Category Archives: Construction

Smart cities: Designed for growth

June 25 will be remembered as a red-letter day in the history of urban India as three mission programmes with a huge spend were launched, all backed by India’s dynamic Prime Minister Narendra Modi: Smart Cities, AMRUT and ‘Housing for All’. The depth of these programmes can be gauged from the detailing in the guidelines and the extent of the detailed planning of the conduct of their launch. After the PM set the tone by defining a smart city as one ‘where the administration thinks two steps ahead of the needs of its citizens’, he urged the assembled urban development state ministers, mayors and municipal commissioners from across India to aspire to leave behind a legacy by which their contribution to building India’s model urban programmes would be recognised. Union Minister for Urban Development Venkaiah Naidu conducted the workshop for two full days where good work done by municipalities was presented and lauded and guidelines to the three missions were explained.
In four months, states will receive proposals from their cities that want to qualify as projects. The states will then choose from among the selected cities from the list, and propose them as their entry to the Smart Cities Mission. It is likely that by March 2016, 20 cities will qualify for funding under the mission. These cities will receive Rs 200 crore in the first year and Rs 100 crore during the next four years. The cities will have to observe certain criteria, which include proposals for retrofitting with 500 acre or redevelopment with 50 acre or greenfield with 250 acre plus a pan-city smart solution initiative that has received the support of citizen groups. Further, they need to ensure that 10 per cent of power is sourced from renewables in case of greenfield development or redevelopment; 80 per cent of the buildings have to be energy-efficient; and 15 per cent of total housing provided needs to fall under affordable housing. The Urban Local Bodies (ULBs) have to provide financial statements for the past two years and demonstrate improvements as per the Swachh Bharat Mission and revenue generations from citizens through provision of services. All this is bound to gear ULBs up for accountability and good governance. As all procurements will take place through e-procurement measures, corruption will be minimised.
The Smart Cities Mission along with AMRUT, Housing for All, Digital India, Swachh Bharat and HRIDAY will see a total spend of Rs 4 lakh crore over the next five years. All these missions are integrated and interrelated. The essential change in these schemes over the past has been that the Centre has passed down the responsibilities of city improvement to the state. Introducing a challenge has added an element of competition. Once the ‘smarter’ states win funding for their cities, private sector money a.k.a. builders will flow in, leaving some in the lurch. Once money starts taking sides, city leaders will compete. This opens up opportunities for PPP as nearly 50 per cent of the money for the cities will have to be generated by attracting the interest of private developers. The Housing for All’ scheme will accelerate ‘in-situ’ slum redevelopment projects as it offers an incentive of Rs 1 lakh per 30 sq m flat built to developers. Housing loans of up to Rs 6 lakh for a 15-year period at an interest rate of only 6.5 per cent is being issued to economically weaker segments of society to acquire a home.
The affordable housing segment is likely to continue to be the only beacon of light for the debt-ridden realty sector. On a similar note, the roads sector has been green lit and the PM is likely to trigger a wave in July. Government expenditure is slated to rise with a major bump in September to come from the additional amount of Rs 70,000 crore set aside for infrastructure. Last month, this column had wished away the dark clouds of despair (‘Bure din gaye’). By September, we are likely to see the first crack of dawn of ‘Acche din’!

Radical solution to land acquisition bill impasse

Introduction

India has a total land area of 32,87,590 sq km, which is 2.4 per cent of the world’s surface area, making it the seventh largest country in the world. Forty-six per cent of the land is under agriculture and 50 per cent is inhospitable; 2 per cent of the land is urban and 1 per cent under industry. The Government has the largest land bank under its supervision and ownership. At present, Coal India has a land bank of around 7 lakh acre whereas the Railways has around 47,336 hectare, making them the owners of the largest land bank available at this point of time, followed by major ports at 2.64 lakh acre and PSUs at 2.5 lakh acre.

Putting land to work

Land needs to be made productive to add to national wealth. Historically, too, land has been offered for development of industry. The Bombay Spinning and Weaving Company was the first cotton mill to be set up in Tardeo, Mumbai, in 1856. A boom in the textile industry followed, with 10 cotton mills set up in Mumbai by 1865, and then a total of 136 mills being set up by 1900. The textile industry was offered added government incentives in the form of long-term leases (some of 999 years), as mills stimulated economic growth and employment. These mills were owned by former traders like the Tatas, Petits, Wadias, Currimbhoys, Thakerseys, Sassoons, Khataus, Goculdas and Greaves. Most of the mill workers came from areas around Mumbai; the Kolis were particularly represented. The mill owners housed their workers in chawls built in the areas of Tardeo, Byculla, Mazgaon, Reay Road, Lalbaug, Parel, Naigaum, Sewri, Worli and Prabhadevi. These areas gradually came to be known collectively as Girangaon (literally ‘the village of mills’).

