Structures of Fortune

Otherwise, given the land acquisition problems we're seeing (Tata at Singur, etc.), things could get difficult. For instance, one might be told that 80 per cent of the land is made available and the balance will come in a few months. But few months down the line, the remaining land is not made available, then projects get stuck resulting in cost overruns. Of course, all the funds need to be tied-up in advance. Have all clearances, like forest, environment, water, etc, come in?

What kind of information should be sought for government projects?

For government projects, the land and law-related issues would be the same as above. Additionally, one has to consider the issue of who's going to pay the fees? Will citizens pay - if so, is there a political will to pay? Will government agencies pay; and if so, is the state solvent? Will richer users cross-subsidise poorer ones - and if so, how? Or will the government give an upfront subsidy? If the main contractor doesn't get money on time, then certainly all his SME suppliers will get delayed payments.

Some common problems?

Not being paid on time! Payments not being fully accounted for. Big companies may still 'manage' the local environment well, but small-time contractors or SME vendors find it difficult to pay all the overheads. On the other hand, the SME is more likely to be a local businessman (unlike the contractor), so he should be more adept at dealing with various inspectors. Other problems would be to prevent poaching of staff! Another problem is being over-dependent on one or two clients.

Construction, in fact, has been the 'default' beneficiary of infrastructure boom. Hence, it feature in different segments that in turn account for infrastructure development cumulatively: construction related to the railways, ports, oil & gas, power, telecom, road, aviation and urban infrastructure among other things.  In fact, its interesting to note that while the imagery of infrastructure is always associated with heavy-duty activities such as highways and power plants among others, what is creeping up right in front of our very eyes is sewage and sanitation issues. India's urban population, according to the Report, increased from 217 million to 285 million between 1991 and 2001.  This rise has been supported by a strong GDP growth and rapid expansion in services and manufacturing industries and it is expected that urban population will grow almost 550 million by 2021. Naturally, this is pressurising the water and sanitation facilities, transportation.  The government has recognised the need by launching the National Urban Renewal Mission to provide housing, water supply, sanitation, slum improvement at a cost of around Rs 837.1 billion over the next five years. Additional investment of Rs 1,078 billion is envisaged in metro railways, special economic zones (SEZs) and land development.  Tagging along is the aspect of commercial infrastructure that has come into vision thanks the boom in IT/ITeS industry, hospitality and retail segments.  India will probably have to add at least 100,000 guestrooms and the minimum investment required would be about Rs 250 billion. Similarly, retail space in India is at an inflection point. According to Edelweiss Research estimate the number of malls will increase to over 600 by 2010.  Moreover, the government to instill confidence in investors and signal commitment to stable SEZ policy regime, a comprehensive SEZ Act was passed by the Parliament in May 2005. The number of SEZs have been increasing 117 (including the three free trade and warehousing zones) spread over 15 states and two union territories in this Act. According to the Edelweiss Research around 30 SEZs will be built over the period from 2007-2012. The total estimated investment is Rs 391 billion.  

 Another picture dominating the urban landscape are the Metro Projects. The Bangalore Metro, when completed, will be a 96 km system with four lines, 87 stations and will cost nearly Rs 56 billion. The Mumbai Metro, estimated to cost Rs 200 billion, envisages a 146-km network, while the Chennai Metro will require an investment of Rs 51 billion over a period of five years. And there are others in the fray as well such as Delhi, Pune and the Hyderabad Metro project.

 Coming on to the action in the core areas, India's road network of 3.3 million km, for instance, is the second largest in the world and this has increased eight times over the last five decades. However, during the same period road traffic has burgeoned 22 times. Hence, the road network clearly needs to be expanded.  "We estimate around Rs 1.5 trillion of road-related spend over the next six years. Around 60 per cent of this is estimated to be contributed by the NHDP. And of the Rs 1.5 trillion investment, we expect Rs 931 billion to be spend towards National Highway development and port connectivity and Rs 589 billion will be spend towards maintenance/upgradation," observes Panja.  The key beneficiaries of this would be the contractors (construction) and the supporting equipment companies and players. Typically, road development is seen as a high-volume, low-margin business. According to the Report, 95 per cent of road investment will accrue to construction and around Rs 250 billion of demand will accrue to the direct input and ancillary equipment space.  And running alongside is the equipment and related ancillary space that is the largest heterogeneous segment in infrastructure investment. Higher requirement of equipment in development of infrastructure is likely to drive demand. Importance of equipment is further underscored by the construction segment's dependence for higher execution run-rate on higher mechanisation.  Similarly, we cannot ignore the presence of mining equipment as the demand for coal is likely to rise to 611-630 million tonnes by 2012, based on a 7-8 per cent GDP growth as per the Report. Since over 80 per cent of coal demand is generated from the power sector, it is imperative to mine additional coal given power capacity addition targets. An investment of Rs 145 billion is needed during 2007-2010 for mining equipment as per the Edelweiss Report estimate.  Funding options  Traditionally, the government has borne the burden of bulk of infrastructure creation. However, the role of the private sector in this field is also getting gradual recognition, given the magnitude of the task at hand and the innovations in the financial world that have thrown open several new options.  Infrastructure funding at the micro level has seen two prominent vehicles in recent years, government-sponsored infrastructure development funds and private funds. Government-sponsored funds bridge the transition till capital markets are well developed. Private funding, which is gaining momentum, serves the useful commercial function of diversifying investor risk. As traditional mechanisms, these funding avenues serve multiple purposes. "They allow the leveraging of government resources or official (planned) development assistance by attracting co-financing from private sources. They not only create a credit history, but also private owners of infrastructure resulting in significant transfer of responsibility of infrastructure creation and operation/maintenance," observers Panja.  In India, there are some key highlights that exemplify the rapid strides made towards attracting private capital. For instance, the concession funding on BOOT (build-operate-own-transfer) road projects awarded by NHAI are the best example of attracting funds for road infrastructure. Going forward, road maintenance will receive a similar leg-up of incentivisation.  Private sector participation in infrastructure development projects, in any form, gets borrowing approvals of up to 80 per cent on 'secured loan' rather than 'cash advance' basis (till a couple of years ago). And significantly, most infrastructure sectors are now open to foreign capital participation.

'We rely on SMEs'

One of the oldest players in the fray, Simplex has completed more than 3,000 projects Amitabh Mundhra, director, Simplex Infrastr-uctures Ltd, speaks about how they are actively working to train and develop SMEs:

Recent trends in your space?

Government spending is going up and thanks to this one has seen the spends on infrastructure-related project going up. Significantly, because of the private partnership the investments in this sector there is considerable inflow. Parallely, what is also helping this is the overseas interest (in terms of funds and players).

And this not a one-way street; equally, Indian infrastructure players are being involved outside on overseas projects. We ourselves are looking at opportunities. As a matter of policy we are looking at 30-40 per cent of our topline growth to come from overseas market.

How do you work with SMEs

We work a lot with SMEs. The biggest reason we find the need to go to them is their attention to niche expertise. They are largely entrepreneur-driven, someone who has passion and ability and is very good in certain areas. We works across spectrum and have expertise within, but we rely on SMEs as well for key inputs like design engineering, form work fabrication and supply of critical components among other things. We rely on SMEs as they are service suppliers who play very important roles.

Significantly, we at Simplex we are trying to develop SMEs. In fact, we start by giving basic training to workers and when we find that there are some people who have the ability and the passion to grow, we help them set up their own enterprise and give them tooling and finance assistance. This way we see that we have a good bunch of SMEs attached to us. There are several examples of home grown SMEs who have gone to be very successful in their own right.