8/6/2019 4 IMACS Presentation
1/34
June 13, 2007
ICRA Management Consulting Services Limited
Stakeholder Workshop
Session on:
Investment Climate Assessmentof Road Construction Industry in
India: Analysis &Recommendations
The World Bank
8/6/2019 4 IMACS Presentation
2/34
Agenda for Discussion
Context & Objectives
Recommendations & Implementation Plan
Background - The construction sector
Key Investment Climate issues and identifiedconstraints
Investment Climate & Competitiveness Analysis
8/6/2019 4 IMACS Presentation
3/34
8/6/2019 4 IMACS Presentation
4/34
Agenda for Discussion
Context & Objectives
Recommendations & Implementation Plan
Background - The road & construction sectors
Key Investment Climate issues and identifiedconstraints
Investment Climate & Competitiveness Analysis
8/6/2019 4 IMACS Presentation
5/34
Vision for State and Rural Roads
Need to identify a core network of
National Highways and State
Highways (and a few MDRs) as
backbone of surface transport system
along with railways
Balanced development of all regions -
particularly the North East Region
Core investment programme to be
formulated by each state within the
framework of core network
About 83,000 habitations covered under
PMGSY; about 1.79 lakh more need to be
taken up
NRRDA may introduce Rural Road
Management Act defining powers of the
agency, governing regulations of rural roads
& instituting an asset management system
Vision for new connectivity:
State HighwaysReport of Sub Group on State Roads
for XIth FYP
Rural Road DevelopmentPlan
Vision 2025
11th FYP Outlay for state roads: Rs.100,000 cr
Core network: Rs. 80,000 cr --> Rs.32,000 cr from private sector
Non-core network: Rs. 20,000 cr
Habitations with population above1000(500 in case of hill, NE states,deserts and tribal areas)
Year 2009-10*(Targets as perBharat Nirman)
Habitations with population above500
(250 in case of hill, NE states,deserts and tribal areas)
Year 2014-15
Habitations with population above250
Year 2021-22
8/6/2019 4 IMACS Presentation
6/34
We have covered the road construction industry andrelated industries...
We have covered the following segments in the road
construction industry:
Apart from/within these, we have also covered: National contractors
Lenders
Road construction industry players usuallytend to cover most construction segmentsand developers also bid for otherinfrastructure segments
Hence the road construction industry hasto necessarily be assessed both from anoverall construction industry andinfrastructure developer contexts:
Construction Industry
EPC/BOT
players
Construction
equipmentmanufacturers
Material
suppliers
Potential
Entrants
Industry Associations
Construction companies possess skillsand experience in building roads, ports and
other infrastructure under the traditionalcash contracting method
Developers usually contract out the actualconstruction to specialized builders, while
retaining the larger role of projectdevelopment and then as an infrastructure
operator
8/6/2019 4 IMACS Presentation
7/34
Agenda for Discussion
Context & Objectives
Recommendations & Implementation Plan
Background - The road & construction sectors
Key Investment Climate issues and identifiedconstraints
Investment Climate & Competitiveness Analysis
8/6/2019 4 IMACS Presentation
8/34
Identification of constraints and suggested interventionsto cover the following investment climate aspects...
