High Performance in Infrastructure and Construction

India Perspectives 2012

Los Cabos, June 20, 2012: Indian Prime Minister Dr. Manmohan Singh said, The Los Cabos Declaration fully reflects our initiative that investment on infrastructure in developing countries can play a major role in strengthening development and in stimulating global recovery. Investment in infrastructure is necessary as a means of stimulating global growth. It lays the foundation for rapid growth in the longer term, while providing an immediate stimulus for their economies and also for the global economy by providing robust sources of demand.

Contents
Foreword 3 Introduction 4 Findings of the survey Roadblocks to growth 5 10

Removing roadblocks 12 Conclusion 14

Foreword
Established by the Planning Commission and the construction industry, the Construction Industry Development Council (CIDC) has been aiding the development of the sector through a variety of initiatives such as skill development and training; developing productivity; grading, green rating and benchmarking risk mitigation methods; developing tools for effective dispute resolution; quality assurance; creating databases; conducting research and studies; creating and facilitating products; and providing forums for the industry to interact and arrive at solutions to common problems. Infrastructure, especially construction, is vital for the growth of the Indian economy. The government also recognizes its importance. According to the Twelfth Five Year Plan, infrastructure is slated to attract investments to the tune of US$1 trilliondouble the US$0.5 trillion in the Eleventh Five Year Plan. Infrastructure growth will have a positive impact on the overall Indian economy and also help in creating significant job opportunities . The key challenges for the sector remain availability of the right skills, raw materials and finance. While India produces numerous engineering graduates every year, there is a need for skill-based training to ensure alignment with industry requirements. At the same time, we as a nation need to plan for availability of resource and raw material to ensure that our infrastructure goals are realized. As India has experienced execution challenges in the past, the government proposes to set up a committee to monitor projects regularly and support project execution. This study and conference, conducted in association with Accenture, is an attempt to learn from the best of global research on this sector and adapt it to the Indian context. Through this initiative, we aim to provide an impetus to the industry to start thinking about what can be done by individual companies and the government to ensure high performance in the infrastructure and construction sectors.
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While this is a beginning, we realize that the road ahead will require a lot of work. We are committed to work with all stakeholders for the holistic development of the industry and hope to be an enabler of positive change and growth of the nation.

Dr. P.R. Swarup

Director General, Construction Industry Development Council

This year marks Accentures twenty-fifth year in India and we remain steadfastly committed to the India growth story. Accenture conducts a global research every other year to identify high-performing construction and infrastructure companies. The insights from this years global research point to three building blocks for achieving high performance in construction and infrastructure As the Indian context is very different from the global scenario, we collaborated with CIDC to launch an India-focused study. The objective was to identify the key priority areas, critical roadblocks and interventions expected from the government in the construction industry. Our study involved detailed and thought-provoking interviews with representatives from leading infrastructure and construction and financing companies. Our analysis suggests that companies need to be able to work simultaneously on three building blocks: Being Agile in responding to changes in the market and secure revenues; ensure Operational Excellence for current projects; and continue to focus on Performance Enablers such as talent, organization and technology. The research also captures the expectations from the government in terms of policy and other interventions that would help the sector achieve high performance.

It is Accentures belief that growth in construction and infrastructure will be critical for the Indian economy in the next decade. We are pleased to note that a number of companies have already begun laying a strong foundation for future growth based on these three building blocks. We are confident that if the best of global experiences are customized for the Indian context and scaled up, construction and infrastructure will continue to drive Indias growth story.

