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As Andhra Pradesh’s economic development takes off, the demand for construction
Andhra Pradesh will soar for two main reasons. First, the thrust to build the growth engines will
will be the centre stimulate the development of almost the entire range of infrastructure: roads, railway
of a booming
lines, dockyards, airports, power plants, and so on. Second, economic growth will
construction and
construction create the need for industrial estates, business complexes and housing. The
services industry. construction industry will thus become a major contributor to economic
development.
How exactly will the construction industry become so important to the economy?
How will its growth be advanced?
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Scaling New Heights in Construction
• Massive demand for construction will be created over the next 25 years, much of
it arising in the next five to ten years. This sector will thus become an engine of
growth in its own right.
1. A major shift in the Government’s approach to the industry, given that the
Government will remain its biggest client.
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Scaling New Heights in Construction
A CONSTRUCTION BOOM
Andhra Pradesh will invest over Rs.4,00,000 crore till 2010 in the development of
infrastructure like ports, roads, power plants, etc. This will give rise, directly and
indirectly, to huge demand for the construction industry, much of it originating in
the next five to ten years.
Construction can thus be a major source of economic growth in the near term. As
infrastructure projects come up, there will be massive demand for civil
construction, such as roads, and industrial construction, such as power plants. As
industry grows, stimulated by the creation of infrastructure, demand for plant
construction will boom. At the same time, the emphasis on environmental
protection will stimulate further construction, e.g., of water treatment plants. The
rise in real incomes that this growth will bring, along with the need for public
and private housing (e.g., the building of townships by corporations) will further
boost the construction industry.
All this growth will have a tremendous multiplier effect: core industries situated in
Andhra Pradesh—cement, coal, steel—will also expand rapidly. The boom in
construction activity will also generate employment on a large scale.
Construction activity will induce growth in practically every region in the State,
intensifying wherever infrastructure and industrial development takes place. The
Rayalaseema area, in particular, will benefit from this growth engine since it will be
a major supplier of building materials given the availability of limestone (as well as
a number of cement plants), various kinds of granite and other building materials
in this region.
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Scaling New Heights in Construction
As stated before, the State Government will not be in a position to build infrastructure
on the scale required on its own. It will, therefore, encourage private sector
participation in infrastructure development in a much bigger way than before. This
will drive major change in the construction industry and set it on a new growth
trajectory.
This, however, will happen not automatically but through a concerted effort by
government and industry. However, the State Government will initially play a
decisive role in this effort. It will thus need to radically change its approach to
Government-sponsored construction.
The Government is the largest client for the construction industry since most
construction is undertaken for State- or Centre-sponsored infrastructure
development and housing. As a result, the Government’s approach towards
construction has largely influenced how the industry has developed, particularly
in terms of skills and practices. On the whole, these have remained narrow and
unspecialised, for several reasons.
First, an emphasis on low costs has led to a bidding and bid evaluation process that
focuses mainly on price. Furthermore, since bids seldom allow for flexibility in
design, contractors have no incentive to invest in design capability, better
technologies, or skilled labour.
Second, bidding and contracting processes do not follow the standard, internationally
accepted, contract format recommended by agencies like the World Bank. This is
particularly true in the case of contracts with domestic companies. This leaves contracts
open to charges of corruption, nepotism, and so on. Furthermore, projects are often
broken into packages, with individual bids invited for each package. The overall
project is conceived and designed by the government department under whose aegis
the works have to be constructed, leaving little room for initiative or decision-making
by contractors. Not surprisingly, they see little need to upgrade their capability and
knowledge about the latest construction methods, designs, and materials.
Together with a number of other issues, such as a tendency to stick to proven and
tested technologies, equipment, and buildings, the construction industry has tended
to remain relatively underdeveloped.
