Investing in Road Construction: Issues and incentives
a. Its not just the length but the density of the road network too that India boasts of. While 1.42 kilometres of roads for each square kilometre of land is good number, it is still far too small as compared to the developed nations of the world that we look up to. While India’s road network is huge, 60% of the network is rural in rural India and mostly unpaved. The road network accounts for 80% of all passenger traffic and 60% of all freight traffic in India.
The Modi government has increased the road construction budget by 12% bringing it up to 64,900 crore INR for the fiscal year. Add to that the introduction of various incentives and legislative reforms and we are looking at a much faster rate of road development. The government plans on bringing the rate of road construction up to 40 Km per day form the current 23 Km per day which is a humongous task in itself. Now that we know we are on the right track for a faster and stronger road network, lets look into the issues and incentives that surround the road construction industry.
Public Private Partnership model Amendments
High risk ventures, delays, land acquisition and environmental disputes are all considered to be signature characteristics of the traditional Public Private Partnership models in the area of road construction. To create a better environment and mitigate these issues the NHAI has re- modelled the model concession agreement to introduce the hybrid annuity model (“HAM”). In the traditional arrangement, it was the concessionaire who had to bear the larger share of the project risk. Under HAM, the developer usually shared 60% of the expense while the government paid the remaining 40% of the project cost. NHAI absorbed the traffic risk by collecting the toll while the developer got steady inflow of revenue and profit through annuity payments.
Earlier the OMT (Operate maintain transfer) model was in place and meant that the bidder maintained the project for a shorter tenure resulting in poor maintenance while the annual payouts to NHAI kept on piling up without the changes in traffic flow and revenue of the investors being taken into consideration. The newly approved TOT (Toll operate transfer) model involves 30 year leasing of toll collection and operation duties on highways operated by the NHAI for more than 2 years, to investors that include foreign funds in consideration of upfront payments made to NHAI by the investor.
Land acquisition Issues
Public pitting against land acquisition for roads and illegal encroachments have always been a major issue for developers involved in construction of roads. These time consuming issues have repeatedly caused delays and losses to the developers. Land acquisition still remains a huge issue for developers despite the Right to fair compensation and transparency in the land acquisition, Rehabilitation and Resettlement Act, 2013 has attempted to address the issue. The act attempted to elaborate on the pubic interest aspect of the project and limited the role of the government to that of a facilitator in the land acquisition process.
Lock in period issues
The concessionaire was required to maintain a minimum 26% stake for the entire concession period for projects awarded before 2009. The stake had to be maintained irrespective of the revenue earned by the investor or their financial status resulting in compounding of debt and financial issues for the developers. the government’s decision to allow developers to divest 100%stake after 2 years of commissioning of the project has attracted interest from the PE’s preferring to hold larger stakes in projects.
Fiscal Incentives
Government has allowed 100 % FDI through automatic route in the roads and also up to 100% FDI for the support services to road sector; 100% exemption in taxes for 5 years and 30% for another 5 years, duty free imports of high capacity construction equipment and viability gap funding up to 40% of project cost to enhance viability on a case to case basis.
Introduction of the Infrastructure Investment Trusts
InvIT (Infrastructure Investment trusts) is the new way by means of which the government seeks to facilitate investment in the infrastructure sector. InvIT’s are created to facilitate raising of funds for lending and investing in infra projects. The is likely to ensure renewed investments in new projects will simultaneously unburdening the existing developers from their debts.
With these and other mitigates like delayed clearances, one sided agreements favouring the NHAI, problems in raising funds and inadequate traffic on highways being in process of being taken care of, the future of developers invested in road construction seems very bright. The measures brought in by the government will provide the much needed encouragement to the investors to invest in a brighter future for India.
Construction Equipment Sales Soar High in 2017
ales volumes in 2015. This jump in the sales volumes is largely dominated by increased sales of backhoe loaders, excavators, pick and carry cranes and earth moving machines. While the numbers are yet to reach the levels in 2011 before the industry went down in a slump phase, the forecast for the coming year is largely positive and expected to cross the 2011 figures by a sizeable margin.
The volume of sales of the construction equipment industry is expected to touch 96,730 units in FY18. If this forecast is to be believed, then the sales volume prospect for FY17 seem quite bright by every measure. At 52,100 the sales figures in the industry at a 4 year high since the slump started. There is no denying the fact that a tidal wave of growth awaits the industry thanks to the Make in India project focusing on development of infrastructure across the country.