Land was put to use once it was handed over on lease. The investors sought to make gains though the productive use of land. It did not matter that the land was not in their ownership as long as they had the right to develop revenues on it for a fixed period of time for rent. Although the rent was a paltry sum, it was reflective of the demands of the times. Even now countries like Ethiopia and Sudan offer land on very low rent to Indian entrepreneurs to help develop their economies. The cost of missed opportunity owing to loss of productivity of land can be mindboggling, especially in a country like India that is starved of infrastructure on all fronts.

Delays and derailment

To illustrate the sheer cost of delay in putting a project to work, let alone the cost of leaving land idle, here are some details: In December 2014, 127 out of 251 projects were delayed with respect to original schedule. The delay is in the range of one to 96 months with respect of projects relating to the railway, power, steel, road and petroleum sectors. Out of the 127 delayed projects, 32 projects have an overall delay in the range of one to 12 months, 25 projects in the range of 13 to 24 months, 37 projects n the range of 25 to 60 months, and 33 projects of 61 months and above.

The total original estimated cost of these 251 projects was Rs 788,629.01 crore and anticipated completion cost is likely to be Rs 970,972.78 crore, which reflects an overall cost overrun of Rs 1,82,343.77 crore (23.10 per cent of original cost). The expenditure incurred on these projects till December 2014 is Rs 411,545.86 crore, which is 42.40 per cent of the anticipated cost of the projects. Out of the 251 projects, three projects are ahead of schedule as per the original timeline, while 52 projects are on schedule and 127 projects are delayed. Brief reasons for time overruns as reported by various project implementing agencies are delay in land acquisition, forest clearance, delay in supply of equipment, fund constraints, geological surprises, equipment erection, geo-mining condition, shortage of labour, inadequate mobilisation by the contractor, contractual issue, ROU/ROW problems and law-and-order situation.

The railway sector has witnessed maximum project delays owing to land acquisition. Out of the 83 projects that have been reported, 21 projects are delayed. In the road sector, 23 out of 37 projects are delayed. Last year, delays in land acquisition and statutory approvals cost road projects heavily. Against the target of 6,300 km of road construction works under various schemes of the Ministry of Road Transport and Highways during the current year, only 3,038 km was constructed till January 31, 2015.

Non-issue for private sector

Private players like Nikhil Gandhi, GMR, GVK, Hiranandani, Lodha, Raheja etc have all successfully amassed land banks for their projects without raising a hue and cry. Even industrialists like Sajjan Jindal, Anil Agarwal, Anand Mahindra have all successfully bought large land parcels for their projects with no cause for delay. So land acquisition is only hurting big-ticket public projects where vested interests are either interested in derailing the success of the government or those who want to leverage this opportunity for their own selfish agenda.

Act now

The Land Acquisition Act has been constantly running into rough political weather every now and then. And if the Government caves into the demands of the opposition, many infrastructure projects (including smart cities, rural electrification programmes and industrial corridors, to list a few) will be stuck in limbo. However, the solution lies in turning the idea on its head. Land for such projects need not be bought but taken on a 99-year lease. Apart from the rent that would accrue to the landowner, some token compensation should be made such that the landowner can buy a piece of land elsewhere for agriculture activity and would also be given a share in the super-profits on the project. This solution can ensure that the capex for such projects is contained and that the landowner continues to get rent for subsistence, does not end up destroying his wealth and capital and can continue to be an agriculturist with another piece of land. ( Recently CIDCO, a state-run undertaking in Maharashtra, acquired 671 hectares of land owned by 1,200 villagers in ten villages of Navi Mumbai for the airport project. In lieu of the surrendered land, the Maharashtra government, in a unique compensation model, offered the owners developed land measuring 22.5 per cent of the acquired land, including 15.75 per cent of buildable plots, and 6.75 per cent development amenities, in Pushpak Nagar township which CIDCO is developing near the proposed airport ).

Renting land for infra projects is a viable and practical solution. It will help save capital by not requiring a large amount of capital to be locked up and saving time in purchase and the entire process of land acquisition, thereby fast-tracking projects ( As per recent estimates the capex for land alone for road projects is Rs 1,85,000 crore). Some industries already follow the model of leasing land instead of acquiring it. Oil and gas extraction usually follows the land-lease model. And renewable energy projects such as wind power, solar farms and bio-fuel projects often lease the land from owners instead of trying to acquire it, which could make the projects prohibitively expensive.

