Demand from Infrastructure

Robust project pipeline offers opportunities to construction sector

Time and again the government has reiterated its focus on infrastructure development. The Rs 3.6 trillion budget allocation to the sector for 2017-18 as compared to Rs 2.2 trillion in 2015-16 is a testament to this fact. This bodes well for construction players, as investment in infrastructure will open up fresh business opportunities. Roads, railways, power, ports and airports could be key growth drivers of the construction sector.

Based on the construction intensity and project pipeline of each sector, India Infrastructure Research has estimated the construction opportunities offered by the roads, ports, railways, aviation, power, urban transport, and water supply and sanitation sectors.

Roads and bridges

The government has placed an increasing thrust on road development. Big-ticket government programmes such as the Bharatmala Pariyojana, Setu Bharatam, the Chardham Mahamarg Vikas Pariyojana and Sagarmala offer substantial opportunities for consultants, contractors, and technology and equipment providers in the near to medium term.

The road sector will offer a construction opportunity of about Rs 5.77 trillion. According to research, 831 projects spanning a length of 67,446 km are in the pipeline (announced and under bidding) and will entail a total investment of Rs 9.16 trillion.

Further, the uptake of engineering, procurement and construction (EPC) projects is likely to increase. The build-operate-transfer (BOT) model is yet to make a full-fledged comeback. Models such as toll-operate-transfer (TOT) and the hybrid annuity model (HAM) have attracted substantial interest and are expected to break the execution logjam the sector has been facing. Under the first TOT bundle, nine operational highway projects worth nearly Rs 62.5 billion have been put on the block – three projects in Gujarat spanning around 240 km and six projects in Andhra Pradesh spanning 442 km. At the state level, states such as Uttar Pradesh, Maharashtra, Madhya Pradesh, Bihar, Rajasthan, Andhra Pradesh, Telangana, Jharkhand and West Bengal are expected to provide significant opportunity to road developers and contractors.

Also, the long-stuck National Highways Development Programme, Phase VI, reported substantial activity in the past two years with the award of a total of eight contracts under the Eastern Peripheral Expressway and the Delhi-Meerut Expressway. Further, the pace of award of national highway projects has also picked up. Fund flow to the sector has risen continuously over the past few years. There is an increasing focus on road construction in the north-eastern region as well. The government has set a total completion target of 15,000 km during 2017-18 and the sector is on a gradual path towards revival.

Following the success of INAM-Pro, an online portal designed by National Highways and Infrastructure Development Corporation Limited as a common platform for bringing cement buyers and sellers together, the government launched INAM-Pro+ in June 2017. The upgraded portal includes all construction materials and machinery, and services such as the lease of new or used machinery and purchase of materials such as cement, steel, stone aggregates, concrete, bricks, wood, etc. In addition, the Ministry of Road Transport and Highways (MoRTH) plans to implement a Value Engineering Programme for promoting new technologies, materials and equipment in highway projects executed either under the public-private partnership (PPP) or the public funding mode. The objective is to reduce construction costs, enhance the speed of construction, increase asset durability and improve aesthetics and safety.

Ports

In the port sector, projects worth Rs 1.33 trillion are in the pipeline. These projects are expected to add a capacity of about 299.4 million tonnes per annum. Construction accounts for nearly 65 per cent of the total project cost, while the remaining comprises electrical and mechanical costs. The actual cost of a project, however, will depend on several factors, including the type of cargo facility (brownfield or greenfield), project scope, location, etc. Based on the construction cost component of 65 per cent, the port sector offers a construction opportunity of Rs 863.41 billion (till 2024-25).

The long-term outlook for the sector remains positive, backed by a series of government initiatives taken in the recent past. Cargo traffic and capacity is expected to increase to 2,500 million tonnes (mt) and 3,500 mt, respectively, by 2025. Besides, the overall exim traffic is expected to grow, although at a modest rate with slight movement in global trade projections.

