Industry Insight – Infra Growth & Constraints
Infrastructure Growth And Capacity Constraints
Incremental demand for infrastructure will continue to be on the rise but the sector continues to face several roadblocks. Sachin Sandhir presents an overview and suggests ways to bridge the gaps
The Indian economy has witnessed quite an upswing ever since 1991 with the implementation and introduction of various reforms into the Indian framework, as a medium of providing economic and financial stimulus to the country. However, this upswing has been dogged by basic infrastructural constraints, both physical and human.
Until now most of the infrastructure activity had been undertaken by the public sector, which operates in a fairly protected and subsidised environment. Also, given the long gestation periods and corresponding social implications, infrastructure compared unfavourably against manufacturing and other industries. These factors collectively with numerous others are indicative of the need of private sector involvement and foreign investment to emerge in this sector.
For the current five year period (2008-2013), the Planning Commission of India has estimated a requirement of US$ 500 billion of investment in infrastructure. Keeping in mind the global fiscal situation, the Government is encouraging private investments in every aspect of infrastructure be it roads & highways, ports, airports, water, education, or transportation. But while the private sector is strong, it still lacks the tenacity to absorb all the risk associated with long-gestation investments in infrastructure. Additionally, with the economy still recovering from the effects of recession, the government needs to incentivise banks to lend, however not at the rate at which they had done in the past, recreating the situation from the 1990s where loans soured and interest on them was unpaid.
Keeping all these constraints in mind, it is commendable that investments in infrastructure have actually risen from 4.9% of the GDP in 2002-03 to 6% as of 2008. Additionally, it has been stated that the sector has the potential of absorbing US$ 1.5 trillion over the next 10 years. However, the challenge will be to ensure that the benefits of growth trickle down to all possible sections of society.
As ramping of investments in infrastructure is viewed critical for India’s growth, support of such investments is of paramount importance. It is for this purpose, that the Indian Infrastructure Finance Company Ltd. (IIFCL) was established as a wholly owned Government company in 2006 to render long term financial assistance to infrastructural projects across the country.
Recently, the World Bank sanctioned a US$ 1.2 billion loan to the IIFCL for Public-Private Partnership (PPP) projects in the infrastructure space, mainly in the roads, power and port sectors; reinforce the institutional capacity of the company; and stimulate the development of a long-term local currency debt financing market.
While the degree of urbanisation in India is one of the lowest in the world, with only about 2% of the total population living in urban areas, the urban sector contributes about 62%-63% of the GDP. This is expected to increase to 75% by 2021. Also, Indian towns and cities are expanding rapidly with large number of migrants moving to these areas in search of economic opportunities.
This has therefore led to increased pressure on the civic infrastructure systems of water supply, sewerage and drainage, uncollected solid waste, parks and open spaces, transport etc.
The current infrastructure scenario in India is no doubt alarming. This is indicative from the fact that there is tremendous pressure on housing infrastructure, with a shortfall of about 25 million housing units across segments, with 99% of the demand being accounted for by just the lower income groups (LIG) and economically weaker sections (EWS) (est. March 2009).
This is further reinforced by a McKinsey presentation to the plan panel which clearly outlines the shortfall in housing for the MIG segment to be between 86 lakhs to 138 lakhs, much higher than the official estimates as outlined in the 11th Five Year Plan.
To address some of these concerns, the Government took the single largest initiative to overcome the issues pertaining to urban housing infrastructure and basic services to the poor, across 63 towns and cities, with the launch of The Jawaharlal Nehru National Urban Renewal Mission (JNNURM) in December 2005.
However, like many other reforms undertaken, this project too has its fair share of shortfalls. Not all states have been uniformly responsive in the acceptance, implementation and enforcement of the JNNURM stimulus. Additionally, at the urban local bodies (ULB) level, the capacity for project preparation, appraisal, monitoring and implementation is limited.
There has also been a shortage of funds and hence a greater need for investments in order to reach targeted growth levels. Another eye sore on the infrastructure radar is the situation pertaining to Indian roadways. Recent figures indicate, road space in cities is grossly inadequate, ranging between 18% of the total city area in Delhi to 6% in Kolkata. This figure should ideally be in the range of up to 30%.
Equally appalling is the situation on road density, the pressure on which only continues to mount, with over 10,000 new vehicles, prior to the economic slowdown, being added on to city roads.
As per ‘India’s Road Construction Industry: Capacity Issues, Constraints and Recommendations’ a World Bank study, the supply of skilled human resources required by the construction industry will fall short by 55% to 64% over the next 8 years.
In order to meet this demand, the number of civil engineering graduates and diploma holders would have to go up by at least a factor of 3. The industry has not kept pace with this growth, as evidenced by the under-utilisation of funds allocated to road projects and perennial time and cost overruns on national and state highway projects. As per estimates, India today has around 110,000 highway engineers, in contrast to China which was supported by over 500,000 trained highway engineers, back in 1989-97.
There are no doubts that incremental demand for infrastructure will continue to be on the rise to keep pace with economic growth and urbanisation. However, the sector has been unable to match this growth due to obvious roadblocks such as capacity constraints in managing and executing projects, especially at the state level and significant barriers to entry into the sector. There is also a derth of manpower and requisite skills that could help bridge some of this gap.
Apart from Civil Engineering, Town Planning and Architecture, the current education set-up in India does not adequately provide for specific curriculum requirements and specialized courses for the construction and real estate sector to aide the infrastructure transformation. Barring a few institutions such as National Institute of Construction Management and Research (NICMAR), Construction Industry Development Council (CIDC), National Academy of Construction (NAC), Centre for Environmental Planning and Technology (CEPT, Ahmedabad) and Indian Institute of Real Estate (IIRE) which cater to a very small percentage of the people employed in the sector, no other professional training and certifications are available in the sector.
The Government, industry associations, educational institutions, real estate and construction companies are all therefore taking unique steps to try and bridge the skill gap. While efforts are being made, they are currently being carried out in isolation resulting in sub-optimal results.
There is need to expand the training and skill certification programmes, both in terms of content as well as geographical reach. What is required is a coordinated effort from all stakeholders including Government, industry associations, educational institutes and companies to come together and build strategies, framework and identify effective and scalable solutions to bridge the demand-supply gap.
Going forth, RICS will endeavour to contribute to the nation building process especially in this critical area of skill development and up-gradation. To start with, RICS will offer distance learning, online and executive education programs to focus on specialised skills development for professionals employed in the sector and in the times to come, RICS India will establish a world class institution offering campus based programs.
Sachin Sandhir is Managing Director & Country Head, RICS India. He can be contacted at email@example.com