Construction - Sector Update (1)

8/4/2019 Construction - Sector Update (1)

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1 Edelweiss Securities Limited

Executive Summary

Edelweiss Securities LimitedParvez Akhtar Qazi+91 22 4063 [email protected]

Rohit Patni+91 22 6623 [email protected]

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Construction

Executive Summary

We travelled more than 8,500 km by road, air, and railway and visited various road projects

across North, South, East, and West India. We met developers, contractors and sub-

contractors executing projects at a cumulative cost of ~INR 65 bn. Our mission was to findanswers to the following pertinent questions:

What are the ground level issues in road project execution?

Do land acquisition issues continue to hamper the pace of project development?

What are the impediments in the land acquisition process?

How smooth is the process of getting regulatory approvals in forest / environment /

utility shifting?

What is the likelihood of reducing cost/time overrun in future projects?

Are there constraints in manpower/equipment/raw material availability?

Our key conclusions are as follows

Regulatory approvals a big dampener

Land acquisition continues to remain the single biggest road block hampering

developers. Lack of clear land titles, protests over land compensation and

lackadaisical attitude of state government authorities are major causes for delays.

Most developers indicated that execution time of projects could be cut by up to six

months by timely land acquisition. Similarly, getting timely approvals from railway

and forest departments is very difficult due to the cumbersome process involved.

Developer involvement in regulatory approvals ensures timely execution

Many projects commissioned in the past had been delayed due to the above

mentioned issues. However, developers have learnt from past mistakes and have

started facilitating coordination within various government departments by hiring

retired officials. As a result, many projects that we visited were running ahead of

schedule; also, cost/time overruns, if any, in future projects may not be substantial

and are likely to be less than in past projects.

Resource availability not an issue

We were positively surprised by the fact that resources (manpower, equipment, raw

materials, financing or sub-contractors) were easily available. Even if there is any

temporary resource crunch, the entrepreneurial spirit of contractors ensures that

these issues are taken care of. Also, with multiple resource providers (in terms of

equipment manufacturers, banks and other financial institutions), timeliness and

cost efficacy of the supply is also reasonably ensured.

Outlook on execution of road projects: Bright

Over FY09-10, the government has initiated many steps to ensure that the pace of

project award has picked up. This leaves execution issues as the principal irritant in

improving the pace of road project development. While enhanced developer

involvement, good resource availability and increased government efforts have

emerged as a positive, some more action is required to speed up the approvals

process. We believe if the regulatory side of approvals is taken care of, ramping up

execution will not be too challenging.




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Edelweiss Securities Limited 3

Construction

Contents

Our modus operandi .................................................................................................... 3

Why focus on execution? .............................................................................................. 4

Land acquisition .......................................................................................................... 6

Utility shifting and other local clearances ...................................................................... 13

Railways, forest & environmental approvals .................................................................. 16

Resource availability issues ........................................................................................ 18

Cash contracts continue to get delayed ........................................................................ 22

Outlook on road projects execution.............................................................................. 23

Major project details .................................................................................................. 24

Dhule-Palasner Project ............................................................................................ 24

Hyderabad outer ring road project ............................................................................ 26

Pimpalgaon-Nashik-Gonde project ............................................................................ 29

Ranchi ring road project .......................................................................................... 31




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Our modus operandi

We travelled more than 8,500 km by road, air and railway and visited various road projects

across North, South, East, and West India. We met developers, contractors and sub-

contractors executing projects with a cumulative cost of ~ INR 65 bn. Apart from interacting

with project managers and engineers, we also met some bankers financing these road

builders.

What was the scope of projects covered?

We have tried to cover the widest possible array of road projects in terms of geography,

project cost, mandate of project (toll/annuity/EPC) and mode of execution (developer /

sub contractor). This was to ensure that we do not restrict ourself to any one particular

kind of project and interact with a wide spectrum of industry participants. To better

understand execution issues across the industry, we tried to diversify the type of

projects visited.

Fig. 1: Projects visited across I ndia

Source: Google Maps, Edelweiss research

Table 1: Covering entire spectrum of road projects

Source: Edelweiss research

Scope of projects visited Mode of projects visited

2 lane BOT toll project

4 lane BOT annuity project

6 lane State govt EPC project

8 lane access controlled expressway District road project

Regions visited Cost of projects visited

North India < INR 1 bn

West India INR 1 - 5 bn

South India INR 5 - 10 bn

East India INR 10+ bn

Visited road projects

across the country to

understand ground level

execution issues

We covered every type

of road project possible




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Why focus on execution?

Between 1951 and 2006, while Indias vehicle population posted a CAGR of close to 11% and

freight and passenger traffic carried by road posted 10% CAGR, the total road length

registered a mere 3.9% CAGR with the National Highway (NH) segment increasing at a

minuscule 2.2% CAGR.

Also, the quality of roads is abysmal. The Global Competitiveness Report 2010-11 ranks

India at a dismal 90th spot as far as quality of roads is concerned, way below

neighbours China (53 rd), Sri Lanka (55 th) and Pakistan (72nd).

This shows that the pace as well as quality of road length addition in the country has

remained tardy over the years. While things have definitely improved, particularly in the NH

segment, since the start of the National Highway Development Programme (NHDP), we have

still fallen short of targets. This can be attributed to: (i) slowdown in the pace of project

awards in 2006-08 due to regulatory issues and recession; and (ii) execution issues on road

projects as manifested in cost and time overruns.

Table 2: Physical targets and achievements for NHDP

Source: Govt documents, Edelweiss research

Over FY09-10, the government has initiated many steps which have enhanced the

attractiveness of road projects for developers and ensured pick up in the pace of project

awards. With most regulatory issues being sorted out and ~ 26,000 km of projects to be

awarded over the next 4-5 years under NHDP, we believe project award is unlikely to be

a major dampener going forward (even if pace of project award may not be uniform).

This leaves execution issues on road projects as the principal irritant in improving the

pace of road development.

How big an issue is execution and what are the costs involved?

As per the government, ~68% of projects undertaken by the National Highway Authority

of India (NHAI) so far have been delayed (includes both completed and under

implementation projects).

