Firms jostle in crazy world of Indian construction

Foreign companies splash the cash in bid for slice of India’s building boom
Firms jostle in crazy world of Indian construction
India hopes that half its targeted $1 trillion in infrastructure spending over five years is privately built
By Reuters
Wed 21 Sep 2011 02:55 PM

When DP World was vying to build a fourth container terminal
at Mumbai's main port this year, the Dubai-owned giant made what it thought was
a solid bid, proposing to share one-fifth of the terminal's income with the

Then a rival came along with a bid that beat all-comers,
offering to hand over 51 percent of the port's takings to New Delhi to secure
the project estimated to cost Rs67bn ($1.4bn).

Such generous terms are part of an emerging pattern of
companies making ambitious - some say unrealistic - bids in a race to cash in
on a massive push by Prime Minister Manmohan Singh's government to lure private
funding into infrastructure.

"The bid competitiveness is increasing to the extent
that the projects will become unviable," said Devang Mankodi, finance
director for South Asia at DP World.

"There is a lot of hype about India's growth story and
probably that is pushing some of the entrepreneurs to bid aggressively,"
he said. "No one wants to miss the bus."

PSA International, the Singapore state company that is the
preferred bidder for the Mumbai port deal, declined comment.

While India hopes that half its targeted $1 trillion in
infrastructure spending over five years is privately built, attractive projects
are scarce, making for fierce bidding.

That means the government may get an attractive deal in the
near-term, but it puts heavy pressure on companies and poses a longer term risk
if such projects are delayed or derailed due to over-optimistic assumptions on
costs or revenue.

Winning bids can sometimes be ten times the second place
offer, said S Nandakumar, a sector specialist at Fitch Ratings. Some projects
attract dozens of bids.

Such aggression has prompted major Indian firms such as
Reliance Infrastructure , owned by tycoon Anil Ambani, to focus on bigger
projects such as expressways.

"In small projects the competition intensity is
completely crazy," said Lalit Jalan, chief executive of Reliance.

"So we will focus on the large projects where we will
have fewer and more rational competitors," said Jalan, whose company built
a slick high-speed rail link to Delhi airport, the first of its kind in India.

Strapped for cash, New Delhi is pushing a model known as
build-operate-transfer (BOT). Firms bid to build a road or a metro and operate
it for a fixed period, collecting toll or ticket fares before handing it over
to the government.

To win, bidders compete to maximise the government's share
of revenue or minimise the contribution New Delhi must cough up to ensure
projects are viable.

"Today you have four or five players who are
aggressively fighting for a project. So basically they have no choice but to
try and increase the financial revenue share... as high as they can to win the
project," DP's Mankodi said.

"The risk associated with that is that once the long
term sustainability of the project is being tested, you will have issues,"
he said.

The risk of that happening hasn't deterred a slew of
companies pitching for infrastructure projects, however.

Article continues on
next page…

GMR Infrastructure, which built Delhi's swanky airport and
will soon build India's biggest highway, for example, bid on 25 projects last
year and won exactly one, according to a spokesman.

"Earlier we were looking at around 6-10 people getting
qualified for a bid. Now around 40 normally get qualified," the spokesman

Newcomers to the BOT model are creating problems, said
Shashank Shekhar, vice president for business development at KMC Constructions.

"Novice players means very new guys who don't have
experience of BOT, they are getting into the BOT, which is actually spoiling
the market today," he said.

Builders of roads, power plants and other big projects are
bidding in part because of optimism over the sheer demand in an economy growing
at roughly 8 percent a year with a severe infrastructure deficit.

New Delhi expects an annual average of $100bn of private
investment in infrastructure between 2012 and 2017, although the government has
consistently missed its targets for both funding and construction.

A slump in India's real estate sector and a drying up of
work in parts of the Middle East amid unrest in several countries, means Indian
builders are turning to domestic infrastructure.

A dearth of attractive projects is another factor. The
fallout from a spate of corruption scandals, red tape and land acquisition
hassles have slowed the award of bids and subsequent construction work.

In roads, for example, India managed to build about 5kms a
day in the last fiscal year, far short of New Delhi's target of 20 kms a day.

The Indian government, which unlike China is not flush with
government funds to spend on big projects, welcomes the competition.

For its part, China has much larger state resources and a
much better record of execution on infrastructure projects, although now
Beijing appears to face a different sort of headache.

The state has accumulated a mountain of bad loans for
infrastructure projects - part of a stimulus package during the economic
slowdown - leaving a clutch of redundant works.

"We want an aggressive bidding climate," Montek
Singh Ahluwalia, a top adviser to the government, said. "It's the job of
the private sector to make intelligent bids."

Some builders have called on the government to shut out bids
that look outlandish and end a mentality in New Delhi that they say is more
keen on getting things done cheaply than done well.

"We need to move out of the syndrome that the cheapest
is the best. It's rarely the best," Shahzad Nasim, Singapore-based global
CEO of the engineering firm Meinhardt said.

For all the latest construction news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.

Subscribe to our Newsletter

Subscribe to Arabian Business' newsletter to receive the latest breaking news and business stories in Dubai,the UAE and the GCC straight to your inbox.