Sanjay Dawar

Managing Director, Management Consulting, Accenture in India

Introduction
The construction industry plays an important role in the development of a countrys infrastructure, which is a key engine of economic growth. Its significance to the Indian economy can be gauged by its growing contribution to gross domestic product (GDP)from 5.1 percent in 200102 to 7.9 percent in 2010111. Additionally, the construction industry creates an annual asset base of US$80 billion and generates employment for more than 40 million people. Over the next decade, India will continue to be among the fastestgrowing countries in terms of construction output. While globally the construction market is expected to grow at 5.1 percent and 4.7 percent during 201015 and 20152020, respectively, in India it is expected to grow at 9.9 percent and 7.6 percent during the same periods (Figure 1). By 2020, India is expected to emerge as the worlds third-largest construction market. Large infrastructure investments and growing urbanization will fuel this growth. Increased infrastructure spending: Under Indias Twelfth Five Year Plan (201217), investments of more than US$1 trillion are expected to flow into infrastructure. The construction industry, which will account for a substantial portion of the proposed investments in infrastructure, stands to gain the most. Increased urbanization: Underinvestment in housing and urban infrastructure has resulted in a substantial pent-up demand. This, coupled with growing urbanization, is expected to drive growth in the construction industry. While the long-term outlook for the construction industry appears very positive, concerns have been raised about its immediate future. Rising interest costs, stagnating orders, a slowdown in new government projects and an increasing number of stalled projects are just some of the challenges the industry is facing today.

Figure 1: Average growth rate in the construction industry in India

Source: Reserve Bank of India. Figures are estimates

Findings of the survey

Against the backdrop of Indias economic slowdown and the impediments to growth mentioned above, Accenture surveyed senior executives at leading engineering, procurement and construction (EPC) companies, finance companies and developers. The objective was to identify the key priority areas, critical roadblocks and interventions expected from the government in the construction industry. Overall, the C-suite executives identified four top priorities: building order pipeline, achieving operational excellence in existing projects, ensuring capital efficiency and focusing on key enablers. In the following pages, we explore in detail these focus areas and their implications (Figure 2).

Figure 2: Top priority areas for business performance

Priority 1: Building order pipeline

Building the order pipeline with forays into new markets and sectors is the topmost priority for the construction industry. While the industry saw order books grow by 1520 percent in terms of value in fiscal year 2011, it has slowed in the first half of fiscal 2012. Despite this, respondents were optimistic about their prospectsnearly 70 percent of them expected revenues to increase by more than 15 percent. To achieve this growth, organizations are banking on new markets as well as diversification into new sectors (Figure 3). New markets: Nearly 60 percent of respondents felt the need to look beyond Indian shores to new markets such as the Middle East, Africa and Turkey. The preferred entry strategy for these overseas forays was joint ventures, said 63 percent of respondents. They felt that partnerships with local incumbents help mitigate risk in a hitherto untapped market. For example, recently, a well-diversified Indian construction company has seen higher order inflows from the Middle East market as compared to the domestic market. Indian companies are facing increasing competition as international players enter the market. A number of European and Japanese companies are seriously thinking of entering niche segments in the Indian market.

Figure 3: New markets and diversification for growth

 Diversification: 37 percent felt that diversifying into new sectors is the best way to ensure growth. Companies are looking to expand their construction and development activities across sectors for better margins and growth. Further, given the cyclical nature of the construction business, diversification helps in mitigating risks to sustainable growth. At the same time, few respondents felt that they should only diversify in areas where they have the requisite expertiseas excessive diversification can increase the risk of failure.

Priority 2: Operational excellence

Achieving operational excellence is another top priority, the study showed. In a highly competitive market where margins are constantly under pressure, greater efficiency is key to achieving profitability. Respondents felt that by combining the right operating model with superior execution, they could not only ride out slowdowns more successfully, but also emerge from them more quickly. Through operational excellence, organizations benefit from lower costs, increased efficiencies, fewer cost overruns and sustainable returns on operating assets. Collectively, this allows them to bid aggressively for projects without compromising on quality. In the survey, Accenture asked respondents to name the top three factors contributing to operational excellence (Figure 4). Project management excellence was identified as the most important factor, cited by 88 percent of respondents. They felt a need for greater focus on internal collaboration across the EPC functions, subcontractor management, risk management across the various stages of a project life cycle and efficient utilization of resources such as material, manpower and equipment. Leading organizations are leveraging innovative

and modern construction techniques and at the same time maintaining high standards of quality to optimize cost and schedule. Leadership qualities and the ability to navigate through the complexities, conflicts and challenges associated with a typical project were consistently highlighted as key factors for success in project management.

Excessive diversification stretches management bandwidth and increases risk of project failure.
Director of a leading infrastructure financing company Forward or backward integration: While globally, companies look at forward or backward integration to reduce revenue volatility, Indian players are not as keen on this option. Only 16 percent of respondents ranked this as important.