The World Bank had carried out a time and cost overrun analysis on on-going and

completed national highway and state highway contracts a couple of years ago. The

results of the study are given below:

Table 3: Time and cost over-run details

Source: World Bank, Edelweiss research

Category Target Achievement Target Achievement Target Achievement

Widening to 4-lanes and strengthening (kms.) 2,885 1,683 3,520 2,203 3,165 2,693

2007-08 2008-09 2009-10

Time Cost Time Cost

100% 7.6 0.0 12.3 0.0

NHAI and

state govt

contracts

% Overrun [overoriginal estimates of

time and costs]

Completed contracts(%)

Completed + ongoingContracts (%)

Pace as well as quality ofroad length addition inthe country has beendisappointing

Most road projectswitness time/costoverruns




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The study indicates that 90% of all contracts had a time overrun of more than 25%;

46% had a cost-overrun of more than 25%. The cost overrun figures for completed

contracts do not include a large portion of pending claims and arbitration orders. As per

estimates, ~ INR 100 bn is locked in disputes between the government and contractors.

Thus, execution remains a major issue in road development; the final costs of road

project implementation are much higher than initially envisaged.

What are the major execution issues?

Major issues in road project execution can be broadly categorised into:

1. Regulatory issues Land acquisition

Utility shifting and other local clearances

Other approvals like forest, railways etc.

2. Resource availability issues Manpower availability

Raw material availability

Availability of financing

Equipment availability

Sub-contractors availability

Our trip was aimed at getting to the root of the execution issues listed above.

Execution is a bigconcern in roaddevelopment




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Land acquisition

How big is this problem?

As per World Bank, on an average, it takes 50% more time than scheduled to hand over

encumbrance-free land to contractors for national highway projects. Also, according to a

survey of 190 infrastructure projects facing delays, 70% were delayed due to land

acquisition problems. This indicates that land acquisition is arguably the biggest hurdle

afflicting road development.

Fig. 2: Delayed due to reluctance of farmers to hand Fig. 3: Problems due to protest over demolition of

over land structure

Source:Edelweiss research What are the relevant regulations?

Land acquisition for development projects in India happens through the Land Acquisition

Act (LAA), 1894. However, land acquisition for national highways is carried out under a

separate law known as the National Highway Act (NHA), 1956.

State governments sometimes constitute a specific law for land acquisition (land

acquisition in India is a Concurrent subject as per the Indian Constitution which gives

state governments the right to legislate on the matter).

Land acquisition is the

biggest issue in roaddevelopment




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What is the process for land acquisition?

The various steps involved in the process of land acquisition for National Highways are

given below:

Fig. 4: Land acquisition process for national highw ays

Source: Govt documents, Edelweiss research

What are the reasons behind difficulties in land acquisition?

We learnt from our visit that there are multiple reasons behind difficulties in land

acquisition. Prominent amongst them are:

Institutional framework and dependence on local authorities: When land is to

be acquired under the NHA, 1956, the NHAI generally relies on the district

administration since the relevant land records are with the revenue department. The

district administration appoints an Additional District Magistrate or Sub-Divisional

Magistrate as the competent authority for this purpose. Sometimes, there is delay in

the appointment of a competent authority by the state government which further

delays the process.

Also, this means that NHAI is dependent on the district administration for the land

acquisition process. Since NHAI has no control on district administration (for

which land acquisition is not a priority issue due to other responsibilities),

the entire process becomes dependent on the proactiveness of district

officials. Sometimes, local officials are transferred, which again hampers the

process.

Special land acquisition cells enhancing coordination but local authorities

still the key: Over the past year, NHAI has set up local cells to enhance

coordination in land acquisition with local authorities. These units carry out the

following functions:

Prepare the notification under section 3A (Intention to acquire land).

Prepare the notification under section 3D (1).

Disburse the compensation to land owners.

These units coordinate with local officials to ensure that the process of land

Govt expresses its intention toacquire the land (3A

notification)

Carry ing out of surveys, inspection etc.,setting out of boundaries and intended

lines of work

Hearing objections fromconcerned persons

Decleration of acquisition afterdisposing off objections (3D

notification)

Determination of amount payable ascompensation

Award finalisation at the SpecialLand Acquisition Officer (SLAO)

level

Approval at the NHAI Projectimplementation unit / NHAI

hedaquarter

Disbursement of compensation amount Physical possession

NHAI depends on localauthorities for landacquisition




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acquisition is smooth. Our interaction with developers reveals that there definitely

has been improvement on the ground level with the setting up of such cells.

However, in case district administration officials are not dynamic and cannot handle

various problems which emerge from time to time with regards to land acquisition,

the entire process is still delayed. Indeed, developers raised serious concerns

regarding the motivation levels of local authorities.

Fragmented land holdings: The fragmented nature of land holdings in rural areas

means that a large number of landowners need to be compensated for their land.

According to data from the Ministry of Agriculture, 62% of farmers have land

holdings of less than one hectare. This creates problems in land acquisition.

Fig. 5: Land acquisition delayed due to nearby farm Fig. 6: Land acquisition stuck due to dispute over

land compensation amount

Source:Edelweiss research Lack of clear land titles: Unclear land titles and absent/incomplete revenue

records in villages are the biggest constraints in timely land acquisition. The process

gets bogged down due to the problem in finding the rightful owner of the land. This

is because land records are generally outdated, inaccurate and/or incomprehensive.

This gives rise to frequent disputes, which result in litigation. This is a problem

which no amount of NHAI/developer involvement can solve. For e.g., news reports

suggest that land acquisition progress in Jharkhand had been hit due to inadequate

land revenue records reflecting ownership; the maps were as old as 1912 and the

state government is now developing land records by way of physical verification.

Similarly, in case there has been an informal division of land amongst family

members, it is not reflected in records of the revenue department. Also, in case the

land belongs to tribals, the acquisition process further suffers since there isrestriction on sale of land from tribals to non-tribals.

Inadequate land acquisition plans: Many a times, land acquisition plans as

formulated according to the detailed project report (DPR) are inadequate; this is

because the professionals involved in preparing DPRs do not have sufficient

knowledge of land acquisition. The design consultants do not have sufficient

expertise in preparing proper land acquisition plans; also, land acquisition plans are

unrealistic due to deficiencies in on-the-ground verification of the design/alignment.