The recent policy initiatives – giving more autonomy to port trust boards, revising the model concession agreement, bringing some clarity on the tariff front, promoting coastal shipping and inland water transport, increasing the ease of doing business, setting up dedicated special purpose vehicles for last-mile connectivity projects, etc. – are expected to revive investor interest and speed up the pace of project execution. Further, the launch of the Sagarmala project has brought optimism in the maritime sector as well.

Railways

India’s railway sector offers a lucrative pipeline of 39 projects, entailing a total investment of more than Rs 3.19 trillion. These projects offer a construction opportunity of Rs 2.4 trillion based on the assumption of construction intensity being 78 per cent of the total cost.

Indian Railways (IR) plans to undertake investment for network decongestion and expansion, safety, rolling stock, logistics parks and station redevelopment works, which will primarily be met through gross budgetary support and debt. At the same time, institutional financing, PPPs, state joint ventures, internal generation and rolling stock lease will also aid IR in raising funds.

One of the most ambitious projects of IR, the dedicated freight corridor (DFC) is being developed along the Golden Quadrilateral to link the four metropolitan cities of Delhi, Mumbai, Chennai and Kolkata and the two diagonals of the quadrilateral they form (Delhi-Chennai and Mumbai-Kolkata). A cumulative expenditure of Rs 316.65 billion has been incurred on the project till 2016-17. So far, 94 per cent of the total tenders involving a total investment of Rs 49.04 billion have been awarded.

The Expert Group on Railways has recommended the modernisation of 19,000 km of existing tracks, strengthening of 11,250 bridges (to sustain higher axle loads at higher speeds) and the elimination of all level crossings. Further, over 30,000 km of routes will be constructed on double/multiple lines, 33,000 km will be electrified and 25,000 km of new lines will be added to the network by 2019-20.

There will also be increasing focus on station redevelopment, augmenting rolling stock and introducing higher speed coaches. Meanwhile, the overall proposed length of 4,215 km of eight high speed rail corridors will translate into a financing requirement of over Rs 421 billion. Besides, signalling and telecommunication projects involving an investment of over Rs 117 billion are also in the pipeline. Improving passenger amenities has also been brought to the fore with several initiatives regarding ticketing, the provision of escalators and lifts, e-catering services, security systems, etc., on the anvil.

Airports

There are 65 airport development projects in the pipeline which present an investment requirement of at least Rs 887.72 billion. Of these, there are 36 greenfield airport projects entailing an investment of Rs 758.68 billion. Besides, there are 34 terminal projects to be built at an estimated cost of Rs 543.73 billion, 17 runway construction, and three maintenance, repair and overhaul (MRO) projects at an expected cost of Rs 51.12 billion and Rs 1.5 billion respectively. In addition, five other aviation projects are in the pipeline entailing an investment of Rs 12.52 billion.

On an average, the construction share of the total cost in greenfield airport and terminal construction and expansion projects is about 66 per cent; the construction share in works like aprons, runways, taxiways, MRO facilities and allied works is 90 per cent; and in new air traffic control towers it is 45 per cent. Given assumptions along these lines, the airport sector represents a construction opportunity of Rs 918.22 billion.

There has been double-digit growth in the Indian aviation sector and the momentum is expected to get stronger in the coming years, driven by active government participation, rising economic activity and tourism, changing demographics and growth in business and leisure travel. The expected growth needs to be supported by the augmentation of airport capacity since a number of passenger terminals/airports are overutilised or are nearing full utilisation, and landholdings around airports remain largely untapped.

The various areas of opportunity in the sector include the MRO segment, city-side development at both metro and non-metro airports, general aviation, green energy, new technologies to improve airside capacity, communication, navigation, surveillance infrastructure, and passenger facilitation, among others.

From a policy perspective, the introduction of the National Civil Aviation Policy (NCAP), 2016, has brought optimism and lent new direction to the sector. Although the real impact of the NCAP will require two to three years to show, the introduction of the Regional Connectivity Scheme shows swift action on the part of the government.

