Ready to leapfrog?
Infrastructure is India’s most happening industry. But is India leapfrogging in terms of technology usage? Asks Balaji Sreenivasan
I recently read in the press that the great Indian cow problem has been delighting investors.
Between Ahmedabad and Vadodara, cattle, tend to wander onto the highway, disrupting traffic and hence commerce. So, at great expense, the government is planning to widen the road and include cow underpasses or cattle crossings (yes you read that right!), one of many such projects underway in India. Thankfully enough, cows aren’t the primary reason we are witnessing new infrastructure projects in India today!
While the Indian infrastructure industry has a great opportunity to leapfrog in terms of technology usage, it is happening at only a few organisations. Those organizations that get their act together will prosper and become world class players, the others will perish or at best remain bit players. This movie has played before in the western countries and while the lessons are obvious, not all players will learn the lesson to their advantage.
India’s Growth and PPP
India’s rapid growth of GDP (8.5% in 2008 and around 6.5% in 2009 despite the global recession), makes it one of the major countries which are on the fast track. The Prime Minister recently announced that India will target 10% annual growth in GDP for the next ten years. He has already committed US$ 300 billion for infrastructure projects over the next five years. Even that may turn out to be on the low side. However, without a very significant investment in building out the infrastructure, this kind of growth, or even a nominal level of growth in GDP, is impossible. And without an adequate infrastructure the economy will come to a bottleneck. China is a perfect example of this phenomenon. They are making very major investments, which dwarf what India or the western developed nations are doing, because there is no other way around to keep their rapid growth going.
If India does not make the investment, it will never be able to be a competitive player in world trade and definitely second class to China. Let us face it, China looks down on India today and that relationship will be more belligerent if India does not step up.
It is evident that with the passing of the 2009 budget, the Indian government’s intense focus on infrastructure development is facilitating huge investments in the basic infrastructure. In addition core basic material companies like steel, cement, oil and gas, aluminium and coal will need to grow capacity at a rapid rate.
The Indian government has also realised that it does not have the resources to fund these investments all by itself, and has opened infrastructure projects to private capital under the PPP umbrella. This has caused private financing to fuel an infrastructure boom in India. Sleepy Indian construction contractors that a few years ago existed on occasional handouts of government contracts and road tarring binges prior to elections now have fat order books. Today India’s infrastructure investment is about 11% of GDP and expected to stay there. This is more than twice the rate of the developed western countries but not as brisk as China.
This is all very good news. So what’s the problem?
Recall the great US Rail road boom of the 1850’s where there was a massive construction boom all across the United States, but it is lost in the annals of history that few companies actually even survived to make money for shareholders over the next two decades.
Why? The answer is simple. There was a total lack of good capital program management, project monitoring and the processes necessary to deliver the projects on a timely basis and within budget.
Things were so good that it was inevitable that the contractors and construction management companies were going to make money. Few did but even fewer knew that during this boom they were actually losing their shirt. For most of the companies (of every aspect) involved in the build out things ended badly. When the business slowed down, as it inevitably does, most of them went belly up. And this repeated again and again over history.
Harnessing Technology for increased profitability
Multi-billion dollar Capital programs that involve building hundreds of miles of highway, entire airports, shipping ports and even large SEZs are not simple to manage. With dozens of contractors and subcontractors, hundreds of vendors and thousands of workers spread across miles of project site, they present a unique set of challenges that more often than not lead to severe delays and serious cost overruns. While labour is cheap in India, the cost of material and capital is very high. Most of the bids are won on thin margins so cost overruns and delays have a catastrophic effect. IT becomes the essential tool at the disposal of the owner and contractor to effectively deliver on the projects.
First, the good news: Just like you see the extensive use of IT in banking, investing, healthcare and in your personal life from PCs, internet to mobile phones, the cost of IT solutions for the capital project management is down by an order of magnitude and the capabilities available are growing exponentially. In addition, you have the ability to, should you so desire, link all of your business processes together so you have a clear picture of how your projects are working out. There are serious capital program management tools available and industry optimized ERP platforms from the largest vendors in the world who spend between hundreds of millions of dollars every year to continue to enhance the capability. It is a great time for the Indian infrastructure industry (owner and contractor) to empower their organizations for success. Comprehensive tools are available today for automating estimation, tendering, contract management and remote field inspections using web, mobile and GPS technologies.
Take the case of Oregon Bridge Delivery Partners, a private consortium formed by two leading infrastructure companies HDR and Fleur. When they were contracted with the job of managing a ten year US$3 billion bridge construction and maintenance program in 2006, they relied heavily on technology to deliver the program profitably. Using a combination of IBM Filenet for Document Management and Aurigo BRIX (capital program management system), they successfully replaced over 250 manual paper inspection forms with just 36 digital forms that have drastically reduced the time taken to conduct their inspections and subsequently track and report against them. They have achieved major savings in inspection labour costs and their information on project status is current at all times.
Western companies in the infrastructure space (Owners, construction management / project management firms and general contractors) have been quick to realize that if they do not make the necessary investments, they will lose their edge and perish. They also realize that these investments cannot be short changed and typically earmark budgets between 2% – 3% of their revenue on IT spend.
Technology play in India
Green shoots. That is probably the best way to describe technology adoption by Indian Infrastructure owners and contractors. As I said before, we have seen this movie before and the experience of the western countries as their infrastructure industry evolved will most probably be repeated in India.
Some enlightened companies will understand that properly deployed, IT investment gives them a competitive advantage and they will become the Bechtels and Fleurs of India and play on a worldwide stage. Others will just limp along with some good years and some very scary intervals. They will remain marginal companies. Many will fail, the boom in infrastructure spend notwithstanding. Given the fact that India has a significant labour cost advantage (just like China does in manufacturing and just like South Korea used its labour cost advantage to win significant major construction projects all over the world) with the proper IT systems in place the winners will win not just in India but on the world markets.
Why will this scenario repeat and what holds back the IT investment for the infrastructure players?
There are many reasons. Companies run by the older generation, did it with seat of the pants, so as long as the older generation remains in control, the change will not happen. It may come with the next generation which is much more technology adept but it may be too late for some companies. They may find themselves starting with a major disadvantage. Material cost control used to be adulterating the cement or using steel rods of smaller diameter than specified, that not only collapses flyovers and tunnels but it finishes off your business.
For a lot of construction companies (and capital project owners) in India the IT spend is more a check mark purchase than a serious investment in productivity. They spend typically around 0.1% of their turnover whereas the western companies in the same field are investing between 2-3% of their turnover. If your entire purpose is to merely say you have IT, you will get results in line with your investment. In addition the pay scale of the IT professionals hired by the construction industry in India is appallingly lower than the standard IT industry payscale. You get what you pay for..
The choices are very clear, it is no longer a matter of faith. India needs infrastructure build out desperately and huge amounts of money will be spent by the government and the private players. Not everyone will win. Those who make technology investments will win. They will have the opportunity to play on the world stage. Those who don’t will perish or at best become marginal players. This movie has run before, one no longer needs to look at a crystal ball. The one big advantage for the Indian companies is that they are not burdened with legacy IT investments. They can leapfrog into the latest with an investment that is an order of magnitude lower than what it was just a decade ago.
Balaji Sreenivasan is the CEO and founder of Aurigo Software Technologies. He can be contacted at email@example.com