Lack of clear land titlesand inadequate DPRscreate hurdles




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Lack of uniformity in state governmentregulations: There is lack of uniformity

across state governments in terms of statutes. For e.g., the Uttar Pradesh

government had earlier imposed a condition that NHAI will have to guarantee

development of a 10 m wide strip of plantation along either side of highways if the

project involves felling of existing trees. This affects land acquisition progress.

Lack of adequate compensation and methodology of computation: Weunderstand that compensation for land acquired is also a big issue impeding land

acquisition. The bone of contention here is both the eventual quantum of

compensation and the methodology used to arrive at the figure.

The NHA, 1956, provides for compensation based on: (a) market value of the land

on the date of publication of 3A notification; (b) extra payments for trees, crops,

houses, or other immovable properties; and (c) payments for damage due to

severing of land, residence, or place of business.

A lot of discretion is vested with state authorities during the entire process and,

many a times, there is lack of clear cut procedures for the same. This results in

grievances against authorities which delays actual possession of land by the

government.

V ar ious p r ob lems r e la ted to c omp ens at i on a r e de ta i l ed be low :

Sometimes, valuation of land, as determined by authorities, is based on sale

deeds recorded with revenue offices; this is way below prevailing market prices

and is a cause of heartburn for the landowner.

Over the past couple of years, land prices in some parts of rural India have

increased sharply due to expansion of rural roads and improvement in

accessibility. This has resulted in many landowners demanding higher

compensation than the official acquisition rate.

Also, sometimes, there is a dispute between state and central governments over

the manner of compensating affected land owners. This is also because manystates have their own land acquisition and rehabilitation laws, which differ from

NHA, 1956.

This means that even after publication of 3D notification signifying the acquisition of land

by the government, the valuation of the land, approval of the same, disbursement and

physical possession of the land by the developer takes a long time. In theory, the land

acquisition is complete as soon as the relevant government notification is issued;

however, in practice, developers have to wait for a long time in getting unencumbered

access to the land.

What is developers viewpoint?

Our interaction with various developers threw some interesting takeaways:

Developers have become involved in land acquisition p rocess: A large number

of projects which have been commissioned over the past couple of years had been

delayed due to land acquisition problems . However, developers have also learnt

from past mistakes and have realized that they need to be proactive to facilitate

coordination between various government departments to ensure that land

acquisition is completed on time in order to save time and cost (for BOT projects).

To this extent, developers have become involved in the land acquisition process.

This includes hiring retired officials (earlier involved in land acquisition) to ensure

smooth running of the process. In fact, we came to know of instances where

Developers lending ahelping hand in landacquisition process

Institutional framework

for land acquisition isinadequate




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developers have themselves acquired certain stretches of land which were proving to

be problematic so as to ensure speedy completion of the land acquisition process.

Developers indicate more efforts from state government could help: While

most developers indicated that NHAI emphasis on land acquisition has improved,

they also highlighted that developer involvement is not the panacea of all problems;

beyond a particular level, land acquisition progress ultimately depends on the levelof state government involvement. They highlighted that states where authorities are

proactive (Gujarat, Rajasthan) are the best places to work. On the other hand,

projects in certain states like West Bengal, Kerala, Uttar Pradesh, Orissa etc.,

continue to face problems. Thus, overall while there has been some progress on the

land acquisition front, it is sporadic in nature and still depends on developer

involvement.

Land acquired is not continuous but piecemeal: Developers indicated that many

a times, land parcels acquired are not continuous , i.e., they are piecemeal and at

quite a distance from each other. This creates problems in execution since it leads to

increase in inefficiencies due to less than optimal utilisation of equipments.

Unencumbered access to land still a problem: As highlighted above, even after

acquisition of land, various encumbrances mean that developers ability to undertakework in a continuous uninterrupted manner is constrained. Unencumbered access to

land thus still remains a problem.

Land acquisition process needs to be initiated earlier in project lifecycle:

Currently, the land acquisition process continues well into the execution period,

thereby affecting the construction schedule. Developers suggested the process

needs to be initiated at the design stage itself, well before the beginning of civil work.

To this end, a comprehensive land survey should be completed before land

acquisition schedules are prepared and included in DPRs.

Our view

We believe that while the land acquisition process has improved, many issues remain to

be tackled before pace of road development picks up. Our key learning from the visit isas follows:

Land acquisition continues to remain the single biggest issue faced by

developers

Our interaction with developers/contractors indicated that land acquisition continues

to remain the single biggest issue troubling developers. This was the unanimous

feedback received across all projects that we visited. Most developers indicated that

execution time of projects could be reduced by up to six months in case land

acquisition is completed in the scheduled time. However, this is hardly the case with

developers having to contend with numerous delays due to non-availability of land.

Cost/time overruns in future projects may not be substantial and likely to

be lesser than past projects

With developers lending a helping hand to the government, project execution was

on the right track for most BOT projects we visited. This leads us to believe that

cost/time overruns in future BOT projects may not be substantial and is likely to be

lesser than in past projects.

Calculation methodology o f land acquisition needs closer scrutiny

The revised guidelines for road project awards announced last year state that a LoA

will be issued only when 80% of the land required is under possession. However, the

calculation of this figure needs a closer look. The Right of Way (RoW) or the land

Developers want more

efforts from stategovernments

Project execution couldreduce by up to sixmonths, if landacquisition is completedwithin schedule




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required for any project includes the portion of the land for existing road as well, i.e.,

for a four laning project, the RoW includes the land of the existing 2 lane project.

As a result, a substantial quantity of land required is available upfront. For e.g., the

RoW of ~40-45 m required for a 4 lane road includes the existing 2 lane road

(usually 10 m wide). Thus, any figure with respect to land acquisition progress

needs to be considered in the proper perspective.

Recent news flow suggest that governments efforts bearing fruit

Recent news articles suggest that governments efforts on the land acquisition front

have resulted in improvement. News articles point that:

NHAI took possession of 3,022 hectares in Q1FY11.This is almost half the size

of the total land possessed (6,244 hectares) by NHAI in 2009-10 which itself

was a huge improvement over the 3,120 hectares acquired in 2008-09 and

3,684 hectares acquired in 2007-08. The total land acquired by NHAI was at a

relatively higher level at 5,513 hectares in 2006-07.