It is difficult for a projects company to survive without strong project management. Good project managers can turnaround a bad project and vice versa.
Project leader of a major EPC company

Figure 4: Top three factors for operational excellence

Superior engineering and design leveraging concepts such as standardization and 3D modeling were identified as critical enablers. This is because 5060 percent of the costs are committed at the end of the design phase for any project. Engineering superiority should not only be reflected by design standards but also by ease and simplicity of operations. Efficient procurement of raw materials and equipment was the other factor that respondents saw as critical to operational excellence.

Priority 3: Ensuring capital efficiency

In past years, secondary market volatility forced companies to turn to high-cost debt to fund their projects. With interest rates showing no signs of falling soon, highly leveraged organizations are now worried about servicing their debt. This scenario has impacted project execution, with a number of projects suffering from schedule and cost overruns due to delayed payment and working capital issues. Little wonder then that respondents ranked capital efficiency as the third priority area (15 percent).

We have a situation where we are not able to pay our vendors and subcontractors due to delayed payments from our clients. This has led to vendors not delivering as per the agreed schedule leading to overall project delay.
Project execution lead for multiple projects at an EPC company

programs, differentiated pay and stock options (Figure 5.1). At junior levels, stock options seem to have lost favor with a number of people whom we interviewed due to the vagaries of the stock market.

Where are the people with the right skills to execute large infrastructure projects?
Managing director of a large infrastructure company

We are facing a war for talent

Chairman of a large infrastructure company It is commonly felt in the construction industry that the education system needs an overhaul to be able to produce the talent the industry needs. Companies today are increasingly focusing on the productivity of their workers. Some leading construction companies are partnering with organizations such as CIDC to develop the skills of their workers.

Priority 4: Focusing on key enablers

Talent, knowledge management and technology emerged as the top enablers (Figure 5). Talent: Nearly 75 percent of respondents rated talent as the most critical enabler. There is an acute shortage of experienced project managers, design engineers, planners and skilled construction workers. Given this shortage companies are finding it hard to attract and retain talent. Commonly used measures to attract and retain the best talent are leadership

Figure 5: Key enablers

Figure 5.1: Key initiatives for managerial staff

Creating a road map for effective career progression is essential for infrastructure companies. This particularly applies to companies that are project owners. When a project is completed, the personnel involved in the project are often at a loss, as the company may be unable to provide opportunities for actively engaging these people. Such experienced talent either move to other companies in the process of setting up new projects or are compelled to move to an alternative line of business. Knowledge management: Nearly 60 percent of respondents felt that to improve their capabilities, organizations need to adopt industry best practices (Figure 5.2). High-performance businesses are also using information technology (IT) to launch in-house e-learning platforms. To sustain its growth momentum, a large Indian developer launched an internal knowledge management system. The objective of this system is to provide a full-fledged learning experience to its employees by utilizing an IT interface to fully or partially deliver trainings. Documenting and sharing failures and near misses provide invaluable lessons for project teams across various verticals. If the decision-making process has to be made efficient and inclusive,

it is essential to disseminate information among a wide range of stakeholders in different locations.

We need to learn from our past mistakes, as repeating mistakes can be very costly.
Project execution lead of a leading EPC company Technology: Respondents agreed to the growing importance of technology as a key enabler. It is increasingly becoming the fulcrum that enables companies to achieve their goalsmore competitively and effectively. Technology can help businesses create a virtual environment for collaboration in which all partnering entities can be integrated on one platform. This can result in improved overall project delivery, efficiency, asset operability and cost control through enhanced data and information transparency. Better integration and integrity of engineering and project systems can also be achieved. To overcome the inefficiencies of the traditional enterprise resource planning (ERP)

system, one of the largest EPC operators in India has implemented an in-house, portal-based enterprise system providing a solid backbone to project execution. Complete job details from concept to implementation and completion are automatically uploaded onto the system and are available across all teams linked to projects. This has helped bring together different phases of construction cyclesdesign, development, tendering and bidding, budgets, and planning and scheduling.

Technology is a key enabler for process efficiency and standardization.

