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Qualification norms stop small contractors

Vandana Gombar  |  New Delhi 

New contractors have little chance of getting work under current tender conditions,

B D Mundhra is very proud of the work he does, whether it is building foundations, or metro pillars or power plants. However, the chairman of Simplex Infrastructure, an 85-year-old construction company, has one grouse: That the industry which has the capability and capacity to grow is being stopped in its tracks.

He cites the example of his own company, which has done construction work on all parts of a power plant “but is still not eligible to bid for a turn-key power contract”.

Stringent pre-qualification criteria in most sectors — from power to roads to airports — means there are limited options for smaller contractors to build on their expertise.

Worse, new contractors hardly have any chance to get work under the current tender conditions of most government-owned companies. Pre-qualification norms present a significant barrier to entry for new players.

“It is difficult to qualify new fellows. The same contractors are therefore getting repeat work, which they are not able to do,” Ravi Kumar, chairman and managing director at Bharat Heavy Electrical Ltd, said.

It also means the actual constructors need a domestic or foreign partner to front-end the larger bids.

However, there is no shortage of contractors if pre-qualification criteria are tweaked to reflect actual capability, according to industry officials. As per the latest data with the Construction Industry Development Council or CIDC (set up under the aegis of the Planning Commission), there are about 28,000 contractors in the country, of which over 95 per cent are small ones, employing less than 200 persons. There are about 1,000 medium sized contractors, each employing up to 500 persons, and then about 200 large contractors with 500 or more employees each.

“Many times, the contractors are sitting idle for want of work. Our machinery is also underutilised,” says a contractor who is working on metro projects.

This is contrary to Delhi Metro chief Sreedharan’s recent comments that he was facing a shortage of contractors.

Contractors vs developers
“The issue is not so much shortage of contractors, but that of developers — the entities who actually take on the financial risk of a project and have a 15-year horizon,” explains Parvesh Minocha, managing director at infrastructure consultancy firm, Feedback Ventures.

There would be just be about 10-odd large infrastructure “developers” in the country on the lines of Larsen & Toubro (L&T), who Minocha refers to as Category-I contractors, capable of handling multiple projects simultaneously. He sees another 15-odd ready to join this club, and the rest are all sub-contractors.

Road transport minister Kamal Nath, who has been on roadshows around the world, is hard-selling to “developers” who can bring in the money as well as large project management expertise, rather than mere basic road development skills.

A record Rs 100,000 crore worth of road projects are slated to be bid out in the current year. A significant chunk of this investment has to come from the private sector and “the local industry does not have the capacity to absorb these projects developmentally and financially,” Minocha said.

A mature construction industry would typically have a three-layered structure — developers or concessionaires at the top, then the EPC contractors with design, technology and project management capabilities in the middle and specialised sub-contractors at the bottom.

“In India, we are en-route to developing such a structure,” says L&T’s director J P Nayak.

Keeping things small
“The ability to undertake large complex jobs does not exist in the country,” conceded Jayesh Desai, national director at consultancy firm Ernst & Young, and the reason for that is the way the industry has evolved. Typical contract sizes were fairly small until a couple of years earlier, and so there was no market requirement for large contractors.

“The external environment promoted a contracting system where large projects were split into smaller packages, which discourgaed development of large professional organisations,” said L&T’s Nayak. Companies then took to structuring projects, keeping in mind the contracting and construction capabilities available. “If a project is reasonably structured, availability of contractors has not been an issue,” says a senior official of a large power company who did not want to be named.

It is only recently that large projects are being bid out. “Real size has come in only in the last two-three years, and there is limited capacity available,” said Desai.

The foreign angle
One way to ramp up capacity quickly is to get in overseas expertise, and capital. Kamal Nath is trying to do that.

However there is a cost to it. “An overseas contractor will typically charge six-seven times more than an Indian contractor will, and the work will ultimately be done by the Indian contractor. Is it better to get the foreign companies in or develop domestic capacity?” asked P R Swarup, CIDC’s director general. There is no serious attempt to develop domestic capacity, he said.

Though construction is now recognised as an industry, it is next to impossible to get bank funding for a contractor. “There is no scheme for entrepreneurs willing to become contractors. How often do you see a start-up construction/contracting company? They don’t get the required support,” said Swarup.

The large contractors like L&T are, however, not keen on taking up smaller projects and opt for projects which are at least a few hundred crore rupees.

The pool of contractors for smaller projects also has to, then, increase. In addition to capacity augmentation at the developer level. Agreed Bhel’s Ravi Kumar: “There has to be a policy initiative to experiment with some new vendors….who will mature in two-three years.”

While CIDC has taken up the funding issue with the Indian Banks Association on one hand, it is also imparting training to plug the entrepreneurial and skills gap.

“This is an issue of skill development,” stressed Swarup. The council imparted various skills to about 180,000 people last year.

The key, then, is to foster growth of the contracting industry in all its rungs, and especially in the middle and bottom layer. In the words of Swarup: “You can’t manufacture contractors. They have to grow organically.” We have to decide how many L&T’s we want tomorrow!

First Published: Wed, August 19 2009. 00:59 IST