Under section 3G of the NHAI Act, which makes the government liable to pay

compensation to the land owner, NHAI has issued notification for 2,204 hectares

in Apr-Jul 2010, compared with 3,605 hectares in the previous fiscal.

Out of the total 60,500 hectares land required for various stages under the

NHDP, the government has managed to acquire around 25,000 hectares.

Enhanced support from state government the key

While NHAI and the roads ministry are doing all they can to improve the land

acquisition process, the big kicker can come only if the respective state

governments pull up their socks and improve coordination at the ground level. In

this context, the signing of state support agreements (SSAs) by 24 states and Union

Territories with the roads ministry is a step in the right direction. The agreement

empowers the concessionaire with access to the site and right of way in accordance

with the provisions of the respective concession agreements without hindrance from

any government agency or person claiming it.

Proposed National Highway Amendment Bill will be a key monitorable

The proposed National Highway Amendment Bill is being keenly watched with

regards to changes in the regulation regarding national highways. News reports

suggest a couple of important recommendations as per the draft bill.

If a planned road is abandoned, the original owner will reserve the right to buy

back the land by returning the money paid by the government for purchase.

Further, the owner will not have to pay the appreciation price but only that

received when he or she sold the land.

It has been proposed that a two-step mechanism be introduced for calculating

cost of land at the time of acquisition by NHAI. In the first step, price of the

land will be calculated on the basis of the average land price of top 50% sales

(in terms of value) in the past three years. The land cost will also be estimated

according to the price guidelines for the area maintained by the collector in

charge. After arriving at the two values, the higher of the two will prevail as the

price that the NHAI will pay to the land owner.

Currently, the land price is calculated based on the average price of all land

sales in the area in the past three years. The new mechanism proposed,

however, takes into account the top 50% values of land sale in three years.

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It is also proposed that the person who sells the land to NHAI should get

solatium for better rehabilitation and resettlement. It is proposed that the land

owner gets 60% of the agreed sale price of the land as compensation for

displacement in addition to the land price.

It is proposed that a time limit of three months be imposed for the aggrieved to

approach an arbitrator in the case of land sale. The current form of bill placesno such time limit, leaving it open ended. The arbitrator will also be required to

give a decision within six months.

Achieving 20 km/day hinges on land acquisition success

Land acquisition will be an important parameter in determining the success of the 20

km/day initiative. As the recent protests by farmers in Uttar Pradesh over land

acquisition for an expressway demonstrated, land acquisition remains a contentious topic

in the Indian infra scene. The sooner the outstanding issues are resolved, the better it

will be for progress of road development.

Land acquisition will bean important parameter

in determining thesuccess of the 20km/day initiative




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Utility shifting and other local clearances

How big is this problem?

Utility shifting and other local clearances is another problem facing road projects. Many

times, while land acquisition is complete, unencumbered access to the land and initiation

of execution is not possible due to delays in shifting of utilities and other approvals.

Sometimes design and layout of the project have to be changed due to problems in

utility shifting.

A World Bank study highlighted had indicated that on an average, shifting of electrical

utilities took about 33 months, telephone utilities about 31 months and water utilities

about 29 months, against the planned target of about 18 months for all these utilities

more than a year of delay.

Fig. 7: Problems in shifting of power lines Fig. 8: While tree cutting has been completed, power

lines still needs to be shifted


Utility shifting and otherlocal clearances delayproject execution




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Various clearances involved

Utility shifting: When it comes to utility shifting, major problems are shifting of

transmission towers, electric wires, telephone cables, water pipes, etc.

Local clearances: Various local clearances required are given below:

Table 4: Various local level clearances required


Agencies involved

For utility shifting, developers need to coordinate with various government departments

like the telecom department, the local municipal board and local bodies for water and

power maintenance.

For other local clearances, entities involved are the village panchayats/municipal board,

District Collector, Pollution Control Board and other government bodies.

Reasons behind delays in utility shifting/other clearances

We learnt from our visit that there are multiple reasons behind difficulties in utilityshifting/other clearances. Prominent amongst them are: Lack of proper coordination between the implementing agency and respective utility

departments

Inadequate investigations during DPR preparation and lack of proper utility

mapping; sometimes contractors come to know of utilities (underground ones)

during the project implementation stage.

The road implementing agency has no leverage on utility relocation departments.

Developer viewpoint on utility shifting/other local clearances

Our interaction with various developers threw some interesting takeaways:

Better coordination between different government departmentsrequired -

Developers highlighted the need of better coordination between various government

departments. Like land acquisition, utility shifting stretches late into the execution

period, thereby preventing developers from optimal use of resources.

Presence of a dedicated agency helps - Our interaction with developers indicated

that the presence of a dedicated agency (like Hyderabad Growth Corridor for

Hyderabad outer ring road project) helps in better coordination amongst

government departments.

Sl. No. Description of permits/licenses required

1 Labour license

2 Registration under building and other construction workers' act

3 Blasting permissions

4 Approvals from village panchayat for installation of crusher, batching plant,

asphat plant etc

5 Approval from Pollution Control Board for installation of crusher, batching

plant, asphat plant etc

6 Blasting permission from District Collector

7 License for use of explosive from Chief Controller of explosive

8 Permission for installation and operation of HSD consumer pump

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Developers giving a helping hand to government - Like land acquisition,

developers have also become involved in utility shifting/other clearances. They have

themselves approached the concerned authorities to ensure smooth coordination

between various entities.

Our viewWe believe the challenges in utility shifting are far lower than those in land acquisition as

the factors involved are less complex. Also, with a little improvement in coordination

between various agencies, there can be a marked upturn in the pace of road project

development.

Better coordinationbetween variousagencies can enhanceroad development




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Railways, forest & environmental approvals

In every NHAI or state highway project that we visited, there was an issue with a railway

over bridge (ROB) or with regards to area under the forest department. Getting approval

from railways or the Ministry of Environment and Forests (MoEF) is a tough task for

developers. An approval for cutting trees can take up to 30 months. Similarly, approval for a

railway over bridge (ROB) from railways can take 15-18 months.