Program lead of a leading EPC company

Figure 5.2: Developing and implementing best practices

Roadblocks to growth

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There is a need to move away from a pure L1 Indian construction (lowest bidder) norm. sector is capable There are numerous of executing large instances where complex projects as projects have been there are companies awarded to the lowest with the required bidder but the project expertise in the market. was finally executed at The key to growth is an a much higher cost to enabling environment. the government due to Project manager of a leading EPC delays and claims.
company Lack of equitable and win-win bidding norms Conditions as well as clauses of the bidding and contract documents strongly influence bid evaluation and the subsequent performance. Fifty-five percent of respondents cited the lack of equitable and standardized bidding norms as an important challenge. Chief executive officer of a large Indian EPC company Shortage of manpower Half the respondents felt that the unavailability of managerial and supervisory staff is a significant impediment to growth and a major concern for the industry. The growth of employable manpower in Indias construction sector has not kept pace

The construction industry has a huge potential for growth. However, it is saddled with some perennial problems such as a shortage of project management staff and construction workers, lack of equitable bidding norms, ambiguous and widely differing land acquisition laws, and delays in project execution (Figure 6).

Bidding procedures for government tenders, for example, fail to weed out low-quality, unrealistic quotes, thus compounding the problem of projects being stalled due to the lack of competency or funding at a later stage.

with the growth in infrastructure projects. While the shortage of project management staff can be attributed to the lack of players providing vocational training, scarcity of construction manpower is partly caused by reduced migration from rural India in the wake of job guarantee schemes offered by the government. The private sector has, meanwhile, set up a number of initiatives to meet the skill gaps. While some of these initiatives are in-house (skill upgradation) or through private third party training providersthere is a significant amount of work being done in collaboration with government supported bodies such as CIDC. An innovative step in this areais the Simplex-CIDC-Bhartiya Vidya Mandir (BVM) initiative to raise the productivity, quality and safety benchmarksof the supervisor level workforce, through on-the-job training. However, there is a need to scale up these initiatives to meet the growing demands of the industry. Land acquisition issues Our survey revealed that more than half of respondents felt that delay in acquiring land is a primary obstacle to completion of large projects. The delay could be on account of land undervaluation, dependence on state governments for actual land allotment and an ambiguous definition of the term unencumbered land. It is interesting to note that while globally, land acquisition is usually completed before a project is tendered, in India, projects are generally awarded with only a part of the land having been acquired. Steps to overcome this problem have been discussed later.

Figure 6: Challenges faced by the industry

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Removing roadblocks

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To accelerate the pace of growth in the construction sector, the industry needs to persuade the government to implement reforms and help remove the major roadblocks faced by the sector (Figure 7).

Land acquisition reforms: The government should modify existing land acquisition and rehabilitation legislation, which balances the needs of various stakeholders without compromising on the quality and velocity of projects. Bidding process reforms: Putting in place stringent qualification criteria at the time of tendering as well as for bidding. Contracting philosophy: There is a need to draft model contracts aligned to global and local best practices, with the underlying principle of being equitable. Approvals and clearances: The government should review and reengineer the approval process to minimize delays. Effective monitoring: The government should establish more monitoring cells on the lines of the investment tracking system planned by the finance ministry for all major projects in the private sector, as well as for public-private projects with investments larger than a reasonable threshold. The government should look at rigorous implementation of guidelines from the Ministry of Statistics and Programme Implementation. Dispute resolution: A robust mechanism for fast and efficient dispute resolution should be put in place. This should be aligned with international best practices and institutional arbitration system.

Although there is a potential to grow at a higher rate, government policies are required to encourage quick decision making.
Director of a major infrastructure lending company A majority (68 percent) of respondents said delays in the resolution of issues related to land acquisition resulted in substantial delays in the completion of projects. More than half (58 percent) flagged bidding process reforms and 42 percent highlighted establishing monitoring groups as other important areas requiring the governments intervention. The respondents listed some steps that the government could initiate:

Financing: Financing of large infrastructure projects with long gestation periods remains a significant challenge. Industry leaders believe that the government needs to focus on two key interventionscreating an environment to attract investments and structural reforms to enable long-term financing. Institutional lending should be ramped up from the current 1.5 percent to at least 5 percent share of total lending. Talent: The government needs to play a more active role to address the shortage of talent by setting up sector-specific skill councils and skill development institutions. We can draw inspiration from China, where the Ministry of Construction (MOC) is playing a leading role in promoting project management. Through multiple programs to improve skill availability, MOC has helped in certification of project managers and training programs in collaboration with numerous universities. In India, CIDC has donned this role well by rolling out training programs at multiple skill levels for the industry players. Additionally, a national-level skill assessment program can be created for workers to train and apply for certifications. On an overall industry level, recognizing and honoring skilled workers, projects and organizations for their contribution to the industry should be explored as a way to strengthen the talent pool.