Sector policy and policy implementation
Institutional structure and regulation
Stability of Law & Order
1
2
3
Administrative/procedural issues - licenses, clearances, tax administration and
customs and Entry Barriers
Access to finance/credit, subsidies and fiscal issues
4
5
Capacity and Human Resources
Industry structure and profitability
6
7
Material and equipment related issues and availability of adequateinfrastructure
8
8/6/2019 4 IMACS Presentation
9/34
Summary of Key Issues
Policy and Institutional Structure
Capacity constraints at central &
state levels & all encompassing
role of some Implementing
Authorities
Absence of independent body &
oversight mechanism representing
stakeholder interests
Local Mafia and Law & Order in
some states
Contract Enforcement & DisputeResolution
Role of Independent Engineers
unclear & weak
Dispute resolution process lengthy
& cumbersome
Lack of a strong dispute resolution
body
Administrative/procedural Issues
Delays due to land acquisition &
other clearances
Delays in obtaining customs &
excise exemptions & visas Stringent entry criteria for foreign
firms as experience of parent not
counted
Access to Finance/Credit, Subsidies& Fiscal Issues
Most construction companies are
owner firms
Finance for unorganized players a
problem
Works Contract Tax leading to
cascading impact
Capacity Building
Constraints in availability
of skilled labour
Lack of research in road
construction Labour policy & contract
labour issues
Profitability & IndustryStructure
Fragmented industry
Players earning relatively
low returns (OPMs & RoE)
Material & Equipment
Availability of aggregates
& possibly bitumen
8/6/2019 4 IMACS Presentation
10/34
Agenda for Discussion
Context & Objectives
Recommendations & Implementation Plan
Background - The road & construction sectors
Key Investment Climate issues and identifiedconstraints
Investment Climate & Competitiveness Analysis
8/6/2019 4 IMACS Presentation
11/34
Investment Climate Perceptual Map & Ranking
Operational issues: Land,Licenses, Clearances
MaterialSuppliersForeigncontractors EquipmentSuppliersDevelopersConstructionCompanies PotentialEntrants
Major Constraint Minor Constraint
Government
Sector Policy & Institutional
Structure
Contract enforcement &Dispute Resolution
Barriers to Entry Issues
Finance cost & availability
Materials cost & availability
Availability of skilled staff
Taxation issues
Import Procedures
Infrastructure issues
Industry Structure
Subsidies & fiscal
concessions
5
2.75
3.75
3.5
6.5
3.5
3.75
3.75
2.5
2.5
1.75
3.5
This perceptual map has been drawn from the result of questionnaires circulated and interviews conducted
including qualitative judgements
8/6/2019 4 IMACS Presentation
12/34
Competitiveness of road construction industry
Industry Competency
PerformanceFactorsDeterminants
Unsatisfactory - need to improve immediately
Downstream Inputs -Materials, Equipment
Workforce
Infrastructure
Government Role
Acceptable - need to monitor and find ways to improve
Satisfactory performance - maintain
Demand-Supply & Capacities
Finance cost & availability
Industry Structure & Barriers to Entry
Profitability
Quality and Delivery Systems
Availability
Cost & price trends
Import procedures
Quality
Taxes & duties
PerformanceFactorsDeterminants
Availability of skilled staff
Education & skill levels
Cost of manpower
Productivity
Labour regulations
Condition of unorganized workers
Transportation cost & time
Power cost & availability
Water cost & availability
Communication facilities
Incentives & subsidies
Regulations on foreign investment
Operational Issues
Sector policy
Institutional Structure
Dispute Resolution
Regulation
Law & order
1
2
3
4
5
8/6/2019 4 IMACS Presentation
13/34
Agenda for Discussion
Context & Objectives
Recommendations & Implementation Plan
Background - The road & construction sectors
Key Investment Climate issues and identifiedconstraints
Investment Climate & Competitiveness Analysis
8/6/2019 4 IMACS Presentation
14/34
InstitutionalStructure and
Regulation
Recommendations
Sector Policy andPolicyImplementation
ContractEnforcement and
DisputeResolution
Admin./procedural
issues - licenses,clearances, tax
admin. & customs
The Biddingprocess andeasing Entry
Barriers
Access toFinance/Credit
Subsidies andFiscalConcessions andtaxation issues
Capacity/HumanResources
Industry Structure& Profitability
Industry Initiatives
Purely Government Initiatives Government/Private Initiatives Purely Private Initiatives
Process RelatedPolicy & Institutional
8/6/2019 4 IMACS Presentation
15/34
Sector Policy & Policy Implementation
Reforms in administration forEPC/cash contract projects:
Need for adequate capacity at
state and lower levels for
planning, project preparation
and monitoring
Need for institutional
strengthening, training and use
of IT
