Real Estate Intelligence Service, Tuesday, November 17, 2009

RBI survey upbeat on corporate profits

RBI survey upbeat on corporate profits
The Hindu Business Line, November 17, 2009, Page 1

Our Bureau, Mumbai

The professional forecasters’ survey of the Reserve Bank of India is bullish about the corporate sector’s profitability in the current financial year.

In the latest survey, the profit growth of the corporate sector in 2009-10 has been revised upwards to 10 per cent from 7.5 per cent in the earlier survey. The survey, however, marginally lowered the corporate sector profit growth for 2010-11 marginally to 14.5 per cent from 15 per cent in the last survey.

However, the survey has notched down the real GDP growth by 50 basis points to 6 per cent.

GDP growth

The RBI, in its second quarter Review of the Monetary Policy, projected a GDP growth of six per cent in 2009-10 with an upside bias by assuming a modest decline in agricultural production and a faster recovery in industrial production. The upward revision comes on the back of a firm recovery in industrial output.

According to the latest Central Statistical Organisation data, industrial production, comprising major sectors such as manufacturing, electricity generation and mining, grew 9.1 per cent in September higher than the 6.03 per cent growth recorded in the same month last year.

Out of the 21 respondents in the ninth round of survey, majority of them assigned a GDP growth range of 6-6.4 per cent for 2009-10 and 7.5-7.9 per cent for 2010-11.

Forecasters’ median estimates for Wholesale Price Index based inflation in the third and fourth quarters of current financial year have been revised upwards to 4 (2.5 per cent last survey) and 6.8 per cent (5.4 per cent), respectively. Majority of the forecasters feel that inflation will be in the 6-6.9 per cent range in 2009-10 and 5-5.9 per cent in 2010-11.

India on way to becoming 3rd-largest construction mkt by 2020

India on way to becoming 3rd-largest construction mkt by 2020
The Financial Express, November 17, 2009, Page 12

fe Bureau, Chennai

In just ten years India will move from the ninth-largest construction market in the world to the third slot— only below construction giants China and the US, says a new ten-year forecast from Global Construction Perspectives and Oxford Economics.

According to the report, by 2020, the country’s construction market will be worth almost $650 million making up 5% of the world’s total construction output. Demand for both affordable and quality housing along with government investment in infrastructure will help to drive growth for construction companies operating in India.

The ten-year projection indicates that emerging markets will rapidly overtake the construction output of their developed neighbours with China overtaking the US and becoming the world’s largest market as early as 2018 and with a 19.1% share worth almost $2.4 trillion by 2020.

The report predicts that by 2020 Nigeria, Vietnam and Turkey will be amongst those experiencing highest growth levels over the next decade along with booming markets like India and China. The construction output of the emerging markets in the Asia-Pacific region will grow by 125% over the next decade.

The top ten highest growth markets by 2020 will be entirely composed of emerging markets with Poland the only European country to feature on the list.

Speaking at the launch of the report Global Construction 2020 in London, Mike Betts of Global Construction Perspectives said that across the board India’s construction industry will continue to grow, “The construction market in India is already enjoying very healthy growth rates which will only get better over the next decade. Most importantly, the country will experience serious growth in all of the different construction sectors and will be a key market for many of the world’s largest construction companies.”

Adrian Cooper of leading business forecasters Oxford Economics said, “We have identified the key drivers and used data including population projections, long-term GDP estimates and public sector budgets to feed into our modeling to help us understand how the global construction industry is changing at a rapid rate.

“All of the data points to both short and long term growth in emerging markets. We predict that in just ten years time construction in these markets will be more than double in size, growing by an estimated 110% and representing 17.2% of GDP in 2020.”

The report predicts that today’s global construction market is worth an estimated $7.5 trillion, representing 13.4% of global GDP. But by 2020, construction will be a $12.7 trillion global market, an overall growth of 70% in the next decade. Construction in 2020 will account for 14.6% of global GDP.

The infrastructure construction market in emerging markets will grow by a staggering 128% over the next decade to 2020, compared with just 18% over the same period in developed countries.

The largest construction market globally is residential accounting for 40% of the total global construction market by 2020 when it will be worth $5.1 trillion.

