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Role of Development Banks: INDIA’s ROAD CONSTRUCTION INDUSTRY

This report explores the role of development banks in India's road construction industry, highlighting the demand for road construction, resource constraints, critical issues, dispute resolution, and entry barriers affecting foreign contractors.

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Role of Development Banks: INDIA’s ROAD CONSTRUCTION INDUSTRY

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  1. Role of Development Banks:INDIA’s ROAD CONSTRUCTION INDUSTRY George Tharakan International Financial Institutions International Contractors’ Associations Meeting Washington, DC December 10, 2008

  2. India’s Road Building Program • India has embarked on a long overdue road infrastructure building program: • National Highway Development Program (NHDP – 50,000 km) • Prime Minister’s Rural Roads Program (PMGSY – 10,000 km) • State Road Programs (varies by State) • Five-year expenditure projection to 2012 is around US$85 billion • World Bank transport sector portfolio in India ~$5 billion • Construction industry is heavily over-stretched, contracts on hand equivalent to 10 years annual capacity • NHDP now relying primarily on Public-Private-Partnership model.

  3. Demand for Road Construction3 Growth Scenarios (2007-2015)

  4. Magnitude of Investments under 3 scenarios

  5. Indian Road Construction Industry (2004/5)

  6. Projected Resource Constraints • It is projected that annually the demand for road works is between 90 and 400 large contracts (>$25 million) and between 100 and 550 medium contracts ($10-$20million). • Contractors capable of medium to large contracts are around 50-60 including about 10-12 international road contractors presently active in India. • Human resource constraints are very restricting. Presently industry has around 110,000 skilled personnel, and intake (6000) just covers replacement needs. Additional 10,000 or so needed annually to accommodate growth. • It is estimated that delays and poor contract management practices are causing about 70 percent of existing contractor capacity to be lost in inefficiencies.

  7. Ranking of the Most Critical Issues The common problems/issues were: • Severe shortage of skilled staff and workers resulting in poor quality designs, poor resource scheduling and work planning (by contractors) and poor supervision. • Non-availability of encumbrance free land in large enough sections to allow start of meaningful construction work. • Poor contract management, lack of decision making, lack of contract enforcement and complete disregard for the dispute resolution mechanism by all contractual parties • Distortion in taxation and cumbersome operating procedures for doing business

  8. Dispute Resolution • Dispute Review Boards (DRB) are an accepted feature of road works contracts. • DRBs not functioning as intended, >50% of Decisions take more than 8 months i.e. far in excess of the mandated 8 weeks • Vast majority (79%) of DRB decisions are rejected, 44% by employer and 35% by contractor • However, DRB decisions have been validated by arbitration in 92% of cases and by the courts in 90% of the cases. • Outside of the DRB process, dispute resolution can be lengthy and costly. Arbitration typically takes 3 years, and court rulings take almost 9 years. • Arbitration Act has ambiguities concerning recovery of judgments in disputes involving international companies.

  9. Entry Barriers Affecting Foreign Contractors • Stringent qualification requirements with no provision for Indian subsidiary to use parent company experience. • Domestic preference clause restrictive – requires domestic partner to have controlling interest in joint venture. • State level interpretations of tax code vary and caution is advised. • Cumbersome visa and travel document procedures for international staff. • Absence of incentives for superior technology, efficient management systems, mismatch of technical specifications with international standards. • Poor law and order, governance and contract administration issues make it difficult for international contractors. • Delays in clearances from Pollution Control Boards for operating plant and equipment, and coordination for utility relocation.

  10. Summary and Conclusions • India’s road construction programs present a large market opportunity for the international road construction industry. • Large contracts of interest to international contractors over the next 5 years could total between US$3 and US$5 billion a year. • Competition is limited due to lack of domestic industry capacity. • While there are a number of obstacles and inefficiencies in the present conditions of the sector, contractors able to overcome these should find attractive opportunities. • PPP contracting modality would remove some of the barriers confronting international contractors – greater flexibility in design and engineering, ability to better coordinate with local bodies. • 5-10 year hump in demand best served by foreign contractors as a big expansion in domestic capacity would not be sustainable.

  11. Thank You email: gtharakan@worldbank.org web: www.worldbank.org/sartransport

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