On the back of the government’s renewed focus on infrastructure development, contractors are likely to witness a significant increase in construction opportunities. The government is expected to pump in more funds into the infrastructure sector, which is likely to attract private investment too. Roads, railways, power, ports and airports are likely to be key growth drivers for the construction sector.
Indian Infrastructure looks at construction opportunities across various sectors…
Roads and bridges
Road development has been a key focus area of the government. Big-ticket initiatives such as the launch of the hybrid annuity model (HAM) coupled with the approval of conducive policies to debottleneck the sector are expected to provide an impetus to construction activity. Besides this, the launch of an online marketplace for cement procurement (INAM PRO) is likely to give a further push to construction activity by focussing on the construction of concrete roads. Significant opportunities will also be offered through programmes such as Bharat Mala, the Char Dham project, the district connectivity project and Setu Bharatam.
According to India Infrastructure Research, the road sector will offer a construction opportunity of over Rs 7 trillion till 2022. As per research conducted, 710 projects spanning a length of over 58,000 km, spread across the national highway and state highway segments, are in the pipeline. The total investment likely to be mobilised by 2022 is expected to be at least Rs 12 trillion.
Contractors will have both indirect and direct opportunities since the government has stated its intent to award projects irrespective of the award mode. Hence, besides engineering, procurement and construction (EPC) projects, the public-private partnership (PPP) model could also slowly make a comeback.
India Infrastructure Research compiled an indicative list of upcoming projects at the national level. Overall, 244 projects valued at over Rs 4 trillion are in the pipeline. Going forward, the targets for 2016-17 are ambitious. The government aims to award 25,000 km and construct 15,000 km of roads during the year. Overall, the national highway segment will offer project opportunities worth Rs 1.5 trillion in the next year. The National Highways Authority of India (NHAI) plans to award projects in a robust mix of EPC, build-operate-transfer (BOT) and HAM modes. Over 8,300 km of roads have been identified for development in the north-eastern region by 2022, at an investment of at least Rs 864 billion.
At the state level, EPC opportunities look promising with Uttar Pradesh, Maharashtra and Bihar remodelling big projects on an EPC basis instead of through PPPs. New opportunities have also been showcased by states such as Telangana, Chhattisgarh, West Bengal and Odisha. Overall, the state governments will spend over Rs 7.4 trillion for the development of roads and bridges, which are expected to add a length of around 35,000 km.
Power generation capacity along with the associated transmission and distribution network has increased manyfold over the years. The availability of funds plays a crucial role in meeting the capacity addition requirement.
According to the National Electricity Plan, 2016, power generation projects will witness a total capacity addition of 72,495 MW during the period 2017-22. Of this, 50,025 MW capacity will be added in coal- and lignite-based power stations, 4,340 MW in gas-based power stations, 15,330 MW in hydro generation and 2,800 MW in nuclear generation. Besides this, there has been a big push by the government for setting up renewable power generation capacity of 175,000 MW by the year 2022, of which 115,326 MW is expected to be set up during 2017-22 (59,674 MW has already been set up).
Based on the likely capacity addition for the period 2017-22, as well as year-wise expenditure phasing in the same period for advance action on projects coming up during 2022-27, the total fund requirement is estimated to be Rs 10.33 trillion. The figure comprises Rs 8.59 trillion for conventional power generation (72,495 MW) and renewable energy addition (115,326 MW), as well as Rs 1.74 trillion for the advance action plan for 2022-27.
Typically, construction works account for 65-70 per cent of the total project cost of a hydropower project. The construction component in thermal power projects accounts for about 40 per cent of the total project cost, while that in nuclear power plants is about 20 per cent. In contrast, renewable energy projects offer relatively meagre construction opportunities.
In terms of the pipeline of projects considered, construction opportunities to the tune of Rs 2,453.15 billion will be on offer in the power sector till 2022. Of this, opportunities worth Rs 1,400.7 billion will be in the thermal segment, Rs 996.45 billion will be offered by hydro projects, and the remaining Rs 56 billion worth of opportunities will be in the nuclear power segment.