Need for pooled fund structuresand road funds complemented
by direct tolling & PPP toll roads
Recommendationsthat would impact EPC
Players/Cash
Contracts
Selecting the right model forPSP projects:
Need for a framework to
select models for PSP
LPVR based bidding
manages certain risks better
& encourages operational &
capital cost efficiencies
Premium concept in new
MCA is a form of modifiedLPVR bidding
Recommendationsthat would impact
Concessionaires
Policy/reform related issues: At the national level,need for
greater focus on PSP &
improving existing models of
private participation
At state level progressive states
should focus on prioritization &
project management, and others
on capacity building
Need for special treatment indifficult terrain and socially
disturbed regions
Need for focus on getting more
players in BOT & road contracts
- district difficulty index
Recommendationsthat would impact both
EPC Players and
Concessionaires
Con
Medium Term; Agencies Responsible:
MoSRTH, SIAShort term (ST): < 1 year
Medium term (MT): 1-2 years
Long term (LT): 2-5 years
Ongoing; Agencies: MoSRTH, SIA, MASIA: State Implementing Agencies
MA: Multilateral Agencies
8/6/2019 4 IMACS Presentation
16/34
Sector Policy & Policy Implementation
Concession/Construction Contracts:Harmonization of contract conditions by various project authorities & compliance with FIDIC
conditions
Project planning:
Need for more focus on pre-construction activities
Better packaging of projects
Peer review of consultants outputs by independent professionals
Need for comprehensive approach covering O&M:
Focus on construction as well as maintenance
Focus on marketing:
Need for enhanced focus on marketing activities both in India and abroad
Marketing of Indias road programme along with technical and other advancements made
Recommendationsthat would impact both
EPC Players and
Concessionaires Contd.
Medium Term --> MoSRTH, MoRD
Short Term --> NHAI, SIA
Short Term --> IRC, MoSRTH, SIA
IRC: Indian Roads Congress
MoRD: Ministry of Rural Development
8/6/2019 4 IMACS Presentation
17/34
Institutional Structure & Regulation
Strengthening the road contracting industry: Training and capacity building (construction and
project management, work methods, sequencing
of operations, effective maintenance and
utilization of machinery) for road contracting
industry at state and district levels
Capacity building in hilly and difficult regions:
Institutional strengthening & capacity building of
PWDs
Improvement in existing construction technology
& use of locally available materials
Recommendationsthat would impact EPC
Players/Cash
Contracts
Capacity building of NHAI: Focus on project
planning, monitoring and
quality control
Training to NHAI
personnel in project
management and
contract administration
Recommendationsthat would impact
Concessionaires
Contd.
Short-medium term --> StateGovernments (SG), PWDs
8/6/2019 4 IMACS Presentation
18/34
Sector Policy & Policy Implementation
Creation of Road BoardState level reforms:
Roads sector needs to be addressed as part of overall reform agenda
States with basic enablers in place better placed to prioritize and focusing efforts
PWD reforms:
PWDs to be reformed into more efficient institutions
These could be restructured to decrease flab and transformed into O&M operators
Alternatively could be converted to intermediate state highway authorities laterconverted to road development corporations (e.g. Madhya Pradesh Road
Development Corporation (MPRDC)
Labour rationalization through VRS or compulsory retrenchment
Recommendationsthat would impact both
EPC Players and
Concessionaires Contd.
Long Term --> MoSRTH, MA
Short-medium term --> State Governments (SG), PWDs
8/6/2019 4 IMACS Presentation
19/34
Sector Policy & Policy Implementation
The need for a Road Board:
All Encompassing role of implementing authorities: responsible for both awarding contracts & regulation
Need for separate independent body as countervailing power to implementing agency/concessionaire At state roads level, need for independent oversight mechanism to oversee the interests of various
stakeholders
What it is:
An independent oversight authority playing a recommendatory role to MoSRTH with an aim to protectconsumer interests while at the same time advising MoSRTH on tolling and safety standards
Functions:
Review financing gaps on a periodic basis (based on existing revenue sources) to evaluate the total quantum
of tolling required and then advise the government; Set performance and capacity specifications (including minimum standards for road safety and maintenance)
for both public/private roads;
Review and advise the GoI (i.e. MoSRTH) on aspects of the MCAs including aspects such as risk allocation;
Set the monitoring framework for the sector
Road BoardContd.