Figure 7: Critical government interventions needed

Footnote: The numbers are percentages of respondents

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Conclusion
Volatility in todays business environment is making it necessary for construction companies to rethink their business models. Building a robust order pipeline with forays into new markets and sectors is the top priority to achieve growth. At the same time, companies will need to continuously focus on operational efficiencies to maintain margins. Project management, superior engineering and design, efficient procurement of resources and risk management will be the essential levers for operational excellence. Adoption of best practices across areas, including green construction technology; health, safety and environment; and adherence to stringent quality norms aligned with global standards is critical for Indian companies as they keep up with their global peers. Accenture believes that in the current business environment there are three main building blocks of success: market focus (requiring agile positioning to capture revenue), excellence in delivery (to improve profitability) and performance enablers (centered on a culture and mindset that will sustain success, with a focus on enablers such as talent, organization and technology). Companies that achieve all three will successfully differentiate themselves from competitors. Given its pivotal role in the creation of infrastructure, as a regulator and a facilitator, the government must play a proactive role in fostering an enabling environment for growth. While it has already initiated several policy measures, three critical areas require immediate attention: land acquisition reform, bidding process reform and setting up monitoring groups. Additionally, involvement of citizens as a stakeholder and incorporating concepts of sustainability will become increasingly relevant for infrastructure development in the coming years.

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Contacts
Accenture
Sanjay Dawar sanjay.dawar@accenture.com Manish Chandra manish.chandra@accenture.com Vishvesh Prabhakar vishvesh.prabhakar@accenture.com

About Accenture
Accenture is a global management consulting, technology services and outsourcing company, with more than 249,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the worlds most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$25.5 billion for the fiscal year ended Aug. 31, 2011. Its home page is www.accenture.com.

Disclaimer
This report has been published for information and illustrative purposes only and is not intended to serve as advice of any nature whatsoever. The information contained and the references made in this report is in good faith, neither Accenture nor any its directors, agents or employees give any warranty of accuracy (whether expressed or implied), nor accepts any liability as a result of reliance upon the content including (but not limited) information, advice, statement or opinion contained in this report. This report also contains certain information available in public domain, created and maintained by private and public organizations. Accenture does not control or guarantee the accuracy, relevance, timelines or completeness of such information. This report constitutes a view as on the date of publication and is subject to change. Accenture does not warrant or solicit any kind of act or omission based on this report.

Contributors
Krishna Bandaru, Rajesh Kamat, Giri Subramanyam, Vivek Srivastava, Arun Munjal, Pranav Singh, Anuj Rikhye, Soujanya Vishwanath, Manuj Ohri, Vivek Kuttappan, Kuljyoti Sehgal, Rahul Shukla, Sashi Kiran, Sanjeev Sharma, Srinath Rajaraman, Vineet Khanna, Ryan Coffey, Raghav Narsalay

About Construction Industry Development Council (CIDC)

The Planning Commission, Government of India, jointly with the Indian construction industry, had set up CIDC to take up initiatives for the development of the construction industry. The Council, for the first time in the country, provides the impetus and organizational infrastructure to raise quality levels across the industry. This helps to secure wider appreciation of the interests of construction business by the government, industry and peer groups in society. CIDC is a change agent to accelerate a process of selfreform that should enable the industry to answer the challenges of the future. Clarity of purpose and intent forms CIDCs mandate. Since its inception in 1996, the Council has taken several initiatives for the development of the industry. Visit the home page www.cidc.in

CIDC
Dr. P.R. Swarup cidc@cidc.in Ashutosh Bhardwaj cidcab@hotmail.com

Contributors
Jyothi Girish, Shrutidhara Kaushik, Tuhina Tripathi, Farha, Saikumar, B.N.Rao

Copyright 2012 Accenture All rights reserved. Accenture, its logo, and High Performance Delivered are trademarks of Accenture.

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