4 IMACS Presentation

8/6/2019 4 IMACS Presentation

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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


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Agenda for Discussion

Context & Objectives

Recommendations & Implementation Plan

Background - The construction sector

Key Investment Climate issues and identifiedconstraints

Investment Climate & Competitiveness Analysis


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Background - The road & construction sectors




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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


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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


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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


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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


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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


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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


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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


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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


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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


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


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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


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


Concessionaires

Contd.

Short-medium term --> StateGovernments (SG), PWDs


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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


EPC Players and

Concessionaires Contd.

Long Term --> MoSRTH, MA

Short-medium term --> State Governments (SG), PWDs


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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


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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


EPC Players and

Concessionaires

Contd.

Medium Term --> MoSRTH, SIA


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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)


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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


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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


and

Concessionaires

ST --> MoF

MT --> MoEA

ST --> MoF, DGFT

ST --> MoSRTH, SIA, NHAI


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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


and

Concessionaires

ST --> SIA, MoRD,NRRDA

ST --> MoSRTH, SIA, NHAI,MoRD, NRRDA

MT --> MoSRTH, SIA, NHAI

MT --> MoSRTH, SIA, NHAI


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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


Players/Cash

Contracts

Contd.Medium Term --> Industry Associations (IA), players, GoI, SGs


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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


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


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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


Players/Cash

Contracts

Contd.

MT --> MoF, MoSRTH

MT --> MoF

Subsidies and Fiscal Concessions and Taxation-related


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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


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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


and

Concessionaires

Contd.

MT --> IA, players, GoI, SGs

MT-LT --> IA, CG, SGs

U i d/C t t L b


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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


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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


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


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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


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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


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Thank You

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4 IMACS Presentation