Reasons behind delays in getting railways, forest and environmental approvals

The reason for delays in getting these approvals is primarily the cumbersome process

involved. For e.g., in case of a forest clearance, the developer first receives an in

principle approval which stipulates certain specific conditions. Only when all the

conditions are fulfilled is the final clearance issued. Project implementation cannot

begin until the final clearance has been achieved.

Road projects which pass through a national park or sanctuary require the approval of

the National Board of Wildlife (NBW) even for the very first step like undertaking asurvey.

News reports suggest that there is a lack of a standard procedure for clearance of such

projects and the matter has been raised before an Empowered Group of Ministers

(EGoM), which is expected to meet shortly to prepare the required norms for such

projects.

Apart from the central government represented by the MoEF, developers have to face

additional conditions imposed by the forest department in the state government.

For environmental clearance, the proposal needs to be submitted at the feasibility stage

itself. A complete assessment of the environmental impact is done and the project is

examined by an expert committee. The whole process can easily take up to an year.

In the recent past, many projects have been stuck due to delay in approvals in one of

the above parameters. For e.g., news reports suggest that only recently, the standing

committee of NBW, rejected NHAIs proposal to divert 85 hectares of forest land for four-

laning in an 85 km stretch on national highway No. 6.

Our view

After interacting with project managers, we believe that railways and forest approvals

are emerging as major choke points. Even the proactive efforts of NHAI or developers

usually fail in front of these departments since they follow their own procedures which

usually take time.

Getting approval from

railways or MoEF is atough task fordevelopers

The process forenvironmental clearancecan take up to a year




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Fig. 9: Project delayed due to construction of an ROB for w hich permission w as

pending for long


We had a chance to examine delays due to ROBs firsthand. In a project, which has been

under implementation for the past four years, the entire road widening part of the

project has been complete for some time now. The only portion where work was still

pending were a couple of ROBs.

Fig. 10: Project stalled due to delays in approval for Fig. 11: Project delayed due to delays in approvalscutting trees from forest department


Similarly, the process for environmental clearances involves a number of NGOs; a single

objection from them can cause a major delay. Sometimes, project alignment itself has to

be changed to accommodate demands of the forest department.

I S I E m e r g i n g M a r k e t s P D F i n

D o w n l o a d e d b y i n - u n i v e r s a


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Resource availability issues

After looking at the regulatory approval scenario, we now focus our attention on resource

availability issues i.e., the ease of building asset base in terms of manpower, equipments,

raw materials, financing and execution multipliers (sub-contractor). Our interaction with

project execution personnel pointed out a few positives which we have listed below:

Quality manpower resources at middle management level are scarce

We observed that there is a scarcity of experienced and good quality manpower

resources at the middle management level (civil engineers with 10-15 years of

experience). Contractors attributed this to the migration of civil engineers to IT

companies (starting from the mid 1990s). As a result, there is a shortage of skilled

professionals at the middle management level. Also, most contractors believed that the

shortage is likely to emerge as a big issue going ahead with the large scale up in

infrastructure spending planned in the coming years. However, unskilled or semi skilled

manpower is not an issue.

We believe contractors have also realized the benefit of developing their own talent base

to cope with the anticipated increase in human resource crunch going ahead. Recent

news flow suggests that Gammon India has started its own training center in Mysore

with a view to create a pool of skilled workforce trained in various skilled disciplines

including masonry, plastering, scaffolding, carpentry, electrical work, painting and

plumbing.

Availability of plant/equipment and raw material is not a constraint

Our interaction with project personnel indicated that there were no major issues with the

availability of either plant/machinery or with raw materials. Funding is easily available for

enhancing the fixed asset base. In fact, many contractors opined that it is easier to get

funding for equipment finance than getting their non-fund based banking facilities

enhanced. They attributed this to the presence of NBFCs in the equipment finance space.

Fig. 12: Fixed asset base is easy to expand Fig. 13: Equipment availabi lity is not a concern


Scarcity of qualitymanpower resources atmiddle managementlevel




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Also, raw material constraints are few; in fact, resources mobilisation was in full swing in

practically all locations that we visited even before the work at the site was

started/scheduled to start. Even in areas where there were some issues with raw

material availability, contractors had the foresight of planning for this beforehand.

Fig. 14: Raw material is easily available Fig. 15: No problems in raw material supply


For e.g., in Haryana where the state government has imposed a ban on mining of major

minerals in Faridabad, Gurgaon and Mewat districts for 10 years, alternate supply

arrangements from Rajasthan were already in place. This ensured that project

implementation was not affected.

No shortage of quality subcontractors

Most developers that we interacted with indicated that there is no dearth of sub-

contractors in the industry. There are enough small contractors willing to work for

developers. We visited a few projects being executed by these sub-contractors and foundthat the asset base, both in terms of equipment and manpower, with these sub-

contractors was substantial. These sub-contractors also had easy access to funding

which is crucial to their growth prospects.

Responsibilities clearly outlined: In projects where the execution is being carried

out by a sub-contractor, the role of developers veers more towards project

monitoring and supervising the implementation schedule. Developers have their own

set of technical personnel engaged at the site who oversee the project execution.

There are weekly review meetings with sub-contractors to keep a tab on progress of

the project.

Sub-contractors have adequate asset base: We also met a few sub-contractors

and visited projects being executed by them. Here again, the fact that these sub-

contractors had their own asset base and qualified manpower came through. Ourinteraction with these sub-contractors revealed that they had scaled up their

execution capabilities over the years which was reflected in the average size of

projects being undertaken by them.

There are enough smallcontractors willing towork for developers




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Fig. 16: Sub-contractors have good quality asset base Fig. 17: Sub-contractors have adequate technical

acumen


These sub-contractors also had their own laboratories for ensuring the quality of

work being undertaken.

Fig. 18: Quality check at a sub-contractors si te


When it comes to the selection process undertaken by developers for choosing sub-

contractors for any project, the asset base and past work are crucial parameters.

Traditional developer-sub-contractor relationships changing: Also, some sub-

contractors indicated that developers had started giving them incentives for

upgrading execution capabilities in terms of asset base and manpower resources.