The fact that various road development and expansion projects have been awarded has been a key factor in the surge of sales of road construction equipment across the country. Wanting to make the most of a growing tidal wave, the OEM’s have started putting in their moolah in creating a strong manpower base and technical prowess so they can launcher new products and enter new segments.
The top management at various OEM’s credits this surge in the sales volume to a rather low base in the past few years in addition to the increased activity in the construction of roads and highways. While the fiscal year 2012-14 saw a rather low compound annual growth rate at a meagre 1% CAGR in the total planned expenditure in key infrastructure sectors, the FY 2015-17 is expected to soar many folds at 21% CAGR if not more. Key infrastructure projects like urban development, roads and highways have seen a sizeable increase in the allocated funds. The funding has seen a constant increase post fiscal 2013-14.
The increased funding for these sectors is likely to fuel sales volumes from construction equipment companies in the year to come. The last two months of 2016 saw a slump in the sales due to demonetisation. The effects of demonetising are slowly but surely receding and creating a favourable ground for increased sales volumes in the months to come. Despite the demonetisation taking a toll at the end of the year, most companies saw rather impressive sales figures in the first nine months of the fiscal year. The positive outlook of the head honchos has to also do with the fact that the government policies are being changed to create favourable conditions for execution of projects.
Even Mahindra and Mahindra, considered a rather fresh face in the industry, making its debut n 2011 saw its sales crossing easily crossing the previous year’s sales quire comfortably. The President Designate for Mahindra’s automotive sector was quoted saying to a leading newspaper that the effects of demonetisation would wear off and the industry would grow at a much faster rate as compared to the previous year’s 2 percent.
Executives at firms are of the belief that while growth is there, it is coming from vacuum and that such high rates will not be sustainable mostly because the sluggish real estate sector has taken a major hit due to demonetisation and is unlikely to recover any time soon. Despite that a 20-30% growth rate is expected and deemed sustainable.
Most brands including Mahindra are planning on diversifying its product range and launching new products to spread its presence across markets. Mahindra is set to launch 3 new products in the fiscal year in addition to the existing range having new variants being added to the line up to cater to the wave of increasing demand.
All said and done, the sales of construction equipment in the present fiscal year is expected to grow at healthy rate surpassing the previous year’s sales all thanks to the the government’s increased focus on core infrastructure projects.
The Nature of Rural Infrastructure: Problems and Prospects
71 percent of Indians live in rural India, more than 244 million is the number of poor people there and the average distance to the nearest all wether road is 2 Km. Add to it the dismal condition of access to basic sanitation, drinking water, power and telephone to get a much clearer picture of rural India as it is today. Various studies, spearheaded by giants in the industry agree that poor “rural infrastructure is a part of the fundamental problem for economic development of these regions. Additionally the lack of infrastructure directly co relates to lower per capita income.
Various studies and surveys boil down to a conclusion that developing infrastructure will in the short and long run increase the per capita income and employment in the rural parts of the country. Add to it increased efficiency and productivity due to reduction of travelling time and more time to rejuvenate. Additionally a better infrastructure means better access to resources and better health eventually culminating in an increased standard of living. For example: developing a constant source of clean drinking water supply will reduce instance of people falling sick from water borne diseases and in turn increase good health and productivity.
Empirical evidence suggests that development of power, irrigation, water, sanitation and road infrastructure has increased productivity, savings, income, better jobs, better health, increased attendance in school and tourism benefits. Increased connectivity means the the middle men will be taken out of the equation and farmers and small businesses can grow. Additionally secondary benefits like access to education and medical facilities have positive long term effects in terms of a developed work force. Hard evidence is available to support the statement that better infrastructure promotes over all growth in a community.
The problem that is unique to rural India is that it has a low population concentration in addition to a very low income and spending power. Infrastructure like telecom, power and connectivity are too cost intensive for timely returns. However fundamental infrastructure like housing, sanitation etc can easily be provided locally with proper initiatives and funding. The people in rural areas have one third the spending power as compared to their urban counter parts but are willing to spend their income for the requisite infrastructure. The problem essentially is a lower concentration of people and income to be of adequate incentive for private players to invest in developing the markets.
