Construction companies’ pangs

How badly is the slowdown in the economy hurting companies?

Quite badly. GDP growth has slowed. But the one industry that is hurting real bad is the construction sector.

A study of this sector by Motilal Oswal Securities Ltd found that of the six companies analysed—Gammon India Ltd, Hindustan Construction Co. Ltd, IVRCL Infrastructure and Projects Ltd, Nagarjuna Construction Co. Ltd, Patel Engineering Ltd, and Simplex Infrastructure Ltd—four had begun to face negative cash flows (see chart).

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Hurting real bad (Graphic)

The study came to the following conclusions: The net working capital cycle for construction companies increased from 145 days during 2007-08 compared with 138 days in 2006-07 and 107 days in 2005-06; debtors outstanding for periods beyond six months increased from 17% in 2006-07 to 21% in 2007-08; loans and advances to subsidiary companies—mostly involved in real estate businesses—zoomed substantially from Rs72.9 crore in 2005-06 to Rs650 crore in 2006-07 and further to Rs780 crore in 2007-08.

As a percentage of capital employed, loans and advances increased from just 1% in 2006-07 to 6% in 2007-08.

Quite clearly, the industry is hurting. One of the reasons is that large construction projects—often cleared by the Union government and by state governments—have not been cleared in the recent past. This is further compounded by money tightening measures introduced by the Reserve Bank of India to curb inflation. Both have caused funds to dry up. Besides hurting the finances of the players in this field, this has also worsened the unemployment situation, as the construction industry remains one of the largest employers of unskilled and semi-skilled workers in the organized sector.

That isn’t likely to go down well with daily wage earners either.

Taking a toll?

India remains a country where costs rise inexplicably—and not necessarily because of inflation. Many projects that were meant to be developed have not been allocated and are being shelved. This will cause costs to soar further.

This is particularly true of roadways, where governmental clearances can make or break a project (and related costs). This is of critical significance to the Indian economy. Much of the economic boom that India experienced in the past five years was largely due to the Golden Quadilateral that the National Democratic Alliance government cleared when it was in power. By doing this, that government cleared the path to constructing 3,625 miles of new four- and six-lane highways compared with just 334 miles of four-lane roadways construction since independence.

That, in turn, is creating around 30 new cities which will encourage the migration of almost 300 million people over the next two decades, making it, what Goldman Sachs Group Inc. rightly described as “the biggest migration the world has ever witnessed".

This is likely to create demand for goods and services and infrastructure which, in turn, should continue propelling India’s growth for the next two decades. It echoes the construction of national highways in the US during the 1920s and 1950s which fuelled commerce and industry. But that momentum has slowed. And, sadly, road construction costs are spiralling. They have gone up from Rs5.07 crore a km in the first phase of the National Highway Development Programme (NHDP Phase I) to Rs16.68 crore and Rs15 crore in NHDP Phase VI and NHDP Phase VII respectively. Both NHDP Phase VI and VII are awaiting clearance.

Ministry of surface transport officials explain away the lower costs in some contracts cleared during the 1990s and prior to 2005, because “they often applied to upgrading existing roads. But phase VI involved the building of greenfield roads". Costs vary with special roads, they add. For instance, elevated roadways could cost around Rs50 crore per km (the 9km Ennore elevated highway is estimated to cost Rs450 crore).

And costs could soar even further because the ministry recently changed the manner in which bids will be cleared. While it has opted for international competitive bidding norms, it has decided to first shortlist the bidders on the basis of technical capabilities, and then select only those who have the largest asset base. This has made several players, including RITES Ltd, quote a price for lending their names and their balance sheets to bidders. That will also get added to costs. And these costs will have to be eventually paid by either taxpayers or toll collections, or both.

But the real shocker could be the Delhi Mumbai Industrial Corridor (DMIC), where the 1,483km route is likely to cost $90 billion (Rs4.12 trillion) or an incredible Rs270 crore per km. Sources in the ministry justify these costs (nobody wants to go on record) as being inclusive of a lot more than mere road-building. Yet, there is no denying that the costs have ballooned to such an extent that even the Japanese who initially wanted to invest in this project appear to have backed off. But more about the DMIC later.

Abandoning growth

At a time when India has decided that curbing money supply to rein in inflation is the best way to prevent hurting the poor, it is interesting to see what China (even the US) is doing.

China, notwithstanding a painful inflation, has opted to reduce interest rates. The argument clearly is that growth is better than a slowdown. Inflation hurts, but unemployment hurts even more. And jobs can be created only by a growing economy.

But then—with elections looming large—inflation can be talked in concrete numbers; growth, only in abstract statistical projections. Is that why nobody in the government talks about growth any more?

Very short-sighted, right?

R.N. Bhaskar runs a company with significant interests in distance learning and examination certification and writes on corporate and business policy issues. Comments on this column are welcome at