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Scaling New Heights in Construction
Furthermore, since an emphasis on initial cost at the expense of quality and reliability
is counterproductive in the long run, other criteria such as prior experience and
resource availability will be used, along with bid price, for selecting tenders. To
keep a check on the bid price, the Government will work out the ‘lowest workable
price’ for a contract, below which all bids would be rejected. This approach will
compel contractors to upgrade their skills and resources, leading to a qualitative
change in the industry.
Rather than break construction contracts into many small jobs to be executed by
small contractors, the future approach will be to shift towards outsourcing projects
on a turnkey basis to a professional construction agency. This will achieve two
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Scaling New Heights in Construction
benefits. It will ensure that the latest skills, designs, materials, technologies, and
equipment are used. It will also ensure better management of cost and time and
encourage the industry to graduate from a ‘simple works execution’ model to larger,
more value-added activities, such as planning and design.
• Clearing the ground for the construction agency to begin work immediately;
reducing procedural delays that could lead to work stoppages; and working
actively to resolve stoppages when they do occur.
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Scaling New Heights in Construction
Today, the construction industry finds it difficult to raise long-term and working
capital finance since financial institutions and banks do not lend to this sector.
Moreover in Andhra Pradesh, contractors are not organised enough to form co-
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Scaling New Heights in Construction
operatives that will finance working capital. Obviously, the industry cannot grow
until this bottleneck is removed.
Several options are available to provide finance to the industry. First, construction
could be declared an industry so that it is eligible for the same financing and
incentives the manufacturing industry receives from commercial banks.
Second, a state-level Construction Development Bank could be set up. Part of its
equity could be held by the State Government, part by national developmental
banks like the Industrial Development Bank of India or the Industrial Credit and
Investment Corporation of India, and the rest by the public. This would provide
the industry with long-term and working capital finance as well as bill discounting
facilities for large projects29.
Third, small contractors, who may not be eligible for institutional funding even
if construction has industry-status, will be encouraged to form credit co-
operatives.
The State Government will persuade the Central Government to reduce duties on
construction equipment. This will encourage contractors and the Government to
use modern sophisticated machinery. It will also give Indian labour the exposure
and skills to operate sophisticated machinery, making it more competitive in foreign
markets. Additionally, duties should be gradually reduced and the domestic
equipment industry should be encouraged to modernise, innovate and become
more competitive on cost and quality.
29 While access to finance must be provided, care will be taken to prevent the kind of reckless construction preceding
the financial crisis in Thailand and other Asian countries.
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Scaling New Heights in Construction
The Government will also have a major role to play in introducing quality control
in this sector. An effective way to achieve this objective will be to introduce
accreditation processes. The Government can work along with industry associations
to develop accreditation systems.
Skills in the construction industry have remained poor, particularly at the three
important levels of tradesman, supervisor, and project manager. This is partly due
to a lack of demand for these skills and partly to the lack of institutions to help
build them. Moreover, the construction industry in the State has failed to build
expertise in the use of new technologies and materials.
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Scaling New Heights in Construction
The Andhra Pradesh Housing Board will set up a Housing Development Institute.
This institute will focus on mass production technology for low cost housing, low
cost building materials, and innovative financing schemes. It will be a centre of
excellence for adaptive research in areas of importance to the State, such as cost-
effective methods for construction in rural areas (e.g., low cost pre-fabricated
housing).
Apart from these six institutes, the State will set up a Construction Materials and A Construction
Equipment Exhibition Centre. The objective of this centre will be to expose industry Materials and
professionals, workmen and the people to the latest technologies, methods and Equipment
Exhibition Centre
materials in construction. Modelled on a similar institution in Munich, Germany,
will expose
the centre will be run on a commercial basis. It will have covered pavilions, an open industry
display area, a trade centre, a function centre, an auditorium and conference hall professionals,
and a construction industry museum. workmen and
the people to
the latest
technologies,
methods and
The new approach to construction by the Government, the focus on development
materials in
and the emphasis on training and research will provide Andhra Pradesh with a construction.
construction industry well equipped to tackle the demands of the growth agenda
and stimulate growth in its own right.
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