Power

India’s power sector offers a lucrative pipeline of 186 thermal power projects (TPPs), 59 large hydropower projects (HPPs) and 27 transmission and distribution (T&D) projects. The announced TPPs will result in a capacity addition of 254,957 MW while the large HPPs will enhance power generation capacity by 30,020 MW. Based on the likely capacity addition as mentioned, the total fund requirement for the power sector is estimated to be Rs 16.69 trillion. The figure comprises a fund requirement of Rs 13.78 trillion for the announced TPPs, Rs 2.66 trillion for large HPPs and Rs 29 billion for T&D projects.

Typically, construction works account for 65-70 per cent of the total project cost of a HPP while the construction component in TPPs accounts for about 40 per cent of the total project cost. In contrast, T&D projects offer relatively meagre construction opportunities.

According to the pipeline of projects considered, construction opportunities to the tune of Rs 7,382.18 billion will be on offer in the power sector. Of this, opportunities worth Rs 5,513.88 billion will be in the thermal segment and the remaining Rs 1,868.3 billion worth of opportunities exist in large HPPs.

In order to fulfil the target of “Power for All” by March 2019, the central government launched the Pradhan Mantri Sahaj Bijli Har Ghar Yojana, also known as “Saubhagya”. The scheme has the mandate to provide electricity connections to over 30 million families in rural and urban areas by December 2018. With a total outlay of Rs 163.2 billion, Saubhagya essentially aims for last-mile connectivity to willing households as opposed to connecting only villages. Of the total outlay proposed under the scheme, a large part of the expenditure will be earmarked for meters and last-mile connectivity. Also, wherever transmission lines do not go up to the households, there will be some expenditure on distribution poles, lines and transformers. Thus, T&D companies in the transformer, cable, insulator, transmission line, substation and metering businesses are expected to benefit significantly from the contracts awarded under the scheme.

Although the central government’s policy focus is skewed towards renewables at present, thermal power, particularly coal based, will be required to meet baseload demand. Therefore, the outlook for thermal power is still strong, especially in the near to medium term. With the increase in renewable capacity addition, the requirement of hydro plants to balance the grid will increase even more. Therefore, the strong HPP pipeline augurs well to meet this challenge.

Urban transport

Civil construction forms a major portion of the total cost of urban transport projects, especially metro rail and monorail projects. Over the past couple of years, there has also been an unprecedented rise in other modes of urban transportation such as skywalks and hyperloop systems.

The 48 upcoming projects in the sector will entail investments worth Rs 2.15 trillion. These projects include metro rail projects spanning 578.49 km, personal rapid transit projects spanning 116.7 km, and monorail and light rail projects spanning 58.48 km and 16.2 km respectively. In addition, transit systems such as trams, hyperloops and skyways spanning 286.95 km are also in the pipeline.

The construction component of a metro rail/monorail project accounts for about 50 per cent of the total project cost. Based on this estimate and the robust project pipeline, the segment provides a construction opportunity of about Rs 1.08 trillion.

Water supply and sanitation

An investment of over Rs 690.89 billion is expected in the 96 upcoming water supply and sanitation projects. These projects have a construction component of 62.5 per cent. Therefore, the water supply and sanitation segment offers a construction opportunity of around Rs 431.81 billion.

With regard to the irrigation sector, 63 projects are in the pipeline, of which 41 have an irrigation potential of 8.71 million hectares. These 41 projects entail an investment requirement of Rs 614.59 billion. The construction component for irrigation projects is 75 per cent, which implies that this sector offers construction opportunity to the tune of Rs 460.94 billion.

Overall, the water supply and irrigation sectors have a positive outlook and offer huge opportunities for construction players. The expansion and uptake of various water supply and sanitation projects will offer multiple business opportunities across different segments – contractors, consultants and equipment suppliers, among others. Given government schemes such as the Pradhan Mantri Krishi Sinchai Yojana and its motto of “Har Khet ko Paani” and “More Crop per Drop”, the policy thrust is likely to enable the continued growth of the irrigation sector.

Conclusion

The line-up of infrastructure projects is a key positive for the construction sector. Sectors such as railways, roads and power are expected to offer significant opportunities in the coming years. Owing to the strong pipeline, order inflows are expected to gain momentum. However, the pace of project execution will determine the actual construction activity on the ground.

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