Supreme Infrastructure India Ltd, a leading player in the infrastructure space, has been focusing on roads and bridges, power, railways and civil construction and is now adding high-margin water projects to its project portfolio. Vikas B. Sharma, in an email interaction with Sandeep Menezes, discusses the state of infrastructure development in India.
How does Supreme intend to achieve its goal of becoming a complete infrastructure solution provider?
In the last six years Supreme has grown from a road specialist to a multi-sector operator. Of its fresh forays, its focus is now on high margin projects in water. It is expecting some headway in the water space in its core area of geography i.e. Maharashtra. Initially, it would enter into water projects with a partner. This would help it acquire prequalification. This would also help it reduce dependence on its core segments of roads and buildings. It also plans to diversify by expanding to the power segment by collaborating with companies at the international level.
Until 2011-12, Supreme’s major revenue contributors were roads, buildings and power distribution. Going forward, you seem to be increasingly focused on water and marine infrastructure.
India is a country embraced by water on three sides. Unlike similar geographies around the world, the Indian coastline remains untapped and teeming with opportunity. This will generate high returns, employment and wealth opportunities and create a new lifestyle around the coasts, putting India on the global coastline culture map. Sensing this large potential, we have decided to dedicate ourselves to developing marine infrastructure.
Supreme has already acquired a major stake in Rudranee Infrastructure. Rudranee has a strong management and a qualified team of engineers. This helps Supreme broaden its exposure to water by using the prequalification and expertise of Rudranee.
The government recently paved the way for setting up the Cabinet Committee on Investment to fast-track large projects entailing investment of over Rs. 1,000 crore. How do you view this in the overall infrastructure scenario?
The government has already proposed to set up a National Investment Board to monitor and advise ministries on expediting projects entailing investments in excess of 1,000 crore. NIB would be a Cabinet Committee on Investment, to be chaired by the Prime Minister. There are over 100 projects, each involving investment of 1,000 crore or more, that have been delayed for various reasons. The main purpose is to oversee and monitor large projects, which will give a fillip to India’s economic growth.
Our problem is not conceptualising projects. Our problem lies in getting numerous clearances and getting the project off the ground within a reasonable time. Similar arrangements are already in place in countries like Japan, Indonesia, Malaysia and Thailand. The NIB will monitor projects, advice ministries and help ministries concerned take a decision. It will really help to fast-track the projects.
How have high interest rates and difficult financing affected infrastructure development companies?
The inherent nature of the infrastructure business is crucially linked to the policy framework. Infrastructure companies are largely dependent on the government for timely execution, and long delays have a bearing on project viability given the high cost of debt. “Interest rates are currently over 14 per cent making it difficult to access debt. To remain competitive, interest rates should fall below 10 per cent.”
The uncertain business environment, resulting in a sharp fall in share prices, has made it difficult for companies to raise equity.
There is a need to improve the investment climate by speeding up land acquisitions and evolving a streamlined process for environmental clearances. “Once there is greater push to infrastructure with policy clarity and faster clearances, investors will start coming in and valuations will pickup.”The Planning Commission has set an investment target of $1 trillion for infrastructure during the 12th Plan (2012-2017) but it is unlikely to be met unless the government addresses the concerns of the sector. “To lift valuations and make fund raising easy for infrastructure companies it is important that steps be taken by the government to ensure speedy implementation on some of the issues hurting the sector.”
The most challenging element in infrastructure is alignment of the four government departments, namely Revenue (land), Forest, Environment and Funding (for government funded projects). Do you have any suggestions to improve the scenario?
Revenue (land), Forest, Environment and Funding for some government projects are among some of the main challenges being faced by the industry. The project award cycle is getting delayed due to environmental and land acquisition issues.
All these factors have impacted the order pipeline of the sector. We face a lot of problems in getting numerous clearances. Some board should be formed which monitor projects, advice ministries and help ministries concerned take a decision. It will really improve the current situation.
Aggressive bidding in highway contracts has often led to projects becoming economically unviable and going for a toss even for a contractor but he does so as he has a capex.
It’s true that L1 kills quality as sometimes companies get over aggressive or bid too low just to get into a contract. Sometimes entire viability of a project goes for a toss even for a contractor but he does so as he has a capex. Also, at times to earn out of such competitive rates, compromise in quality is observed, or some malpractices to have a better situation in the contract. But at the same time this is the only legitimate and universal way of bidding for a project. A strong control mechanism at the government front can improve the scenario.
About 50 per cent of the 12th Plan’s estimated $1 trillion investment in infrastructure development is expected through private participation. Do you think this is achievable given that only 38 per cent private investment occurred in 11th Plan?
Government institutions and international organisations like development banks play key roles in mitigating risks and overcoming market failures that often stand in the way of badly needed investments. Private sector participation is usually critical for supplying the funding, technical expertise and implementation capabilities that are necessary for undertaking complex infrastructure development projects.
Government entities, often at the state or city level, typically act as project sponsors and bid out contracts to private companies. The capacity and conduct of government sponsors can have a major impact on the initiation and delivery of infrastructure development projects. Governments need to be able to efficiently and competently identify and execute deals with private partners and manage projects over the course of their lifecycles.
India’s ambitious 12th Five-Year Plan (2012-2017) calls for $1 trillion in infrastructure investment, with the goal of funding half of that hefty sum through private sector involvement in public-private partnerships. As in other BRIC countries, the scope of India’s infrastructure challenges correspond to the country’s expansive geography and ample development needs. At 3.14 million km, India has the second largest road system in the world behind the US. In 2009, India needed to build 20 km of road per day at a cost of $70 billion over three years to ensure future economic growth. Described as a “lifeline to the nation,” Indian Railways operates the world’s second longest railroad network and is the nation’s largest employer.
Among other measures, India’s infrastructure development plans call for:
- $42 billion in road-related infrastructure, including doubling the size of the country’s 70,000 km highway network;
- $67 billion in rail-related infrastructure to expand routes to ports and the country’s vast interior and improve shipping capabilities, among other objectives; and
- Upgrading infrastructure in Delhi and other cities to support the nation’s rapid urbanization.
The bidding and tendering process has improved but global infrastructure developers enjoy huge cost advantage here.
Global infrastructure developers after entering in India have definitely increased volumes of contracts. As a result, the same bidding and tendering process has improved. Since they have huge cost advantage because of fund cost available for them, it is almost 20 per cent of cost than available to us. So this is definitely a huge advantage in terms of FDI coming into India and there is a huge impact due to that.
FDI is a boon for our growth requirement. However, this will sustain only when operational hurdles of various government offices for project execution are overcome, especially bottlenecks of land acquisition, environmental and forest clearances etc.