This was being done by developers in the form of assuring the sub-contractor of a

minimum volume of work every year for a fixed period of time. We believe this is a




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win-win situation for both parties involved as sub-contractors get to enhance their

execution capabilities and also learn from project management skills of experienced

developers; for developers, the benefit is in the multiplier effect brought in by sub-

contractors.

Fig. 19: Sub-contractors have built up execution capabilities and asset base

over the years


Funding not an issue: We enquired about the ease of availing financing for

purchasing equipments etc. Here again, sub-contractors indicated that they were

not facing any shortage. They had relationships with multiple banks and fund

availability was not an issue.

Interaction with financial institutions corroborates findings: We also

interacted with a couple of financial institutions who fund sub-contractors. They

corroborated sub-contractors feedback and were optimistic about future growth

prospects of these sub-contractors. These institutions had witnessed growth

trajectories of these sub-contractors for the past many years and sounded confident

in their ability to scale up their business.

Our view

We believe there is no shortage of resource availability, be it manpower, equipments,raw materials, financing or sub-contractors. Even if there is any temporary resource

crunch, the entrepreneurial spirit of contractors ensures that these are taken care of

adequately. Also, with multiple providers of these resources (in terms of equipment

manufacturers, banks and other financial institutions etc.), the timeliness and cost

efficacy of supply is also reasonably ensures. One more positive thing is that even the

small sized entities have access to these resources; also, these resources are not

geographically concentrated. What this means is that if the regulatory side of approvals

is taken care of, ramping up execution will not be too challenging.

There is no shortage ofresource availability, beit manpower, equipment,raw materials, financingor sub-contractors




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Cash contracts continue to get delayed

We visited a number of projects being implemented on cash contract basis. The primary

difference between these projects and BOT projects lies in the mode of funding; while cash

contracts are funded by the government, in BOT projects, the developer has to tie up the

financing i.e., in BOT projects, developers own money is at stake. As is natural, the

commitment towards avoiding cost/time overrun is higher in BOT projects.

It was not surprising to find that almost every cash contracting project that we visited was

running behind schedule. Since there is no incentive for contractors to get involved in the

process of land acquisition and other regulatory approvals, most contractors adopt a laidback

attitude with regards to cash contracts. They were content with religiously documenting their

machine/labour idle time for the purpose of claims adjustment at a later stage. The entire

responsibility for getting regulatory approvals in this case lies with the client (NHAI/State

PWD etc). The process is rarely completed in time due to bureaucratic hurdles. Thus, cash

contracts continue to get delayed. As is natural, the chances of legal disputes at a later stage

in such projects are also much higher.

Fig. 20: Project stalled due to delays in land acquisition Fig. 21: Project stuck due to delays in utility shifting


The delay in cash contracts is also due to the fact that the incentive payment for an early

completion of a cash contract project is minuscule as compared to those for BOT projects

(bonus annuities or early toll collection). Hence, contractors are also not proactive in

completion of cash contracts on time.

Data from NHAI corroborates our hypothesis. Of the 136 projects which were running late

w.r.t. their original implementation schedule at Sep 2010 end, only 28 were on BOT basis

(toll or annuity), balance were all cash contracts.

It needs to be kept in mind that only ~ 9% of projects in the NHDP work plan for future

(approved last year) are proposed to be completed under the EPC mode. This means that

future delays in NHAI projects may be lesser than the past due to smaller share of cash

contracts. However, for state government roads and district roads which continue to be

implemented on EPC basis, there is no such ray of hope.

Most cash contractscontinue to get delayed




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Outlook on road projects execution

Over FY09-10, the government has initiated many steps to ensure that there is a pick-up in

the pace of project award. We believe project award is unlikely to be a major

dampener going forward; this leaves execution issues as the principal irritant in

improving the pace of road project development.

Our interaction with developers and other project execution personnel has convinced us that

there are quite a few positives when it comes to road project execution. Enhanced developer

involvement, good resource availability and increased government efforts are likely to ensure

that the execution on road projects is likely to improve going ahead. However, regulatory

constraints continue to stifle efforts to build 20 km/day of roads. We believe if the regulatory

side of approvals is taken care of, ramping up execution will not be too challenging.




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Major project details

We highlight the key learnings from some major projects we visited:

Dhule-Palasner project

Key project specific details:

Developer: Hindustan Construction / Sadbhav Engg / John Laing consortium

Project scope: Design, engineering, finance, procurement, construction, operation

and maintenance of 4/6 laning of Madhya Pradesh/ Maharashtra border-Dhule

Section of NH-3 from km 168.500 to km 265.000 in Maharashtra under NHDP Phase

III A on BOT (Toll) basis. The concession period is 18 years including construction

period of 30 months.

Client: NHAI

Project award date: Jan 2009

Scheduled completion date: June 2012

Total project cost: INR 14.2 bn

Significance of the project: The project involves expansion of an existing 2 lane

stretch on NH-3 into 4 lane. National Highway 3 (NH-3), which is commonly referred

to as the Mumbai-Agra Highway, is a major Indian national highway that runs

through the states of Uttar Pradesh, Rajasthan, Madhya Pradesh and Maharashtra.

The highway originates in Agra in Uttar Pradesh, travels South-West through

Dhaulpur in Rajasthan, Gwalior, Shivpuri, Guna, and Indore in Madhya Pradesh, and

Dhule, Nashik, Thane and terminates at Mumbai in Maharashtra. NH 3 runs for a

distance of 1,161 km.

The project starts from the city of Dhule. At Dhule, NH-3 crosses National Highway 6

(NH-6) which is a busy national highway that runs through Gujarat, Maharashtra,

Chhattisgarh, Orissa, Jharkhand and West Bengal. NH-6 passes through the cities of

Surat, Dhule, Nagpur, Raipur, Sambalpur, Kolkata, running over 1,949 km from

Hazira to Kolkata.

Fig. 22: Location of the project Fig. 23: Project stretch

Source: Maps of India, Google map, Edelweiss research




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Key observations from site visit:

Land acquisition problems and forest clearance big challenges: We learnt

that the project faced land acquisition problems in the beginning. This was primarily

due to resistance from land owners who were demanding a higher compensation for

their land. There was some opposition amongst people due to compensation rates

being different from village to village. Also, land acquisition was not lateral in nature.

