Keeping the long-term growth momentum intact

K. V. Rangaswami

K. V. Rangaswami  

A slight fall in infrastructure growth — 3.5 per cent — has been reported for May. But it has not yet touched the core development areas of infrastructure. In this interview, K. V. Rangaswami, President and Whole-time Director, Larsen & Toubro, which is involved in several major projects, outlines the current and future course of the infrastructure sector.


With the current oil prices and inflation, do you see an imminent slowdown in the infrastructure sector? The prices of steel and cement in particular must have a major impact on cost escalation.

I believe that the current economic scenario in India is more linked to the global economic dynamics. The rising crude price is the major concern for India. But, there is increasing evidence of speculative financial flows causing the oil price hike rather than the more fundamental supply-demand equation. I am sure that prices have almost reached the peak levels and would stabilise now.

The current trend of inflation with skyrocketing commodity prices is definite to have its impact on input costs of projects leading to overall cost escalation. The policy measures by the government to tame this high inflation rates could marginally impact the cost of capital, and liquidity tightening, leading to delay in financial closure of some projects. But, this may be a short-term phenomenon.

Overall, there may be some marginal impact on the infrastructure investments on a short-term basis due to the current economic trends, but surely it will not lead to any adverse cuts in investments leading to imminent slowdown, which I believe the country cannot afford at this stage of the economic growth.

Also, the bulk of the planned investments in the sector will have to continue to reduce the infrastructure bottlenecks, ensure improved cost-competitiveness, and higher growth rates. This has broad political and policy consensus too to keep the long-term growth story intact.

L&T has been associated with both greenfield and the expansion plans of major airports. What has been your experience in the development or reconstruction of these airports?

L&T is associated with the development of Bengaluru International Airport limited (BIAL) in consortium with Siemens Germany, Unique, part of Zurich airport, Karnataka State Industrial Investment & Development Corporation and AAI.

This is the first PPP project in Indian aviation industry conceived way back in 2001. The project, being the first of its kind, had to face some turbulence as it involved framing and clarity of new policies.

BIAL was the first greenfield airport project in the country to achieve financial closure. While there was considerable interest and appetite for funding this project among the lenders, there was no precedence with regard to concession agreement or loan agreements. Furthermore, clarity on several regulatory issues was not in place (for example, tariffs, closure of existing airport, ATC management, clauses on consequences of termination, direct agreements between lenders and the government agencies).

Hence, the negotiation process was long and a learning process for all parties. The loan requirements too were large requiring a consortium of bankers.

To provide viability, the Karnataka Government provided an interest-free state support loan of Rs. 350 crore.

Support services

The State support agreement entered into with the Karnataka Government stipulated that the State and its agencies would provide support in the form of water, power and other infrastructure on a priority basis to the project but on commercial terms.

Nearly 4,000 acres was acquired by the State for the project and provided to without encumbrances — this is no mean achievement. The land is given on long lease to the project.

Considering the complexities, both regulatory and political, the support of the Government was strong but the pace could have been hastened with a more consistent approach.

A number of cities have taken up major infrastructure projects in terms of roads, flyovers, under-bridges and the like. Do you think the development of roads has kept pace with the growth in the population of vehicles?

Huge gaps do exist in the supply and demand levels of urban transport infrastructure in India. The vehicle population has grown beyond all averages particularly in the last 2-3 years, without a corresponding improvement in infrastructure facilities.

Transport infrastructure in urban areas is more of a subject of the States and local bodies who need to plan and implement these projects. Project funding is often a major issue of concern as the scarce funds flow to other priority sectors such as health and education, and transport infrastructure takes a backseat.

The well-crafted PPP model by the Central Government for infrastructure development with the concept of ‘User charges’ in highways, ports, and airports, is a difficult proposition in urban infrastructure and is yet to mature in the Indian context.

Are the State governments planning for growth and infrastructure development in pace with the growth in the economy?

The approach of the State governments towards infrastructure development is definitely positive and some of them have progressed quite ahead.

You can see certain State governments taking assertive initiatives in developing State highways in line with national highways. However, the concept of PPP model for infrastructure development in State government projects is yet to evolve in big way though some of the State governments are really enthusiastic and have made good headway by adopting this model. But, a well-designed framework of policies and transparency in awarding concessions is the prerequisite to ensure private participation in infrastructure.

What do you think about the plans for and the development of SEZs? Have they hit a road block because of the politically sensitive land acquisition issue?

Land acquisition has become very sensitive and with the soaring prices, it has become a political weapon leading to law and order problems. Further, there are no major SEZ (other than some IT SEZs) success stories, which have come up in a very big way to be touted as examples to encourage SEZ development.

Instead, they are seen as land grabbing methods by some groups. The Government must support the creation of some success stories.

How have inflation, the price rise, and the interest rates affected the housing sector?

Housing is an interest sensitive sector as both the ultimate real estate owner and the developer are exposed to interest rate risks. Thus, a rising interest rate regime has always been negatively correlated to the real estate growth.

Moreover, at the present juncture, banks also may not be eager for a higher exposure to the real estate sector.

Residential housing, especially for customers with EMI exposures, would be affected the most, in the short-run, as prospective customers would tend to postpone their purchase plans awaiting the downturn of the interest rate cycle.

The high-end residential segment may be more affected as such customers are usually people with strong financial position and are already homeowners. Large-scale residential projects catering to middle/lower income groups may be less affected.

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