The roles and responsibilities of the independent engineer (in the case of concession contracts) should beclarified and they should be appointed by the road user board
8/6/2019 4 IMACS Presentation
20/34
Contract Enforcement and Dispute Resolution
Road Appellate Tribunal: The current system of dispute resolution in the roadsector is cumbersome and protracted and does not serve the purpose of an
efficient and fair system
An independent appellate tribunal should be formed for arbitration
Would be an independent body separate from the proposed road sector
regulator and the implementing agency
Should be the next level of appeal after disputes have been referred to the
Dispute Resolution Board (DRB) and in case the DRBs decision is not
acceptable
Arbitration would be through the Appellate Tribunal and not through the
Indian Arbitration and Conciliation Act 1996
Recommendationsthat would impact both
EPC Players and
Concessionaires
Contd.
Medium Term --> MoSRTH, SIA
8/6/2019 4 IMACS Presentation
21/34
Proposed Institutional Structure in roads sector
Road AppellateBody
Road
Board
National HighwaysAuthority of India (NHAI)
Ministry of Shipping, RoadTransport & Highways
(MoSRTH)
Policy
Regulation
DisputeSettlement
Implementing Agency
IndependentEngineers
Road sectoroperators (EPC
contractor/developer)
State Road DevelopmentCorporations (SRDCs)
State Road User
Board
State Government
NRRDA SRRDAs
Ministry of RuralDevelopment
State Road Fund(Trust)
8/6/2019 4 IMACS Presentation
22/34
Administrative/Procedural Issues
Land acquisition and other clearances:
Pre-construction cells in respective sector units for assisting in
LA & other clearances
Need for further streamlining/cutting down of procedures
High level empowered committees at the centre and states to
ensure co-ordinated action by different departments/agencies
through a single window concept
A small guideline information brochure highlighting the
procedural steps with expected timelines could be of help to
contractors and developers
Dialogue could be taken up at senior levels in the concerned
ministries (e.g. Ministry of Railways) to discuss ways of cutting
out avoidable delays
Recommendationsthat would impactboth EPC Players
and
Concessionaires
Contd.LA & other clearances: Short Term --> MoSRTH, SIA, NHAI, District Collectors
8/6/2019 4 IMACS Presentation
23/34
Administrative/Procedural Issues
Other Procedural Issues:
Streamlining procedures for customs and excise exemptions for import of
equipment/purchase of materials
Easing restrictions with respect to re-export of imported equipment
Streamlining procedures with respect to issue of visas
Mapping of material sources for each state where major road projects are in progress
Use of locally available materials with stabilization or other blending innovations should
be encouraged through more R&D effort and technological breakthroughs
Prompt Payment statutes
Developing a vendor base
Recommendationsthat would impactboth EPC Players
and
Concessionaires
ST --> MoF
MT --> MoEA
ST --> MoF, DGFT
ST --> MoSRTH, SIA, NHAI
8/6/2019 4 IMACS Presentation
24/34
The Bidding Process and Easing Entry Barriers
Bidding process and eligibility criteria:
Entry criteria need to be enforced strongly
Entry barriers for foreign contractors:
Parent companys experience should be taken into account in evaluating the
experience of Indian subsidiary, provided adequate protection against liability
Restriction on lead partner holding 51% equity stake in the SPV throughout the
period of concession restrictive for foreign players & should be relaxed
Evaluation of Joint Ventures:
Joint Deed Agreement prior to award of contract to a joint venture: to honour
the stipulated responsibilities as per the bid
Registration of JV prior to project award & more strict oversight by client
Entry barriers in states with poor law & order situation:
e-procurement (entire tender process online) in states with poor law & order
Recommendationsthat would impactboth EPC Players
and
Concessionaires
ST --> SIA, MoRD,NRRDA
ST --> MoSRTH, SIA, NHAI,MoRD, NRRDA
MT --> MoSRTH, SIA, NHAI
MT --> MoSRTH, SIA, NHAI
8/6/2019 4 IMACS Presentation
25/34
Access to Finance/Credit
Encouraging industry to become more organized/transparent: Encourage a practice of registration for contracting entities above a particular size (say annual
turnover of Rs. 10 lakh)
Accreditation of sub-contractors by recognized industry associations who will ensure adherence to a
publicly floated code of conduct
Make filing of audited financial statements mandatory for being eligible for becoming a contractor, for
