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G. Madhan

Only top-drawer borrowers manage to access funds from banks. This has forced many players to seek recourse to high-cost funds.

THE industry continues to be plagued by several problem areas. These are largely external in nature, though. Interestingly, a few players such as Nagarjuna Construction and IVRCL Infrastructures have also managed to come out with workable solutions to mitigate to some extent such external pressures and improve their competitiveness.

The key areas that pose ground-level challenges are:

Stringent pre-qualification criteria: The rigorous filtering process poses a major challenge for small and mid-sized construction companies in bagging large contracts. While some companies believe that pre-qualification criteria are required to avoid unequal competition, several believe that it is a hindrance to growth.

Non-availability of funds: Despite getting industry status, the availability of finance continues to remain a problem for this sector. Industry players are still unable to garner funds at competitive market rates. Non-availability of funds, to an extent, is also due to practical difficulties. For instance, if a construction company bags a contract and gets the letter of intent, it has to start the project within 14 days. Banks and financial institutions (FIs) find it difficult to process the requirement within that period.

However, for large and mid-size companies, the problem of funds is slowly fading as they execute infrastructure projects that are funded by the Government and by multi-lateral agencies such as the World Bank and the Asian Development Bank.

For instance, the World Bank has funded infrastructure projects worth Rs 5,000 crore since January 2001, which includes the Rs 240-crore Allahabad bypass project, the Rs 348-crore Tamil Nadu road sector project, the Rs 542-crore Mumbai urban transport project and the Rs 488-crore Uttar Pradesh State road project.

Institutions are wary of lending, as quite a few construction companies are poorly managed. Only top-drawer borrowers manage to access funds from banks. This has forced many players to seek recourse to high-cost funds, adding to the pressure on margins.

Nature of the contracts: Several industry players are of the view that the contracts are generally loaded against the bidders. Most require performance guarantees from the successful bidder. Besides, if the contractor does not complete the work within the prescribed time, he is liable to pay damages. On the other hand, the awardee does not get penalised for payment delays. Though at times, the awardee pays interest for delayed payment, the industry players feel that this is not a solution.

Time lag and cost escalation: In large-scale projects, generally, a time lag exists between bidding, project approval, implementation and actual cash flow. This results in an uneven revenue stream for construction companies. Besides, if the cost of raw material shoots up, the margins of the contractors can go haywire, as the bidding price is generally based on the price of raw materials at the time of bidding.

However, companies have also managed to cope with this problem. Several players, at present, insist on an in-built escalation clause before bidding contracts. Of late, government contracts, too, have an in-built escalation clause.

Few players such as Nagarjuna Construction have also insulated themselves from price hikes by entering into fixed price contracts with their suppliers and vendors, an area where they have a degree of control.

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