According to India Infrastructure Research, projects worth Rs 356.91 billion related to the construction of berths and container terminals are on the anvil at existing ports. Of these, projects worth Rs 74.75 billion are at the bidding stage, while projects worth Rs 249.94 billion have been announced. Type-wise, brownfield projects entail an investment of around Rs 197.7 billion in states such as Tamil Nadu, Kerala, Odisha and Gujarat.
Sagarmala, the flagship programme of the Ministry of Shipping, is expected to provide an impetus to the development of three major ports – at Vadhavan, Maharashtra; Sagar, West Bengal; and Colachel, Tamil Nadu. The Sagar port project involves the development of a deep-sea port at an investment of Rs 120 billion. In October 2016, the central government approved a grant of Rs 5.15 billion to make the project financially viable. Vadhavan port, entailing an investment of Rs 92.97 billion for Phase I, will be able to handle 40-60 million tonnes (mt) of cargo every year. The project will be developed by a joint venture of the Maharashtra Maritime Board and the Jawaharlal Nehru Port Trust. The Colachel port project involves an investment of Rs 275.7 billion and will be implemented on a PPP basis. The Union cabinet gave in-principle approval for setting up a major port at Colachel in July 2016. In addition, new port projects, targeted to add over 370 mt of capacity, worth at least Rs 779 billion are coming up across various states.
Construction accounts for nearly 65 per cent of the total project cost (rough estimate) of a port project, while the remaining comprises electrical and mechanical costs. The actual cost, however, depends on several factors, including the type of cargo facility (brownfield or greenfield), project scope, location, etc. Assuming a construction component of 65 per cent, India Infrastructure Research has estimated a construction opportunity of Rs 738.66 billion at existing and new ports by 2022.
Indian Railways (IR) aims to invest Rs 8.56 trillion in new tracks, faster trains and station redevelopment by 2020 and, therefore, plans to increase debt to help fund this unprecedented modernisation plan. To meet this objective, around Rs 2.5 trillion ($37 billion) of debt is required till 2020. IR has prepared a prioritisation plan where the focus is on longer loops, line doubling and electrification projects. Doubling projects on high-density routes are likely to get priority. The easing of foreign direct investment norms permitting overseas investments in high speed rail (HSR) development is a good sign for the sector.
Some big-ticket projects such as the dedicated freight corridor (DFC), the Mumbai-Ahmedabad HSR, semi-HSR projects, and station redevelopment and modernisation have been undertaken to transform the railways sector. With an investment of over Rs 800 billion, the DFC project is one of the biggest ongoing infrastructure projects in the country.
Another focus area for IR is the development of HSR projects. The eight proposed HSR corridors of 4,215 km length translate into a financing requirement of over Rs 421 billion. The first HSR in the country will run on the Mumbai-Ahmedabad section and will involve an investment of Rs 980 billion. Recently, in December 2016, the Japan International Cooperation Agency inked a tripartite consultancy pact with the Ministry of Railways (MoR) and the National High Speed Rail Corporation of India for the project. Besides, nine corridors have been identified for the development of semi-HSR corridors in a phased manner involving the introduction of express trains running at 160 kmph. Additional expenditure will be incurred towards increasing speeds on select existing routes.
Besides this, IR’s station redevelopment and modernisation plan is likely to create huge construction opportunities. In July 2015, the central government approved IR’s proposal to offer A-1 and A category stations (407 stations) for redevelopment. An expenditure of Rs 1 trillion has been envisaged by IR for station redevelopment and logistics parks development by 2021-22. A $5 billion fund for the redevelopment of railway stations called the Railways of India Development Fund has been proposed by the MoR. Of this, the MoR will seek $500 million from the World Bank, $1 billion from the Ministry of Finance and the remaining from pension and sovereign funds. Japan has evinced interest in funding station redevelopment projects.
In the aviation sector, the National Civil Aviation Policy, 2016 has been released and air traffic is once again on a growth path. India is projected to become the third largest aviation market by 2020, behind only China and the US. Although most metro airports do not have current expansion plans, there is abundant opportunity in greenfield and existing Airports Authority of India (AAI) airports.