Prospects for development in rural India is good and on an increasing trajectory. The government and private players are both realising the potential in developing the smaller scattered markets. This is being done by means of various government ventures and scheme. Some of them being semi private and semi government organisations to push the potential of rural India in the development of the Indian economy and make it all inclusive. Various government initiatives have been showing positive effects over the years and are coming on the fast track to bring about the required change much faster than its current rate. The Make in India campaign for one is proving to be a tremendous boost.
Road to Riches? An Evaluation of Indias Rural Road Programme
Additionally it helps elevate the general standard of the population of a country. Benefits of a well connected nation can be seen in both the short and long term and its effects are long standing to bring about progress. Lets take a look at India’s flagship programme to increase the road density in the country while connecting most villages to the nearest market.
Development: Rural Road connectivity is known to bring about wide variety of changes across a vast spectrum of life in rural India. Connectivity means increased income for the farmers by removing the middle men and delivering the produce directly to the market. Additionally more variety of produce can be grown due access to an expanded market. Access to increased resources means better health, better education, better medical facilities, more awareness for opportunities. All in all road connectivity is vital for making rural India a part of the country’s main stream economy and increasing the standard of living of the general masses.
Short term impact: The connectivity reduced the travelling time between trading villages there by providing more job opportunities to youth. About 10% of youth dropped out of school to take up the working opportunity. However younger kids have increased attendance in schools owing to connectivity and easier access. Connectivity also means that government employees will reduce absenteeism quoting connectivity issues, meaning better education for children. road creation means that the price of the farmer’s lands increased giving them relief from the money constraints in addition to getting them better prices for their produce. Better access to medical facilities mean a healthier more productive work force.
Creation of growth conducive environment: Developing connectivity has far reaching effects and for the better. Farmers and traders get access to larger markets and better pricing. Leading to increased income, spending power, savings and better credit risk. Connectivity boosts perishable item trade in addition to animal husbandry and manufacturing. increased spending power and job opportunities create an environment conducive to overall growth of a community. Roads are quite literally the fast track way to creating an all inclusive economy to power the growth and development of the country.
The impact of the flagship road development scheme so far has been monitored in the short term prospect. The long term impact of the venture is predicted to have positive impact on the country and its economy on a whole. Roads are creative an environment that is overall conducive to growth on a grass root level and up. Many opportunities on the small and large scale have opened up with the increased connectivity across the country and is expected to only get better as the years go by. These are exciting times with all its exciting changes that are coming about.
Earth Moving Equipments India Growth Statistics Details
After a long down slack, the industry has finally found its growth spurt and is set to fly high. Here is a look at some statistics from various organisations to support the claim.
1. USD 5 Billion is the expected value of the construction equipment industry in India by 2020 owing to increased unit sales and revenue.
2. Rising infrastructure investments mean increased investment in the construction equipment manufacturing and its subsidiary industries.
3. More than 60% of the total investment in infrastructure development will be focused on construction equipment.
4. 7-8% of the national GDP is the contribution of the construction equipment sector on a whole including its sister services.
5. The material handling industry is completely de-licensed under the Make In India campaign paving the way for 100% FDI investment.
6. UDS 24.28 Billion is the cumulative FDI inflow in the Earth moving equipment sector from FY2000-2016.
7. Investment requirement of 1 Trillion USD in the infrastructure sector means heavy demand for earth moving equipments along with other construction equipments.
8. Revenue from construction equipment is expected to reach USD 5 Billion by 2020 growing at a CAGR 2.34% FY 2007-20.
9. The equipment rental business in India is still in its nascent stage and has huge potential to grow similar to the after sales revenue component in the construction equipment industry on a whole.
10. Sale of construction equipment is expected to go up to 96,730 by FY18 due to the heavy investment and demand in the infrastructure sector.
11. CAGR 6.18% is the is the estimated growth rate of sales of construction equipments.
12. 62.1% is the share of the earth moving equipments in the construction equipment industry as a whole.
13. Backhoe loader and crawlers are expected to amount to 70% of the total industry sales and revenue.
14. Crawlers are the fastest growing segment wishing the earth moving equipment sector due to increased demand of mid sized machines.