Leasing land can ease the pressure on demands for capital expenditure that does not add any wealth to the nation. True wealth to the nation is generated only when the land is put to productive use. Land on rent will result in accelerating the cycle of investment in projects by at least three to five years for each project and consequently accelerate the return on investment. This will also defuse the social upheaval caused by these injections of wealth in the lower economic strata of society while enhancing lives owing to a consistent flow of rental income. This debate on land acquisition is as unproductive as the land sitting idle with no investments to enable its productivity.

Earthquakes compound building penalties

As news of the disaster caused by the 7.9-Richter magnitude earthquake hit news channels, my focus shifted back to the vulnerability of our structures. India has been besieged by earthquakes every few years since 1991—before that, the notable one was in 1975. In recent times, the biggest one was the 9.1-magnitude quake near Sumatra islands that caused the tsunami in December 2004. India suffered quakes of 7.6 magnitude in Kashmir in 2005 and Gujarat in 2001. All, inevitably, caused heavy losses of life and investments.

Living on fault zones, we are prone to these hazards and yet don’t seem to have learnt much. Japan withstands earthquakes of 7-plus magnitude in a routine manner with not much suffering caused to its citizens. Countries like Japan, New Zealand and the US have detailed seismic code provisions. India too has a fairly good range of seismic codes covering a variety of structures, ranging from mud or low-strength masonry houses to modern buildings. However, the key to ensuring earthquake safety lies in a robust mechanism that enforces and implements these design code provisions in actual construction of structures.

As urban migration gains momentum, we are likely to add another equivalent of our existing urban population of around 400 million to our cities by 2050. The lives and investment at stake will be even higher—it’s time to stop tolerating abuse of building codes. Last year, the Ministry of Urban Development (MoUD), Finance Ministry and PMO approved, through an ordinance, the regularisation of 895 unauthorised colonies of Delhi benefitting 6 million people. The Delhi government had also suggested that regularisation of unauthorised colonies would bring in planned construction under existing building bylaws and other applicable rules that, in turn, would result in more orderly development of these colonies. This is all fine until disaster strikes and then the ‘house of cards’ crumbles. The government should be duty bound to bring the colonies so ‘regularised’ to adherence by ensuring they get retrofitted to a certain standard of construction quality. There is need for a diktat from the MoUD to all state governments that all such regularisations are done only after audit and a certificate of their stability of structure is issued by the municipal corporation concerned. Further, all such regularisations already completed should be subject to a structural audit immediately and then the regularisation should be kept on hold until compliance takes place.

Boss, no action on the ground!

While addressing a private gathering recently, Union Minister of Power Piyush Goyal referred to the common disdain and complaint heard in corners of corporate boardrooms about the slow pickup of the economy: “Boss, there is no action on the ground!”

He narrated that when the NDA set about seeking a tender for street lighting using LED lights in place of incandescent bulbs as LED lights consume only 7 w (against the 60-w consumption of incandescent bulbs), the lowest offer it received was Rs 315. According to the minister, the use of energy-efficient LED lights will slash electricity demand by 10,000 mw and lead to savings to the tune of Rs 12,500 crore. He claimed that the price per LED bulb has come down to Rs 81.93 over the last few bids compared to Rs 315 in February 2014 owing to the transparent bidding process. Shekhar Bajaj of Bajaj Electricals confirmed that 75 per cent of inputs for LED lights are imported to achieve such cost savings. Reputed local companies like Usha and Crompton Greaves are among those bidding and such large-scale orders also help the ‘Make in India’ theme of the Government, confirming that quality is not being compromised in the quest for a lower price. The minister then shrugged his shoulders, saying this ‘action’ will not ‘show on the ground’ immediately.

We all know that solutions such as these—including recovering the best price for natural resources like coal, which recently won a commitment of over Rs 2 lakh crore during transparent bidding for mines—will show results on the ground eventually. But for the short term, the business community is growing listless and opposition parties are working overtime raking up controversial issues to derail the development agenda.

However, in recent times SEBI, in consultation with the Reserve Bank of India, has relaxed norms for conversion of debt of distressed listed companies into equity by banks and other financial institutions, to help ease recovery in non-performing assets (NPAs). Though this cannot be the only solution, the bankruptcy laws announced by the FM during the Budget in combination with this can prove to be effective as then there would be a choice between converting into equity if the interest coverage ratio turns positive or liquidating the company. As on December 2014, total gross NPAs at banks had swelled to over 5 per cent of all advances and improving financial health is of prime concern, especially in the construction and infrastructure sector. Indeed, the FM needs to come up with a more dynamic approach to resolve the NPAs. The growth rate in bank lending had also plummeted to 8.41 per cent by December 31, 2014, as against 16.05 per cent in December 2013.