Road construction suffers capacity constraints

Road construction suffers capacity constraints
The Financial Express, November 17, 2009, Page 8

Mukesh Kacker

Highways development, which remained largely comatose during UPA-I, has got an adrenalin injection with the induction of Kamal Nath as the minister in-charge. But his pitch to create 20 km of highways, despite his good intentions, looks hard to achieve, primarily because of capacity constraints in the road construction industry—an issue that has got much less attention than it deserves.

Reasons and solutions for the slow progress in this sector have been discussed by various committees. Policy attention have been mainly on three areas: (a) reducing pre-construction delays—land acquisition, tree-felling and shifting of utilities; (b) changes in the policy environment—changes in request for qualification or proposal (RFQ & RFP) documents, model concession agreements, viability gap funding, public-private partnership format (BoT or annuity or a mixture) and fiscal concessions & taxation, besides introduction of new windows of financing; and (c) strengthening the capacity of NHAI to implement a vastly enlarged programme.

While the government prepares to reintroduce the two Bills on land acquisition and resettlement & rehabilitation, Kamal Nath has already taken administrative steps to reduce pre-construction delays. The BK Chaturvedi committee has been entrusted with the job of finalising the changes in the policy environment, and a formal announcement of the changes is expected. Strengthening NHAI’s capacity is proving a daunting task, and nothing concrete has been done so far. Theoretically, even if these three factors were to be handled, it would still be impossible to make a quantum leap in the speed of project execution, since the road construction industry lacks the capacity to execute projects quickly. This area is not under the government control, and hence received poor attention.

When the National Highways Development Authority was launched and 100% foreign direct investment was allowed in the sector, the objective was to bring about a paradigm shift in the quality and execution of road projects. It was then hoped that foreign road construction companies would bring in better technology, equipment and experts and global best practices. In the initial years of National Highways Development Project, (NHDP) there were encouraging changes in these spheres. The change over to a managerial system based on ‘supervision consultants’ and ‘independent engineers’ vastly improved project execution and monitoring.

There were also bigger and better pavers, hot-mix plants, concrete batching plants, rollers, levellers and crushers. More companies jumped into road construction and suddenly, there was a huge demand for civil engineers and skilled and semi-skilled workers. It appeared as if the road construction industry was going through a process of qualitative change. Ten years down the line it seems that this process got derailed somewhere and the initial expectations stand belied now.

There has been little consolidation in the industry and the number of companies that can take up big projects is pretty limited. Western companies have ignored the programme, and a handful of East Asian companies continues to be there. The size and quality of machinery and equipment have also reached a plateau. While technology has moved everywhere else at a face pace, we no longer see equipment capable of delivering projects quickly. There is a massive shortage of qualified civil engineers, diploma holders, masons, carpenters, electricians, mechanics, cutters, welders and machinery operators.

No lessons seem to have been learnt on imbibing best practices. Just sample the excruciatingly slow and shoddy way in which the three flyovers on the outer Ring Road in New Delhi have been/are being built by Afcons, one of the largest road construction companies in India.

If the NHDP has to speed up the pace of project execution to the level envisioned by the minister, then the average capacity of present road construction contractors will have to increase manifold. This can happen only if big foreign construction companies enter the scene. The minister’s plan to introduce ultra-mega projects to attract big foreign companies is a step in the right direction.

The domestic industry is beset with capacity constraints on two fronts. One, there is an extreme shortage of skilled and semi-skilled human resources. Two, there is a shortage of quality construction equipment. On both these fronts, the domestic industry will have to raise its capacity by a factor of three. The construction industry needs to sit down with the government and adopt a time-bound action plan for: (a) increasing the number of civil engineers, diploma-holders and other semi-skilled workers; (b) introducing capacity building courses for each segment of human resources; (c) bringing construction specifications to international standards; and (d) increasing the availability of latest equipment and machinery.

The government and the road construction industry need to wake up to this challenge of capacity constraint.

—The author is director-general, CUTS Institute for Regulation & Competition

How to pay for roads and airports

How to pay for roads and airports
The Financial Express, November 17, 2009, Page 6

Shyamala Shukla

India’s public-private partnership (PPP) programme in infrastructure has acquired substantial size over the last few years. To fill the gap in public infrastructure investments, the government created future obligations in the shape of the PPP programme, which started with a large annuity-based road sector programme. The government committed a part of its fuel cess for 25-plus years for payment of annuity and for facilitating additional borrowing by NHAI. In addition, various clauses of concession agreements in user fee-based PPPs were framed such that the government undertook guarantees to lend comfort to investors and lenders entailing substantial levels of future payments contingent upon specified events. These are off-balance sheet.