contractors with a turnover above a certain size, say Rs. 1 crore
The construction industry should respond by initiating steps to retain reputed auditors and financial
consultants and for getting ISO or quality certification
A system of annual empanelment of contractors and sub-contractors could also be used to lend
credibility to contractors
Create a formal alliance (or enable a formal dialogue) between accredited contractors/builders and
the Indian Banking Association (IBA) to lay down standard practices in the construction sector
Recommendationsthat would impact EPC
Players/Cash
Contracts
Contd.Medium Term --> Industry Associations (IA), players, GoI, SGs
8/6/2019 4 IMACS Presentation
26/34
Access to Finance/Credit
Incentivizing grading/rating and ISO certification:
Grading of project developers and contractors in the road construction industry
by independent and accredited agencies should be encouraged
New Basel II norms would result in better risk weighting & more appropriate
pricing - encouraging transparency for a favourable rating
Even in order to get themselves rated/graded, smaller contractors need to
improve the quality of their financial statements and also quality of operations(ISO 9000/14000/22000)
Ratings of issuers (opinion on the general creditworthiness of rated entities)
especially for SMEs should be encouraged - Issuer Ratings as against
instrument ratings
CIDC carries outgrading of construction entitiesin association with ICRA and
NAREDCO has entered into MoUs with ICRA & CRISIL for similar mechanisms
Recommendationsthat would impact EPC
Players/Cash
Contracts
Medium Term --> IA, players, lenders
Recommendations for concessionaires not being addressed in detail but are mentioned in our report...
Subsidies and Fiscal Concessions and Taxation-related
8/6/2019 4 IMACS Presentation
27/34
Subsidies and Fiscal Concessions and Taxation relatedissues
Providing duty exemptions to EPC contractors:
Should be provided to the contractor apart from the SPV
Abolish Works Contract Tax (WCT) to do away with cascading
impact:
Applied on the material portion of the value of works
executed & has cascading and distortionary impact because
of the absence of input tax credit in most cases
This tax should be abolished by all states
CST should be brought down further in order to lessen tax
burden on inter-state works contracts
Recommendationsthat would impact EPC
Players/Cash
Contracts
Contd.
MT --> MoF, MoSRTH
MT --> MoF
Subsidies and Fiscal Concessions and Taxation-related
8/6/2019 4 IMACS Presentation
28/34
Subsidies and Fiscal Concessions and Taxation relatedissues
Reduction in customs duty on import of equipment: From the current ~37%
Incentivizing construction rental industry:
Incentives such as duty free import of equipment and exemption
from other taxes should be provided to rental equipment
Pre-qualification criteria could cover access to equipment besides
ownership
Concept of Equipment Banks (already in operation) needs to be
strengthened especially for special regions like North East India
Section 44BBB benefits:
Presently Section 44BBB benefits (presumptive taxation) are
provided to turnkey power projects - extend to foreign companies in
the roads sector
Deemed export benefits:
For large expressway projects on the lines of those provided for
Mega Power Policy projects. Or increased tax depreciation rates
Recommendationsthat would impactConcessionaires
MT --> MoF, DGFT
MT --> MoF, DGFT
C it d H R
8/6/2019 4 IMACS Presentation
29/34
Capacity and Human Resources
Strengthening institutions for training in construction management:
Need for institutes both at graduate & post graduate levels providing training
in construction management & highway engineering
Re-orientation of curricula at all levels of institutions - IITs/ITIs/NITs Institutions such as NAC Hyderabad and NICMAR should be replicated and
NITHE should be strengthened
National Plan for training and certification of construction personnel at all
levels should be developed and implemented
Dedicated road construction research institution:
Dedicated institution for research in road construction sector to address lack
of research in road construction, e.g. Forum of European National Highway
Research Laboratories (FEHRL), Belgium
Need to strengthen existing institutes in field of R&D in roads & road transport
- e.g. CRRI, New Delhi, CIRT, Pune, Indian Roads Congress - IRC, a few IITs
Regional research centres such as Highway Research Station, Chennai;
Research Institutes at Vadodara, Nashik & Guwahati should be strengthened
Recommendationsthat would impactboth EPC Players
and
Concessionaires
Contd.
