

Thankfully Indian infrastructure companies understand their responsibility. As Shrivastava of Feedback Ventures says: “By virtue of our pan-India presence, we will be transferring the best practices from one part to the other.”

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