The findings of a study on infrastructure financing that commercial banks, with public sector banks as major contributors, have provided a large part of debt financing so far have additional implications for the government’s fiscal management, especially because many of these institutions are characterised by substantial government interests. Out of the total availability of debt financing for infrastructure in the Eleventh Plan of $206.38 billion, almost 70% would come from domestic bank credit, non-banking financial institutions and pension/insurance companies, again many would be institutions with government interests.

Considering the model concession agreements (MCA) for the road, railways (container), urban metro and port sectors currently in use, the transmission service agreements and the share purchase agreements of the power sector and limited clauses of the draft MCAs for the airport and railway sectors, the contingent liabilities of the ‘authority’ are in three major categories: compensation for change in law, penalties for authority default and termination payments, of which the first and the third are more important.

The concessions in different sectors provide coverage for change in law with minor differences. For the road sector, for example, the concessionaire is to be compensated if aggregate financial effect exceeds the higher of Rs 10 million or 0.5% of realisable fee.

The basis for termination payments in all agreements is the debt due or book value or replacement value. A partial answer to the obvious question on why the GoI did not consider market value as a basis lies in the level of comfort demanded by lenders. The substitution agreement which forms part of the concession agreement states that: “Lenders are entitled to receive from the concessionaire, without any further reference to or consent of the concessionaire, the debt due upon termination of the Concession Agreement.”

This means that government, through termination payments, is essentially paying its banks or itself. Bluntly, it means that private debt will almost fully be paid for by government should the private sector fail to do its job. Over the course of time, with more financing coming from other sources, the situation would change, but the prospects of large contingent liabilities are indeed alarming.

A draft World Bank report, GoI: Managing the fiscal implications of PPPs, states that GoI’s exposure to PPP termination payments is approximately Rs 40,000 crore ($10 billion, 1% of GDP in 2007) with current value of obligations at about 1% of the exposure, which is relatively low at present. Under similar assumptions, we can calculate somewhat loosely that the combined exposure of 17 state governments could be around $16 billion and additional exposure of GoI and the state governments combined could increase by approximately $50 billion in the next five years.

PPP experts in GoI have suggested the notion of ‘Net Contingent Liabilities’ based on the reasoning that most PPP projects are monopolies; services rendered cannot be replaced and demand inelasticity will keep revenue streams intact. On termination, the asset reverts to government and a new operator can be procured. Therefore, net contingent liability would take into account the current value of the asset and the NPV of earnings for the remaining period. This reasoning has an obvious flaw: a project with intact revenue streams would probably not require termination.

An institutional framework for controlling contingent liabilities would consist of investment planning, sector strategy, adequate project design, risk appraisal involving other than line ministries, risk sharing, limiting contingent liabilities overall, disclosure, separate promotion and oversight functions, tracking variables impacting probability of termination, tracking lifetime budgetary implications of PPPs and creating a reserve fund for called liabilities.

—The author is working as advisor to India’s executive director, at The World Bank. These are her personal views

Post-recession customer is going to be infinitely more demanding

Post-recession customer is going to be infinitely more demanding
The Financial Express, Brand Wagon, November 17, 2009, Page 4

Radhika Sachdev

As President and CEO of the world’s fourth largest premium spirits companies, Beam Global Spirits & Wine, Matthew Shattock’s task is well cut out for him. Since the third quarter sale of premium whisky remained flat in the West, the beverage arm of the US consumer goods group Fortune Brands, is now training its interest and investment on the developing markets. India, therefore, is a focus market for the company. Shattock is responsible for a portfolio of eight of the world’s top-100 premium spirits brands that bring in $2.5 billion in revenue. In India, the company is known more for its Teachers’ Scotch Whisky and the recently launched DYC, the liquor maker’s first domestic product in the premium malt whisky segment, developed at the company’s plant in Rajasthan. In an interview with FE’s Radhika Sachdev, Shattock says his company plans to export this brand to other countries from India. Edited excerpts:

Your market share is just around 1% in the estimated $6 billon liquor market in India…

Yes, but in the premium segment that we operate in, we have a share of 40%. Our compound annual growth rate in this segment is 20% (annual turnover $40 million) that is higher than the industry average of 11%.

