Evolution of the Infrastructure sector

We keep hearing a lot about dynamics, industry dynamics and how a whole sector has evolved over a period of time. Infrastructure has been one such sector which has seen a paradigm shift in the recent times. The infrastructure that we talk about is not just limited to real estate but encompasses a diverse range of sub-sectors like Telecom, Roads, Airports, Ports, Highways, Oil and gas, Metals, Irrigation and Mining.

The government was quick to realize the fact that if the Indian economy is to grow at a pace of 9% annually then the spending in infrastructure should grow at about 12%. To speed up the growth it could not rely on its executing arms, so they thought of a novel way to rope in private participation and came up with BOT (Build-Order-Transfer) model of awarding projects.

Earlier the construction space used to be a low risk and a low return business, but with the XI five year plan envisaging a massive investment in the infrastructure arena, the game has changed altogether. The government plans to set up UMPP (Ultra mega power projects), the NHDP program divided into six phases plans to construct more than 53000 kms of road. A large number of private ports are also being developed by various private construction giants; an area which up till now was only dominated by the government agencies.

To put in an more structured format the whole new paradigm shift can be attributed to the following four factors

1. Increase in Number of projects: The construction companies are being awarded bigger projects than ever before. The average length of the roads used to be between 10-20 kms on a cash contract basis to the constructor. Now the average road length awarded is to the tune of 100 kms on a BOT basis. More than 38000 kms of road construction needs to be awarded according to the NHDP on a BOT basis. Power sector has also seen a lot of new projects coming up in the form of merchant power plants and UMPP's. With the increase in the size of the project there is a requirement for larger working capital and a bigger balance sheet to fund the activities and sustain the business.
2. Complexity of the projects: With time, the complexity of the projects have increased. It is difficult to construct and maintain a 100 km highway as compared to a 10 km one. Smaller companies are thereby being forced to enter into contracts with the larger companies in order to qualify the technical requirements for the bidding process.
3. Trend of commodatization:There has been a constant increase in the prices of two major expenses of these companies

· Material cost: Steel, cement, bitumen and aggregators make up most of the material cost for these companies and the constant increase in the prices of these raw materials is making life difficult for these players and is compressing the margins.

· Personnel Cost: The IT boom and the compensation packages paid by the IT companies cannot be paid by the these companies due to which there is a constant attrition of people and these days it is becoming more and more difficult for these players to get civil engineers into the business.

4. Own Equipment: More and more companies have now started to own the equipment rather than relying on subcontracting. This has led to a margin expansion for these companies.

Now the only question that remains to be answered is - will the focus of the coming governments be in alignment with the present government. A difference in focus of the next government can sound a alarm bell ringing for these companies.

MAY THE GOVERNMENT BE WITH THEM :)

- Vivek Jain
Student, Business Management (2007-09)