Moreover, since the project passes through a stretch which has forests, clearance

from MoEF was required. This took some time.

Local resistance led to design changes: Since the project passes through an

urban area, there was a demand from the local population to include certain

underpasses which were earlier not part of the original scope of the project. This

issue has been sorted out now. The changes have been incorporated and the

additional cost to be incurred has also been approved by the client.

Project designed keeping future needs in mind: The project has been designed

keeping in mind the expected traffic growth in the future. As a result, even though

the project will be a 4 lane road after completion, various structures such as flyovers,

bridges etc., which are being built will have 6 lanes. We believe this is a step in the

right direction to ensure that the project can handle the increase in traffic ahead and

that future capacity expansion will not be difficult.

Fig. 24: Execution underway on a major bridge Fig. 25: Construction in full swing on a bridge across

a river


Despite challenges, project running ahead of schedule: Despite the challenges

mentioned above, the project has been running ahead of schedule. This is primarily due

to the developers proactive attitude, aided by the NHAI. The developer mobilisedresources as soon as the project was awarded. Also, a major effort was put in identifying

the challenges in land acquisition, forest clearance etc., in the initial part of the project

itself. Close coordination with various government departments has ensured that all local

clearances have been achieved; design changes have also been incorporated. Significant

progress on the land acquisition front has also been achieved. As a result, currently the

project is ahead of schedule.




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Fig. 26: Execution on track after resolution of land Fig. 27: In spite of heavy traffic, construction is ahead

acquisition issues of schedule


The progress on the project is commendable considering that the stretch lies on a busy

route. There was heavy traffic on the road; despite this, construction was in full swing.

Crushers, wet mix plants, batching and asphalt plants were in operation; similarly,

machines like excavators, pavers, graders etc., were also working.

Hyderabad outer ring road project

Key project specific details are:

Road stretch: Cyberabad Expressway

Developer: Gayatri Projects consortium

Project scope: Design, construction, development, finance, operation and

maintenance of an eight lane access controlled expressway from Kollur to

Patancheru (km. 12 to km 23.70). The project is on BOT-annuity basis under Phase

II programme of Hyderabad outer ring road (ORR).

Client: Hyderabad Growth Corridor (HGCL), an SPV formed for development for the

Hyderabad outer ring road by the state government.

Date of commencement: Dec 2007

Total project cost: INR 5.01 bn

Significance of the project: The Hyderabad ORR is aimed at the development of

well planned and well connected urban settlements around the Hyderabad

Metropolitan area. The 159 km long ring road provides connectivity to various state

and national highways to bypass the city of Hyderabad. The proposed corridor is

expected to relieve congestion in the metropolitan area and inner ring road, provide

orbital linkage to radial arterial roads, provide link to the proposed MRTS and bussystem and provide quick access to the international airport from strategic parts of

the city.




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Fig. 28: Outer ring road project in Hyderabad city Fig. 29: Project stretch (Cyberabad expressway)

Source: HUDA, Edelweiss research

Key observations from site visit:

Major portion of project completed: Work on majority of the project stretch has

been completed. Construction is still going on a small stretch of the road.

Fig. 30: Completed portion of the expressway Fig. 31: Work going on a small stretch of road


Land acquisition problems delays project: The project has been delayed due to

land acquisition problems. Our interaction with project personnel indicated that

majority of the work has been completed. However, land acquisition problem for a

small stretch of land has meant that the work is incomplete on that portion of the

project.




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Fig. 32: Project stalled due to land acquisition issues Fig. 33: Progress hampered by delays in land

acquisition


A look at the website of Hyderabad Metropolitan Development Authority indicates

that this indeed is the case. Of the RoW of 11.7 km required for the project, only

11.2 km has been handed over.

Utility shifting: Apart from land acquisition, the project progress was also

hampered by delays in utility shifting. This happened due to delay in getting

approval for shifting power transmission lines.

Fig. 34: Shifting of power transmission lines delayed Fig. 35: Utility shifting hampers project completion

project execution schedule


The developer has been coordinating with HGCL for getting the approval for this purpose.

Timely land acquisition could have avoided the delay: The project has been

delayed by more than three months due to delay in land acquisition/utility shifting.

To put things in perspective, an identical project on the same road by the

same developer has been completed six months ahead of schedule i.e.

Hyderabad Expressway is a 13 km stretch of Hyderabad ORR from Bongulur to

Tukkuguda. This project (again an access controlled 8 lane expressway) being

undertaken by a consortium headed by Gayatri Projects has been completed 6




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months ahead of schedule. This was possible due to timely handover of land

required for the project.

Key learning: Despite being close to an urban area which raises its own set of

execution challenges, the developer has been able to build a good quality road

ahead of schedule when RoW was available; however, when land acquisition/utility

shifting is delayed, the project is delayed too despite the best efforts of thedeveloper.

Pimpalgaon-Nashik-Gonde project


Developer: L&T / Ashoka Buildcon consortium

Project scope: Design, engineering, finance, procurement, construction, operation

and maintenance of 6 laning of Pimpalgaon-Nashik-Gonde Section of NH3 from 380

kms to 440 kms in Maharashtra under NHDP Phase III A on BOT (toll) basis. The

project involves construction of 452 lane kms of roads. The concession period will

expire in January 2029.

Client: NHAI

Project award date: Jan 2009. Construction began in January 2010.

Scheduled completion date: July 2012

Total project cost: ~ INR 17 bn

Significance of the project: The project involves expansion of an existing 2 lane

stretch on NH-3 into 6 lane.

The project runs from Pimpalgaon to Gonde via Nashik with Gonde lying on the busy

Mumbai-Nashik highway. Nashik today is one of the fastest growing cities in India

and has been identified as a tier-2 metro. The city's economy is driven chiefly by the

engineering and manufacturing industry; many auto majors and original equipment

manufacturers have their plants here and have spawned a huge network of auto

component suppliers and engineering ancillary services.

Fig. 36: Location of the project Fig. 37: Project stretch

Source: Maps of India, Google Maps, Edelweiss research




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Key observations from site visit

Land acquisition and utility shifting a key test: Since the project passes

through the city of Nashik, land acquisition and utility shifting have emerged as a

key test for the developer. We surmise that many small commercial establishments

will have to be shifted to get the land required for road widening.

