The Hindu Business Line : ‘I don’t think there will be any slowdown in infrastructure’

In a developing country such as India, there cannot be any slowdown in infrastructure for the next 10 years. The fundamentals are strong. What you see here now is not a stunting of long-term growth; it is a short-term economic fluctuation.

MR K. V. Rangaswami, President — Construction, Larsen & Toubro

N. Ramakrishnan

The ECC (Engineering, Construction & Contracts) building of Larsen & Toubro in suburban Chennai is a landmark. It has won awards for design and construction. It now sports a new look — a glass façade to shut out the noise from the hundreds of vehicles speeding outside, and to keep out the heat.

From his spacious and functional office, Mr K. V. Rangaswami, as head of L&T’s ECC Division, has a pulse of infrastructure development in the country. “We should not confuse between short-term economic fluctuation and long-term growth. I have not seen many people postponing their projects,” says Mr Rangaswami, Member of the Board and President — Construction, Larsen & Toubro Ltd. He feels that the high inflation numbers, rising prices of crude and that of commodities such as cement and steel, and high interest rates have not resulted in a shrinking of the market (for infrastructure projects).

A graduate from IIT-Madras, Mr Rangaswami, who has been with L&T since 1965, asserts, “I don’t think there will be any slowdown in the infrastructure sector at all.” In this interview, he talks about the infrastructure sector and L&T’s experience in building airports in the country.

Excerpts from the interview:

How is the infrastructure sector performing? Is there a slowdown?

I have not seen any shrinking of the market. The number of enquiries we keep getting for construction continue to be at the same level. In infrastructure, the gap between supply and demand is so huge.

A figure of $400 billion is being mentioned as the required investment over the next five years in infrastructure. Even if 50 per cent of it were to fructify, it is still a big number. I don’t think there will be any slowdown in the infrastructure sector at all.

Nobody is going to put off plans for a cement or a steel plant or an ore beneficiation unit or an automobile plant. If at all, financial closure might get delayed by a few months because of the high interest rates. In a developing country such as India, there cannot be any slowdown for the next 10 years. The fundamentals are strong. What you see here now is not a stunting of the long-term growth plan; it is a short-term economic fluctuation. We should not confuse between short-term economic fluctuation and long-term growth in demand.

What is the type of projects you are now booking? Is there a size that you restrict yourself to?

We are not taking projects which are less than Rs 200 crore. This is a policy we have been trying to enforce for the last few years. Three years back, we had about 500 job sites, both big and small. Irrespective of the size, the clients had to be serviced.

We found it difficult to service 500-odd clients because each one expects certain amount of service, especially from a company such as Larsen & Toubro. This was the time when human resources were also getting scarcer. They were joining other companies or going to West Asia; on the workmen front too, things were not that comfortable. We had to apply filters, in terms of the size of the jobs. Today, I have something like 230 jobs.

This is a simple strategy and we are able to satisfy 200-odd clients better. Also, there are hundreds of contractors. We can leave that space (projects lower than Rs 200 crore in value) to them.

Our total revenue has been increasing steadily at the rate of 30 per cent. Bigger jobs are available today. One could have never imagined a few years back that a Rs 7,000 crore airport would be given to a single contractor. Earlier, the Airports Authority of India would divide the project into numerous small packages.

The present trend is to have one large package and they want to finish the job fast, as time is precious. If they commission the airport one year ahead of schedule, for them, it is so much more revenue.

Take, for example, a Rs 1,000 crore job in the road sector. It is serviced by toll collection and if you finish the job ahead of schedule, the toll is something like Rs 40-50 lakh a day. The interest you save on the loan represents another Rs 40-50 lakh.

Typically, a Rs 1,000 crore road project can net a saving of Rs 1 crore a day for the investor. That is quite a lot. You can imagine the mindset of the investor. He does not mind putting it all together in one package to have a bigger job and pay a small premium to get it done on a faster schedule.

Are there are any delays…

The only delay is due to land acquisition. If the land is given to us on time, the projects are completed on or ahead of schedule. The main planks on which L&T has done its marketing are timely completion and quality. It is our performance in Bangalore and Hyderabad (airports) that brought us the Delhi and Mumbai jobs.

What do you do about the cost escalation, especially of steel and cement?

Cost escalation is not a major issue because all government departments have a cost escalation formula in their tender conditions. However, the formula does not give full relief. It is based on wholesale price index for materials and cost of living index for labour. Another factor is petrol and diesel.

The wholesale price index is not truly reflective of the cost of construction materials. When you have a huge price increase on steel and cement, the index may not correspondingly go up. Many government departments are making suitable adjustments following representations from builders.

For the Kolkata and Chennai airports tenders, floated by the Airports Authority, the formula is different and is based on cement price, steel price and some index pertaining to construction materials. It takes care of the escalation in prices fully.

For private sector bids, we quote the star (prevailing) prices and request for escalation based on these prices. Most of the clients accept this. I don’t think this escalation is an unmanageable problem although it needs attention.

L&T is involved in all the four major airport projects in the country in one way or the other. What has been your experience?

For the Bangalore airport, we were also equity partners. Initially, discussions on the concession agreement took a long time as there was no precedence or a model concession agreement to follow. The L&T-Siemens-Zurich Airport consortium was competing with Hoctief, which manages the Dusseldorf airport.

The concession agreement took a long time in Bangalore but the Hyderabad airport actually benefited as it had a model to follow. It took us almost three years to finalise the agreement.

The point is, any project should be speedily executed. What you conceptualise today may go out of fashion in three years. On the whole, our experience in Bangalore and Hyderabad has been good.

For the Hyderabad airport, we first bagged the contract for the airside works — runway, peripheral buildings — designing and constructing them. The terminal building was initially awarded to a Chinese company — China State — and we were the sub-contractors. This work was given to us after six months and we executed this project too completely.

In Delhi, things are proceeding to schedule and the runway will be inaugurated on August 15, which is the first milestone. The Mumbai airport project is tougher and complicated as it involves working with limited space and time.

We have roped in some foreigners with extensive experience in designing and building airports. It is not just about construction, it encompasses other activities and, hence, requires a lot of integration.

Our experience of working with them has been good and our people are also getting trained.

Going forward, we would like to bid for designing and building airports elsewhere, preferably with a much higher equity participation.