According to India Infrastructure Research, there are 22 key airport projects in the pipeline. Of these, eight projects are likely to add a capacity of about 150 million passengers per annum (mppa). (The planned capacity addition figures of the other 14 are not available.)
Of the 22 projects in the pipeline, 18 have an investment requirement of at least Rs 547 billion (the cost of four projects is not available). Of this Rs 547 billion, some portion is expected to be mobilised through AAI funds, as it plans to invest about Rs 83 billion in the next three fiscal years to carry out brownfield and greenfield works.
Type-wise, over 62 mppa of capacity is likely to be added through eight brownfield projects, followed by over 87 mppa through the development of new airports.
With regard to project status, most of the projects have been announced. Another three are under bidding (such as Navi Mumbai airport), while the Mopa airport project has recently been awarded to GMR. (It has been considered as being in the pipeline for the purpose of this analysis despite being awarded because sub-contracting opportunities still exist.)
State-wise, Andhra Pradesh and Maharashtra both have three upcoming projects, followed by two in Tamil Nadu. Other states that will witness airport development works are Gujarat, Karnataka, Madhya Pradesh, Punjab, Nagaland, Odisha, Telangana and Goa.
On average, the share of construction in the total cost of an airport project pertaining to terminal expansion and construction is about 66 per cent; the construction share in works like aprons, runways, taxiways and allied works is 90 per cent; and in new air traffic control towers it is 45 per cent. Given these assumptions, the
airport sector represents a construction opportunity of Rs 361.02 billion. It is difficult to ascertain the construction opportunity individually for brownfield and greenfield projects since AAI has laid out its capex plan based on the state of infrastructure only in cities where it has projects.
Civil construction has a huge share in the total cost of urban transport projects, especially metro and monorail projects. As cities increasingly come up with decongestion plans, the urban transport sector will continue to offer a lot of opportunity.
As per India Infrastructure Research, based on investments entailed by projects that are coming up (yet to be awarded) between 2017 and 2022, investments worth Rs 3.63 trillion are in the pipeline for this sector. About 48 metro/light/mono rail projects are currently in the pipeline. These include greenfield projects as well as extensions to currently operational networks and cover a total length of about 1,828 km. Of these, the maximum investment will be in the development of 37 metro rail projects. Most of the investment in these projects is likely to be mobilised by 2020-21.
Of the total investment requirement of Rs 3.63 trillion, over half (about Rs 2 trillion) will be for greenfield urban transport projects, while the remaining will be invested in the expansion of existing metro/light/mono rail projects by 2022.
The construction component of a metro/ mono rail project based on the civil engineering works required accounts for about 50 per cent of the total project cost. Based on this estimate and the robust project pipeline, India Infrastructure Research has estimated that the sector will provide a construction opportunity of about Rs 1.82 trillion by 2022.
Water supply and waste management
The water supply sector continues to receive significant central support in the form of appropriate policies, budgetary support as well as new programmes and schemes. At the central level, programmes such as the Atal Mission for Rejuvenation and Urban Transformation, the Swachh Bharat Abhiyan and the Smart Cities Mission have been launched. Besides, state governments and local bodies are undertaking a number of water supply and sewerage projects to improve service delivery. These projects are expected to give a push to construction activities in the sector.
On the basis of projects tracked by India Infrastructure Research, it is estimated that an investment of over Rs 540 billion is expected in 96 water supply and sanitation projects. Overall, projects in the pipeline are expected to create more than 5,200 million litres per day (mld) of additional treatment capacity. Most of the opportunity exists in the 86 greenfield projects. In the waste management segment, 10 projects have been announced entailing an investment of around Rs 23.25 billion. These projects are coming up in states such as Gujarat, Andhra Pradesh, Maharashtra, Bihar and Rajasthan, among others.
Drinking water supply and wastewater treatment projects have a construction component of 66 per cent. As per India Infrastructure Research, the water supply and waste management segments together will offer a construction opportunity of around Rs 371.74 billion by 2022.
In the next few years, prospects appear to be good for developers, contractors and technology providers. However, issues that restrict private participation and delay project implementation need to be addressed to maintain growth momentum in the construction sector.