Management of existing traffic will be the key: Since the project passes

through a heavy traffic density area, developers have to undertake the construction

work along with managing existing traffic. The project also contains an elevated

corridor for traffic to bypass the underlying city congestion.

Execution happening on both sides of the road: The existing road is 2 lane. Due

to heavy growth in traffic, it is being directly widened to 6 lanes (instead of the

more usual 2-to-4 laning in the first part and 4-to-6 laning thereafter). As a result,

construction is being carried out on both sides of the road. Despite the challenging

task, we believe the developer was carrying out work admirably. We did not see any

disruption in traffic; work was going on smoothly.

Fig. 38: Land acquired for widening on both sides of road Fig. 39: Construction in full swing


Raw material availability enhances efficiencies: The project benefits from easy

and cost effective raw material availability as the sources of raw material are close

to the project site. This has in turn led to smooth resource mobilization. Ashoka

Buildcon has two captive RMC plants with a capacity of 60 and 120 cubic meters per

hour which are being used in execution of the project (Source: IPO prospectus).




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Fig. 40: Adequate asset base helps in resource Fig. 41: Convenient raw material availability near

mobilisation project site


Project progress on track: In spite of the project lying on a busy route which brings

traffic management into the picture, execution was on track. Construction was going

ahead at full speed, aided by easy raw material availability and adequate resource

mobilisation. Land acquisition challenges have been adequately met with good progress

on land parcels located within the city. As a result, construction on the project is

progressing satisfactorily.

Ranchi ring road project


Developer: IL & FS Transportation Networks

Project scope: The project is concerned with improvement of the Ranchi ring road

(Sec III, IV, V and VI). It involves design, engineering, finance, procurement,

construction, operation and maintenance of 6 lane divided carriageway on BOT

(annuity) basis. The length of the project is 36.2 km. The concession period is 17.5

years (including construction period of 30 months).

Ranchi ring road is part of the Jharkhand Accelerated Road Development Programme

(JARDP) which involves development of select road stretches in the state of

Jharkhand. The total length covered under the programme is 1002 lane km; of this,

phase I involves 3 projects (Ranchi ring road, Ranchi to Patratu road and Patratu to

Ramgarh road) spread over 466 lane km while the balance comes under phase II.

The Jharkhand government is a stakeholder in JARDP with it holding 26% equity in

the SPV for the project.

Client: Road construction department, Govt of Jharkhand

Date of commencement: March 2010

EPC cost: INR 4.77 bn

EPC contractor: Sadbhav Engg

Significance of the project: The project aims to ease traffic congestion in and

around the city of Ranchi, the capital of the mineral rich state of Jharkhand. Ranchi

boasts of a number of industrial facilities which are located in and around the city.

With rapid growth in trade, commerce, and industry in the city, the traffic has

jumped sharply.




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Fig. 42: Location of the project Fig. 43: Ranchi ring road

Source: Maps of India, Company, Edelweiss research

Key observations from site visit

Involvement of state govt helped in land acquisition: Since the state

government holds a stake in the project SPV, there was a high degree of

involvement from state officials in the project. This has helped in regulatory

approvals like land acquisition, utility shifting, etc.

Intensive project monitoring on the part of developers: The developer has

given the EPC contract to a third party contractor. Developers involvement is in

terms of design and value engineering, project development, consultancy and

management as well as operations and maintenance management. To this end, the

developer is intensely involved in all the facets of the project including review of theproject construction also. There are regular review meetings to take stock of

progress as well as to assess and to plan for future milestones.

Well qualified EPC contractor(s): The EPC contractor(s) engaged in the project

are well qualifiedboth in terms of having a substantial equipment base and

technical/human resources. This has helped in the smooth implementation of the

project. The plant/machinery deployed at the site included batching plants,

excavators, graders, compactors, tippers, pavers, rollers, transit mixers, crushers

etc.




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Fig. 44: Excellent asset base with EPC contractors Fig. 45: Equipment strength not lacking in case of

contractors


Construction in full swing: The project involves construction of various structures

like flyovers, RoBs/RuBs and major/minor bridges. At certain points, it intersects

existing national highways as well. Regulatory approvals for various structures were

in place and execution was in full swing. Overall, the project is progressing as per

schedule.

Fig. 46: Work on structures is going on Fig. 47: Execution is progressing as per schedule


Key learning: In case the state government is actively involved, getting regulatory

approvals becomes easy. Also, regular project monitoring and review along withintensive developer involvement is the key for a project being on the right track.

This, when supported by well qualified contractors, leads to smooth project

execution.




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NOTES:

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Cove r age g r oup ( s ) o f s t ocks by p r im a r y ana lys t ( s ) : Cons t ruc t ion

Consolidated Construction Co., C and C Construction, Gammon India, Hindustan Construction Co., IRB Infrastructure, IVRCL Infra,Jaiprakash Associates, BL Kashyap & Sons Ltd, Man Infraconstruction, Nagarjuna Construction Co, Patel Engineering Ltd, SimplexInfrastructures Ltd

EW Indices Recent Research

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Distribution of Ratings / Market Cap

Edelweiss Research Coverage Universe

Rating Distribution* 116 45 12 176

* 3 stocks under review

Market Cap (INR) 110 53 13

> 50bn Between 10bn and 50 bn < 10bn

Buy Hold Reduce Total

Rating Interpretation

Buy appreciate more than 15% over a 12-month period

Hold appreciate up to 15% over a 12-month period

Reduce depreciate more than 5% over a 12-month period

Rating Expected to

16-Nov-10 IVRCLInfra

Weak quarter; strongorder book the only silverlining; Result Update

133 Buy

15-Nov-10 PatelEngineering Stable performance;progress on assetownership ventures;Result Update

372 Buy

12-Nov-10 ManInfraconst.

Steady revenue growth;margins decline;Result Update

339 Hold

Date Company Title Price (INR) Recos

800

950

1,100

1,250

1,400

20-Nov-09 20-May-10 20-Nov-10

EW Construction Index Nifty




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Construction - Sector Update (1)

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