15. The share of crawler excavators is expected to go up to 35% from the previous 23% in 2015
16. Demand for larger excavators is expected to increase in the tie to come, particularly in the mining industry.
17. Growing demand for rental equipments has led to an increased demand for tie ups and sales of the equipment on a general note.
18. After sales support and end to end solutions as an industry is expected to grow rapidly in the time to come due to the increased demand for niche products.
19. Increased mining activity will mean greater demand for equipments in the coming years.
20. Reduced export duty means increased production and export of low grade iron ore, resulting in a higher demand for equipment.
Earth moving equipments as a segment is set to grow on the fast track should we believe the above statistics.
Construction Equipment Rental News
Industry experts are of the opinion that the market is set for a boost after the slow down in the previous years. The Make in India campaign is expected to prove to be a steroid to the previously slumped market and set it on a growing trajectory.
Experts are of the opinion that various factors like a growing need to replace outdated machinery with the latest available tech and increasing expenditure on commercial and residential infrastructure will all contribute to growth of the construction equipment rental industry in India. The big shots in the industry have started renting out equipment to construction companies in an attempt to ride the growing wave of equipment rental sector in the industry.
Big shots in the industry opting for rental services to construction companies goes to prove that the market is a more or less even split between the OEM’s and third party rental companies. As a matter f fact construction companies are increasingly preferring to opt for equipment rentals from equipment manufacturers given the additional services that they provide. The trend of renting equipment directly from manufacturers is bound to grow in the years to come and the OEM’s will make the most of it.
The equipment rental industry in India has a very low penetration as compared to other developing nations. Most machines in use are owned and people are still getting used to the idea of renting construction equipment. One major problem that the equipment rental sector faces is the lack of servicing in the remote areas where the machines are increasingly being used. Not having the required service facilities in the remote areas is impending the growth of the equipment rental market in rural India.
Increased spending on construction of roads, highways and flyovers under the make in India campaign are bound to create an increased demand for equipment rental services across the length and breadth of India. The major boost however is the fact that various huge projects are simultaneously going on to create the increased demand and more projects are seeing approvals with the passing day. In an attempt to bring the road density in India at par with its international counterparts, the equipment rental sector is getting a much required boost.
A major factor aiding the growth of the equipment rental business is the introduction of GPS monitoring and control systems in the newer machines in addition to other new technologies that are being added to the machines. Constriction companies can not afford to block capital in depreciating assets that would remain idle once the project is completed and have them be sold for scrap given that machines are becoming outdated at a much faster rate as compared to the last few decades.
Simply put if the challenges are met head on, the construction equipment rental sector is all set for a boom in the industry that is here to stay at least for the next decade to come.
Rural Road Development to Boost Road Construction Equipment Demand
ade in building rural roads since last few years, thus, road construction activities and related equipment demand has grown considerably.
Further, since the inception of Pradhan Mantri Gram Sadak Yojana (PMGSY) in 2000 (the central governments plan to provide good roads to isolated villages), as many as 1.9 lakh habitations across the country have been connected through roads from April 2000 to January 2017. This amounts to 17 per cent of all habitations. Between FY 2000-2001 and January 2017, 1.54 lakh new projects had been approved and 4.87 lakh kilometres of roads has been newly constructed or upgraded under the scheme. This amounts to an average of 80 kilometres constructed per day.
Particularly, the pace of road construction was 133 kilometre per day under PMGSY in 2016-17 as compared to 73 kilometre during 2011-14. The total length of roads, including those under PMGSY, built from 2014-15 till the current year is about 1,40,000 kilometres which is significantly higher than the previous three years.
This large scale development of rural roads is touted to have a very positive impact on the road paving equipment demand too.
Important steps taken by the government to boost rural road development
- The 12th Five Year Plan (FYP) proposes spending of Rs 126,491 crores on rural roads which is on par with the total sanctioned amount for PMGSY since inception. The investment is expected to result in the construction of 1,58,000 km of new roads and upgrades for 84,181 km of existing roads in rural areas.
- Government of India has allocated Rs 1,07,758 crore for Ministry of Rural Development in the FY 2017-2018.
- An allocation of Rs19,000 crore has been made towards the PMGSY to connect far flung habitats in the Union Budget 2017-2018. The target is to complete PMGSY by 2019. In all, Rs 27000 crore is there after state contribution.
