In order to execute mega specialised projects, one of the important requirements is new technology equipment. DK Vyas elaborates on the financing issues in the procurement and use of such equipment.
The construction industry in India is the second largest industry after agriculture, in terms of GDP and labour employed. While this makes a significant contribution to the national economy and provides employment to large number of people, the performance and growth is largely dependent on the government’s economic policies and implementation of such policies. A well-governed state which has vision for growth and development and harness the multiplier, the construction industry can deliver quickly to bring back the trajectory of over 8 per cent growth.
As per the Planning Commission, India has already announced the details of 12th Five Year Plan (2012-2017), where the spent in infrastructure development through various scheme will be approximately Rs 40,992 billion. During this period, some mega projects in the following sectors are expected to be developed:
- Metro rail project
- Highway projects
- River inter-linking project
- Sea ports projects
- Air taxi projects
Apart from policy clearances and single-window clearances for environment, land acquisitions, the other prerequisites for the execution of such specialised and mega projects are expertise in construction and equipment technology, and skilled manpower. Involvement of international consultants and participation of Indian consultants/contractors in international projects is also of immense importance to ensure quality and appropriate pace of execution. While work needs to be done in these areas, we need to be aware of the challenges that we will face in the current economic context.
Large capital investment and uncertain market: The balance sheets of most of the large construction companÂ¡es are over-leveraged and the appetite of banks is also low. The special vehicles that the government announced for takeout financing have also not been that successful, therefore the funding sources for such projects on a public private partnership (PPP) route looks difficult now.
Technological and engineering expertise: While these can be surmounted in terms of collaboration the economics need to be factored in.
Challenges and opportunities: As mentioned above, to execute such mega and specialised projects, one of the important requirements is new technology equipment. Challenges with the procurement of such equipment are high capital investment, longer delivery period and foreign exchange risks, lack of alternative uses of equipÂ¡ment’s, high obsolescence risks due to project specific needs of many equipment.
Financing is an important aspect of procurement and use of such equipment, many financers who are available in the financing of infrastructure projects and equipment. The major risks that need to be addressed when financing such specialised equipment are:
- Cost of the equipment and finance amount concenÂ¡tration on single equipment and customer
- Limitation of application of such equipment in various jobs and different sector
- Existing population of the equipment in the region or country
- Redeployment risks, and resale values in secondary markets
- Whether, in the event of default and repossession, financing can be done at a quicker pace, or with it has been done with special orders from court, and the cost evolved
- Principle of the contract where the asset needs to deploy and terms and condition of the contract
There is an ability and will among the Indian corporates to undertake and execute complex infrastructure projects, using specialised equipment, but a clear policy and roadmap needs to evolve so that the corporate can take a conscious decision and invest time and capital.
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