Not only are the current debt-stressed developers yet to get relief by exiting projects but the latest figures compiled by the Ministry of Finance in March 2015 indicate that 299 mega projects involving an outlay of Rs 18.13 lakh crore still remain stalled with the Project Management Group (PMG).This is quite disturbing as there seems to be no headway by the Government in resolving stalled projects. As on February 25, 504 projects worth Rs 25.38 lakh crore were reported with the PMG for resolution of pending issues. Everything hinges on the Government’s ability to resolve the stalled projects and gather momentum—that’s the only way ‘action can show on the ground’ soon enough.

Only a kickstarter

With a public spend of Rs 1.25 trillion, the budget spells out a coherent roadmap for growth & fiscal consolidation

Having proved without doubt that the Modi government was quite adept at enhancing the administrative and the executive quotient in the country, the union budget was an awaited event which needed to kickstart the economy by infusing public spending. An overall increase of Rs.70,000 crore in investment in infrastructure in fiscal year 2015-16 over the current year with an increase in the allocation for roads and the railways, by Rs 14,031 crore and Rs 10,050 crore respectively is definitely a trigger. The FM has further made provision for an infusion of Rs 80, 844 cr of additional CAPEX of the public sector units taking it to a total of Rs 3,17,889 crore. Considering that the cash rich PSUs would make this investment and inject adrenalin in the economy makes this a credible proposition. The recognition of the PPP proposition turning weak has brought in the wisdom of depending on public spending than private. He also announced the formation of an investment and infrastructure fund and tax-free bonds for raising funds for investment in rail, road and irrigation infrastructure. Proposal to set up 5 new Ultra Mega Power Projects, each of 4000 MWs in the plug-and-play mode with all clearances in place, is a reformed investment magnet and could draw Rs 1 lac crore, provided the distribution end is fixed. In housing for all by 2022, the plan is to build 2 crore houses in rural India and 4 crore in urban India. For roads, the vision is to complete 1,00,000 km currently under construction and additionally build another 1,00,000 km. The progress for DMIC corridors, especially the Ahmedabad-Dholera Investment Region in Gujarat, and the Shendra–Bidkin Industrial Park near Aurangabad, are now in a position to start work on basic infrastructure and have an outlay of Rs 1,200 crore.

The most transformational idea of the budget in line with PM Modi’s vision has been the 14th Finance Commission which has enhanced the share of states in central taxes to 42% from the current 32%  giving more funds in the hands of the states making them more accountable for enhancing the attractiveness of their state as an investment destination. Although there has been no direct mention of the progress on smart cities, this particular devolution of finances to state empowers the state to enhance the civic infrastructure for its cities and make them more attractive for its citizens, for tourists and business travellers. The public procurement bill, the dispute resolution bill and the introduction of a bankruptcy law are other pillars enhancing the attractiveness of the infrastructure sector amongst investors.

The FM has definitely utilized the budget opportunity to inject public spending, laid out a road map for infrastructure with targets for growth & means of finance. The budget is a good indicator of the intent but the devil lies in the execution. Businesses will await the multiplier effect of the public spending infusion. Considering each annual outlay and expenditure has been under 6% of GDP for infrastructure during each of the years from 2007-08 i.e. eleventh five year plan (except 2010-11 when it touched 8.4% of GDP), even if all financial projections were to come true we would not end up spending the required 10% of GDP on infrastructure in the twelfth five year plan which in itself is a dampener for GDP growth. So as a kickstarter this can be considered a beginning, but a very cautious one considering the mandate.

 

Don’t buy land for infrastructure, lease it

The Land Acquisition Act has been constantly running into rough political weather every now and then. And if the government caves into the loud opposition demands, many infrastructure projects (including smart cities, rural electrification programmes and industrial corridors, to list a few) will be stuck in limbo. However, the solution lies in turning the idea on its head. Land for such projects need not be bought but should be taken on a 99-year lease. Apart from the rent that would accrue to the land owner some token compensation should be made such that the land owner can buy a piece of land elsewhere for agriculture activity and he should also be given a share in the super-profits on the project to bring the land owner an upside. This solution can ensure that the capex for such projects is contained, the land owner continues to get rent for subsistence, he does not end up destroying his wealth and capital and he can continue to be an agriculturist with another piece of land. Renting land for infra projects is a viable and practical solution. It will help save capital by:

  1. not requiring the locking up of a large amount of capital
  2. saving time in purchase and the entire process of land acquisition thereby fast tracking projects

Some industries already follow the model of leasing lands instead of acquiring it. Oil & gas extraction usually follows the model of leasing lands. Renewable energy projects such as Wind Power & Solar farms and Bio-fuel projects often lease the land from land owners instead of trying to acquire the land which could make the projects prohibitively expensive.

So lease land and release capex required.