Thus, road construction equipment manufacturers in the country are not wrong if they believe that the government’s policies for rural road development will lead to unprecedented growth of road construction equipment sector.
Positive impact of increased focus on rural roads on road CE segment
It goes without saying that developing Indias rural roads will provide mobility and connectivity to more than 800 million people living in rural areas. Further, emphasising the development of rural roads can prove to be a catalyst to Indias goal of maintaining a good GDP growth rate and improving the well-being of millions of underprivileged and rural citizens. Hence, the road CE industry in the country has all the reasons to smile.
Here, it would not be wrong to say that road CE industry plays a major role in developing the rural infrastructure of the country. Given the increased demand for CE for rural roads as well as other roads, there has been a remarkable advancement in road construction technology in the recent years. Many new players have entered in the road CE segment and established players like Mahindra Construction Equipment with their flagship Mahindra EarthMaster backhoe loaders are ruling the Indian road CE segment.
In a nutshell
Road CE industry is one of the most intensive sectors of earthmoving and CE industry. With high investments expected to pour into the rural road segment over the next few years, road CE industry will definitely get a boost and flourish like never before.
Construction Equipment Rentals to See Big Growth
The global report for the construction equipment rental business is pretty optimistic given the growing demand for residential and connectivity infrastructure. The rental business in India is still in its nascent stages and has a huge scope for growth in the years to come. Add conducive policies to the mix and the segment is bound to growth at a rate never seen before.
The market is driven forward by the need to replace the outdated equipment in the market with the new ones equipped with the latest tech. This is one of the most crucial factors that will help the market grow. Internationally and nationally the equipment rental market is seeing a strong presence of the manufacturers unlike the past when third party operators ruled it. More and more manufacturers are opting to rent out their equipment directly to the companies and on the other hand the companies are preferring to rent from manufacturers thanks to the additional services and expertise that the manufacturers are willing to provide.
Residential infrastructure, energy infrastructure, transport and power are the segments that are currently attracting high volumes of investments. With companies handling multiple projects at the same time, they are opting to rent equipment instead of buying them to cut down on costs. Additionally fleet management softwares make it easier for the construction companies to take inventory and manage their fleet for optimal use of resources. Services provided by the manufacturers when renting out the equipment add to the company’s savings and efficiency of the project.
While construction equipment rental is set for growth, it has its own set of problems that the industry needs to tackle. Rental companies find it difficult to provide services in rural areas often restricting the market for small and big rental companies alike. While the industry is run by the big honchos, the smaller companies and local contractors take the cake in the rural areas of the country. Most of the big manufacturers across the globe are present in India either independently or in collaboration with local manufactures. OEM being big in the equipment rental market is a trend that is predicted to stay in the years to come.
While the global equipment rental market is set to bloom, the market in India has its own set of hurdles that will need to be overcome before the market can bloom to its full potential. Given India’s growing economy and the huge investments happening in the domestic infrastructure these problems will need to be overcome soon if the market is to ride the wave of growth. That being said, billions of dollars are being put to work in the development of the infrastructure of the country and the industry is bound to make its moolah. How much? is the question that remains to be answered.
Challenges for Industrial Equipment Manufacturers
untry. This presents good opportunities for growth to the IE manufacturers in the country. At present, IE manufacturers in the country deal with various types of equipment such as hydraulic excavators, wheel loaders, backhoe loaders, bull dozers, dump trucks, tippers, graders, pavers, asphalt drum/wet mix plants, breakers, vibratory compactors, cranes, forklifts, dozers, off-highway dumpers, drills, scrapers, motor graders, rope shovels etc.
While there are various opportunities for growth, the challenges for IE manufacturers are no less as the market is very competitive. Thus, manufacturers need to be constantly on their toes and ready to deal with various challenges.
Challenges for IE manufacturers
Let’s take a look at some of the challenges faced by IE manufacturers:
1. Industries are increasingly demanding world-class technologies for better fuel efficiency, higher productivity and profitability. Thus, IE manufacturers have to live up to the expectations.
2. Increased flexibility is another challenge for IE manufacturers. An increasingly volatile and unpredictable Indian economy requires Industrial Equipment manufacturers to build more flexible and efficient operating machines.
3. Increasing competition from international players is also forcing the manufacturers to spend more on R&D activities, market reach and on finding new ways to improve productivity for their customers. This is also posing as a challenge for the domestic IE manufacturers.