What is your view of the restrictions on advertising of liquor brands?

It limits our ability to use all media vehicles creatively, but we are a responsible brand and we have to abide by the country norms while driving responsible consumption patterns in our consumers, especially youth consumers. It’s to do both with integrity and credibility.

In view of the restrictions, how do you plan your media spends?

Below-the-line activations account for about 70% of our marketing budget and it would continue to remain so. Teacher’s Achievement Awards that honours individual achievements in fields of business communication, entertainment and sports has entered into its 9th edition now and it’s a wonderful property that our team here has built for us. We will continue to invest in this property.

You did large-scale restructuring at other offices and laid off a few employees. Were the India operations also impacted by those cost-trimming measures?

On the contrary, since India is one of the top 10 markets for us, we have been empowering our workers here to create new products here. Teacher’s Original, a fine blended Scotch Whisky is one outcome of that, that’s very appealing to the connoisseurs in this market.

What’s the way forward that you see in India?

We have already consolidated our position in tier-1 cities. Our next port of call is the tier-2 cities. We feel that the post-recession consumer in India and the West is going to be very value-conscious. He would not be swayed by the image factor. He would look for real value in a brand.

You have put in long stints at Cadbury and Unilever. How has been the transition from consumer goods to liquor brands?

It’s a wonderful experience handling these heritage brands where each brand has a story to tell. But the challenge is dealing with the many regulations of this market. The tax rates in India, for instance, are at least 30% higher than the rest of the world, that’s nearly two-thirds the price of the product. Nonetheless, surviving and profiting in this kind of a market is exciting.

Expenditure on education, health hit due to slowdown

Expenditure on education, health hit due to slowdown
Business Standard, November 17, 2009, Page 6

Devika Banerji / New Delhi

Govt focuses on infrastructure, urban development

The economic downturn has had an unusual casualty. The UPA government’s stated agenda to increase expenditure on education and health during the Eleventh Plan Period (2007-12) has gone awry.

With the global economic downturn forcing the government to reprioritise its focus areas and increase its spending on infrastructure and urban development, the education and health sectors will see only around 35 per cent of the envisaged expenditure in the first three years of the Plan period.

Including 2009 budget estimates, only around 35 per cent of the envisaged plan expenditure has taken place in health and education, while sectors like urban and rural development — including infrastructure — have witnessed excess spending.

Revised estimates of 2008-09 budget also show that stated key sectors, like agriculture, health and education, witnessed lesser than anticipated expenditure during the year, while expenditure exceeded in other sectors. Expenditure in education and health fell short by 9 per cent and 0.36 per cent ,respectively, while expenditure exceeded by 83.10 per cent and 3.3 per cent in urban development and transport infrastructure, respectively.

When the Eleventh Plan was formulated, the education and health sectors were identified as focus areas. This was reaffirmed when the UPA government contested elections with an agenda along similar lines.

Now, due to the economic downturn, the government is likely to face substantial financial shortfalls in the next two years, which is likely to jeopardise the government’s stated agenda of increasing expenditure on these two sectors.

“We had expected at the beginning of the Plan that our fiscal deficit situation would be good by the middle of the Plan period, which would facilitate more spending during the last two years. However, the slowdown led to increased spending in sectors like infrastructure and rural development. Therefore, we might end up spending less in some other sectors,” Planning Commission member Abhijit Sen said.

Prime Minister Manmohan Singh had recently said that spending on education should be 6 per cent of the GDP (Gross Domestic Product), while that on health should be 2-2.5 per cent of the GDP.

Expenditure in another key sector, agriculture, fell short by 2.5 per cent in 2008-09. This was, however, balanced out by expenditure in rural development, which exceeded the original estimate by 58.4 per cent. Such expenditure will have to be continued for some time for sustainable economic recovery to take place. This, in turn, will create hurdles to achieve increased spending in health and education in the final years of the Plan period.

According to officials in the Planning Commission, the downturn has made it difficult to realise the entire vision for the Eleventh Plan. The Plan had envisaged that the first two years of the period will have relatively lesser spending and, by the mid-term appraisal, the government will be looking at a fiscal deficit in the 2-3 per cent range.

