Construction - 'Road' to recovery; sector update by Edelweiss

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Executive Summary

We travelled more than 8,500 km by road, air, and railway and visited various road projects across North, South, East, and West India. We met developers, contractors and sub-contractors executing projects at a cumulative cost of ~INR 65 bn. Our mission was to find answers to the following pertinent questions:

·         What are the ground level issues in road project execution?

·         Do land acquisition issues continue to hamper the pace of project development?

·         What are the impediments in the land acquisition process?

·         How smooth is the process of getting regulatory approvals in forest / environment / utility shifting?

·         What is the likelihood of reducing cost/time overrun in future projects?

·         Are there constraints in manpower/equipment/raw material availability?

n  Our key conclusions are as follows

·         Regulatory approvals a big dampener

     Land acquisition continues to remain the single biggest road block hampering developers. Lack of clear land titles, protests over land compensation and lackadaisical attitude of state government authorities are major causes for delays.  Most developers indicated that execution time of projects could be cut by up to six months by timely land acquisition. Similarly, getting timely approvals from railway and forest departments is very difficult due to the cumbersome process involved.

·         Developer involvement in regulatory approvals ensures timely execution

     Many projects commissioned in the past had been delayed due to the above mentioned issues. However, developers have learnt from past mistakes and have started facilitating coordination within various government departments by hiring retired officials. As a result, many projects that we visited were running ahead of schedule; also, cost/time overruns, if any, in future projects may not be substantial and are likely to be less than in past projects.

·         Resource availability not an issue

     We were positively surprised by the fact that resources (manpower, equipment, raw materials, financing or sub-contractors) were easily available. Even if there is any temporary resource crunch, the entrepreneurial spirit of contractors ensures that these issues are taken care of. Also, with multiple resource providers (in terms of equipment manufacturers, banks and other financial institutions), timeliness and cost efficacy of the supply is also reasonably ensured.

·         Outlook on execution of road projects: Bright

Over FY09-10, the government has initiated many steps to ensure that the pace of project award has picked up. This leaves execution issues as the principal irritant in improving the pace of road project development. While enhanced developer involvement, good resource availability and increased government efforts have emerged as a positive, some more action is required to speed up the approvals process. We believe if the regulatory side of approvals is taken care of, ramping up execution will not be too challenging.