4. Since, the secondary market for used IE is not fully developed in India, the resale of used equipment is also a challenge for the IE manufacturers in the country.
5. Other challenge includes interstate movement of equipment, limits over emission or pollution and maintenance of high safety standards.
6. The IE manufacturing sector includes high operational as well as maintenance costs. Given that, poor networking with financial institutions and delay in loan executions is inhibiting the manufacturers from moving towards modernisation and expansion of equipment facilities.
7. To achieve high performance in a competitive business environment, IE companies need to take a comprehensive approach to providing services as well as producing quality products. Many IE manufacturers are yet to do this.
8. IE manufacturers also need to find new ways to maintain and acquire the leading edge. Many IE manufacturers are yet to work upon their visibility, branding and marketing strategies.
9. Last but not the least, surging demand for IE is placing greater pressure on the manufacturing companies to keep their cost-per-unit steady. Thus, in future, maintaining or improving profitability will be a key to address this challenge. Assembling operational excellence teams focused solely on eliminating or minimising manufacturing process constraints, increasing production efficiency and generating the largest bottom-line returns based on specific profitability and value targets will help stabilise costs for IE manufacturers.
Future growth opportunities for IE manufacturers
Given the challenges, the opportunities for IE manufacturers are no less. IE are heavily used in power, engineering, automobile and mining sector. Further, with the governments Make in India campaign aiming at providing a boost to the manufacturing sector in the country, the demand for IE will increase manifold.
With this unprecedented growth of various industrial sectors in the country, IE manufacturers in India have all the reasons to celebrate. They will have to adopt newer intelligent features and increased sophistication to gain a large market share. It is believed that in future, increased flexibility, usability and reduced cost of industrial equipment will write down the bright future of IE manufacturers.
Thus, opportunities are plenty; only the IE manufacturers have to counter few challenges to attain success and wider reach. Foreseeing large industrial activities underway, the IE industry is set to see a boom in coming days.
Opportunity in the Road Construction Equipment Industry in India
This being said, it is a given that the road construction equipment industry is the backbone of the backbone driving the Indian economy towards greater heights. Here is a look at the infrastructure projects that are set to serve as a steroid to the slumped road construction equipment. industry.
1. The Asian Development bank has approved a loan of US $ 61milion to develop the first coastal corridor from vishakhpatnam to chennai.
2. The Maharashtra state government is set to launch projects worth 73,367 Crore worth of infrastructure projects for development of roads, metro rails, ports and harbours.
3. A Hong kong based equity hedge fund is set to invest INR 2000 Crore in construction of Highways in the country.
4. The Indian Government has announced Highway projects worth US $ 93 Billion including the National Highway Building Project.
5. The road and transport ministry plans on building another 5 greenfield expressways across the country to help reduce the travel time.
6. The government plans to award more that 100 highways in the Public Private partnership mode.
7. Various national and inland waterways are set to be created by passing the water way bill in the parliament.
8. More than 50 new airports are panned across the country to reduce the burden of heavy traffic on the existing airports in the metros.
9. Creation of more than 100 smart cities will require development of roads and highways to connect the smart cities to the rest of the nation.
10. With new ports being developed, new highway corridors are set to be developed to make the ports accessible and to reduce travel time.
These are just some of the projects that are in the pipeline to boost the development of connecting infrastructure across the country. The road construction equipment these days are so versatile that they can easily be used in construction of various other infrastructure projects in addition to their fundamental use in construction of roads.
Road construction equipments like bulldozers, backhoe loaders, concrete mixers, road rollers, trucks etc are bound to be used in various railway, highway, port development, fly over construction, metro rail construction and even housing projects to name a few.
With both government and private bodies heavily invested to boost infrastructure development across the country, the construction equipment industry on a whole is sound to get a steroidal boost. This boost will help develop the business for construction equipment manufacturers, rental companies and the resale market for these machines.
Thanks to the new investment and policy changes, indigenous manufacturers will enter the market to manufacture the machines while there will be new entrants in the construction rental and resale markets too. With the increased demand many small and big players will enter the market to earn their moolah with the changing times. Simply put, the developing infrastructure across the country will prove to be a monumental boosts to the construction equipment and its complimentary industries.