MT --> IA, players, GoI, SGs
MT-LT --> IA, CG, SGs
U i d/C t t L b
8/6/2019 4 IMACS Presentation
30/34
Unorganized/Contract Labour
Environmental, occupational, health and safety standards
EHS standards for the road industry should be set by the
proposed road user board/IRC - could be part of an overall Code
of Practice for employment and training in the construction
industry
Social Security Net & Contract Labour
Central government already initiated steps towards creating socialsecurity net for unorganized workers
Central legislation enacted for building & other construction
workers towards creation of welfare funds at state level - already
set up in Kerala, TN and Delhi - more states should beencouraged
State level amendments to Contract Labour Act at times enable
certain flexibilities in employment of labour
Recommendationsthat would impactEPC Players/Cash
Contracts
Good working conditions & EHS standards.: MT --> Players, CG, SGsCondition of unorganized & contract workers: ST --> CG, SGs
I d t St t d P fit bilit
8/6/2019 4 IMACS Presentation
31/34
Industry Structure and Profitability
Capacity Building Through registration/accreditation
Fragmented industry with large proportion of unorganized players: Need
for capacity building of SMEs
Need for ways of geographically dispersing the industry (concentration inSouth, esp. AP)
Enhanced role of IRC (information dissemination) will help smaller players
prepare well reasoned business plans & thus improve financial aspects
Recommendationsthat would impactEPC Players/Cash
Contracts
Recommendationsthat would impact
both EPC Playersand Concessionaires
Information on size, capacity & organization of middle & small-sizedcontractors needs to be compiled; performance & capabilities of
contractors in a contractor database
Need for strong body to represent the equipment manufacturing industry*
The government should procedural/administrative constraints relating toland acquisition and award of clearances, which currently reduce gross
margins
Price increase should ideally be linked to a Construction Cost Index (CCI)
or to alternate indices (e.g. a combination of WPI and CPI)
* ICEIAL - Indian Earthmoving & Construction Industry Association Ltd. exists under CII but needs strengthening
MT --> MoSRTH, NHAI, SIA, DIADIA: DistrictImplementing Agencies
Recommendations on Possible Industry Initiatives
8/6/2019 4 IMACS Presentation
32/34
Recommendations on Possible Industry Initiatives
Making financial statements more transparent Keeping unaccounted transactions to a minimum - make financials more transparent
Ensuring compliance with regulatory requirements and norms
Taking steps to improve the human resources pool
Instituting training programmes in appropriate skills related to construction
Tying up with industry associations & other technical institutes offering construction workers training
and other diploma programmes
Developing their own regular training programmes and programs for employee retention
Use of index futures
Use of more commodities futures to hedge price increase of key materials used in road construction
Increased marketing of road construction industry in India & abroad
Enhanced role for IRC - marketing roads sector & Governments plans to stakeholders
Needs to be focus area for industry players & associations - would help attract more foreign contractors
Greater use of index futures: MT --> Players
Implementation Plan Summary of Outcomes/Indicators
8/6/2019 4 IMACS Presentation
33/34
Implementation Plan - Summary of Outcomes/Indicators
Total number of roadcontractors increasedOverall cost of user comingdown
Overall cost of usercoming down
Number of and amountlocked up in disputescoming down
Institutionalstructure and
regulation
ContractEnforcement andDispute
Resolution
Sector Policy &Policy
Implementation
No. of projects completedon time & within costincreased
Use of modern equipment/specifications
Timeframe for setting upbusiness reduced
Bidding Process& Entry Barriers
Administrative/procedural
issues
No. of road contractors (incl.foreign) increased
No. of contractors bidding forpackages increased
Bid price in real terms comingdown
Access toFinance/Credit
Finance availability to contractorseased
Gaps in equipment and materialscoming down
Subsidies, fisc.concessions &taxation-related
Reduction in demand-supply gapsin terms of human resources
Capacity/HumanResources
Industrystructure &profitability
No. of road contractors increased
Profitability of players increased Marketing of road contractingindustry gaining prominence inother countries
8/6/2019 4 IMACS Presentation
34/34
Thank You
Top Related