With the government facing a fiscal deficit of 6.8 per cent this year, the big spending in health and education is not likely to happen, especially since there is a shortfall in Plan resources for the rest of the Plan period.

Planning Commission estimates show there might be a decline of 17.58 per cent in the estimated gross budgetary support (GBS) for 2010-11 and an estimated decline of 37.8 per cent for the last Plan year (2011-12). In the wake of the slowdown, GBS for the years 2008-09 and 2009-10 exceeded estimates by 19.74 per cent and 8.85 per cent, respectively, to Rs 2,12,099 crore and Rs 2,55,353 crore.

The Planning Commission, however, is coming up with recommendations to put the plan vision on track. It recommends strong steps to curtail non-Plan expenditures, especially on subsidies. Moreover, disinvestment proceeds, which are slated to be used in social welfare programmes, will also provide a way to keep the plan on track.

Withdrawal of stimulus will be gradual: Cab secy

Withdrawal of stimulus will be gradual: Cab secy
The Times of India, November 17, 2009, Page 27

TIMES NEWS NETWORK, New Delhi

Ruling out any change in government's stand on withdrawal of stimulus packages, cabinet secretary K M Chandrasekhar said on Monday that the immediate concern of the government was addressing issues of supply constraints and easing of prices. "There are supply constraints in some commodities globally as well as in India. We have removed import duties on most of those goods and the situation is improving," he told reporters on the sidelines of a business meet here.

Chandrasekhar said the government would not withdraw the stimulus measures until the economy returns to high growth and when it actually does, the withdrawal will be gradual.

Right now all indications are that there is no immediate need to change the stimulus package, he added. "The general indication today is that stimulus will continue this year, that is the indications given by everybody. Let us not think stimulus is something that will be withdrawn all at once," Chandrasekhar said. And when the government would start considering withdrawal, Chandrasekhar said certain items in the stimulus packages would still be retained benefiting specific sectors.

Among other food items, prices of retail sugar have risen by 90% to Rs 38 a kg from Rs 20 a kg during October last year.

The top bureaucrat attributed this primarily to global shortage. He said the Centre is keeping a watch on prices. The government has taken steps like allowing duty-free imports of both raw and white sugar and banning of futures trading in the commodity.

Blaming the rise in prices to a chain of intermediaries who "do not always work competitively", finance minister Pranab Mukherjee said, "Our agriculture markets are characterised by market imperfections...a huge gap exists between the consumer price and the price received by primary producers."

FM assures of phased booster exit

FM assures of phased booster exit
The Economic Times, November 17, 2009, Page 9

Our Bureau NEW DELHI

STIMULUS packages to perk up the economy during the slowdown are unlikely to be withdrawn in the current financial year and the exit, when it happens, will be a gradual one, finance minister Pranab Mukherjee said on Monday.

The recovery has mounted pressure on the government to clear its stand on the fiscal stimulus, as the country needs to quickly get back to the path of fiscal consolidation. “Stimulus will be removed when economy is firmly on the path of recovery. The common man had been cushioned against the global slowdown by the government regulation,” Mr Mukherjee said at a CII conference on competition policy.

India had announced three stimulus packages between December 2008 and February 2009 that included tax cuts and borrowings-financed additional government expenditure to create local demand to counter recession in advanced economies. It had reduced the cenvat rate or the tax on factory output from 16% to 8% in stages beginning Budget 2008-09 to stimulate demand. The government is budgeted to borrow over Rs 4 lakh crore to finance extra expenditure, taking the fiscal deficit to a 16-year high of 6.8% in 2009-10.

Last week, Mr Mukherjee had said, in London, that the stimulus packages have achieved their objective. The signs of revival are evident. One of the key macro indicators, the industrial production, expanded by 9.1% in September 2009.

Cabinet secretary KM Chandrasekhar also echoed the views expressed by the finance minister. “The general indication is that stimulus will continue this year, that is the indications given by everybody. Let us not think stimulus is something that will be withdrawn all at once,” he said. Mr Chandrasekhar added that certain elements in stimulus packages might be retained while others might go, but declined to reveal the details.

Policymakers fear the government’s high borrowing could crowd out private fund raising when the demand for funds picks up. The growth in non-food credit has been less than 5% in the current fiscal. Once the economy gathers momentum, credit off take will pick up.