Interview

'2009 : Deciding Year for Direction of India's Growth Story'

Posted on 10 February, 2010 | Tags:

" We are passing through uncertain times as most of the developed world is in recession. However with a capable leadership committed to strive to mitigate challenges ahead, 2009 has the potential to go down in the history of India as the year that marked beginning of many more new initiatives," says K Venkataramanan, Member of Board & President (Operations) Larsen & Toubro Limited in an Exclusive Interview Excerpts:

K. Venkataramanan, Member of Board & President (Operations),
Larsen & Toubro Ltd.

Last year has been a phase of slowdown in the industry with many projects delayed, being reconsidered or deferred. When do you see the situation getting stabilized?
The slowdown in FY09 in India set in from October 2008 onwards, as recessionary conditions swept across most countries in the world. The financial crisis, led to a liquidity crunch as credit markets lost confidence and India witnessed substantial outflows of foreign money. This created an uncertain environment leading to delays and postponements of planned projects. The other reason for the delay in projects was the lack of decision-making on the part of the Government on account of impending elections.

The election mandate has provided the political stability that was required to revive economic growth. India is expected to grow in the range of 6 percent even in this FY. Growth at the higher trajectory of 9 percent achieved in the past years is possible once the rest of the world also breaks through the recessionary environment. Leading indicators from around the world, as well as expert views of IMF and the World Bank project a scenario where there appears to be some revival in some segments of the global economy. Perhaps the declining indicators are reaching their bottoms. If this is true, we can expect economic growth in India to begin stabilizing in the 2nd half of FY10. This in turn would lead to speedier implementation in projects.

Where does the order book of L&T stand today?
Despite the industrial slowdown, the engineering conglomerate, L&T, got around $1 billion worth of orders in the last week of March. With this, its order backlog has risen 13 per cent to Rs 77,000 crore, from Rs 68,000 crore in December 2008. About 75 per cent of the orders are from engineering and construction sectors and the remaining mainly from the heavy engineering segment. Of the total backlog, about 20 per cent would be from overseas. As on June 30, 2009, the order book stands at Rs 716.5 billion. With order inflow expected to increase in the coming quarters, the company is targeting to end the FY 2009-10 with around Rs 1000 billion.

May we have your comment on reforms that would give much needed momentum to the growth of the industry Budget 2009?
The increase in expenditure by 36 percent will create avenues for higher demand, which in turn will create demand for investment. Emphasis on Infrastructure development and the target of raising the infrastructure spending to 9 percent of GDP by 2014 is a step in the right direction. To ensure smoother execution, the Finance Minister announced that IIFCL would refinance 60 percent of commercial bank loans for Public Private Partnership (PPP) projects in critical sectors over the next 15 to 18 months. Take-out financing will be used to effectively address the asset liability mismatch for lenders to long-term infrastructure projects, and will free up capital for financing new projects. It will also help banks that have reached their sectoral limits to release funds for funding new long-term projects. IIFCL has sanctioned 106 projects with a total loan of Rs 18, 414 crore in 3 years since its inception in 2006. Recently Reserve bank of India (RBI) doubled the size of the tranche to be given to IIFCL (UK) to $500 million by one of August. IIFCL and banks are now in a position to support projects involving total investments of Rs100,000 Crore.

In the roads sector, the allocation to the National Highway Authority of India (NHAI) has been increased by 23 percent. In the railway sector the outlay has been increased from Rs.10, 800 Crore to Rs. 15, 800 Crore. Jawaharlal Nehru National Urban Renewal Mission (JNNURM) has an outlay of Rs. 12, 887 Crore. The budget places gas at par with oil by providing a tax holiday benefit for seven years.
 
This year's budget has clearly focused on alleviating the rural sector in order to widen the base of growth. The investment allowance has been introduced in case of certain sectors such as gas grids and agriculture cold storage facilities. Excise duty has been exempted on pre-cast concrete goods manufactured at site for use in the same project. This will significantly reduce the tax litigation.

However, the budget did not detail out the reform agenda, particularly in the case of disinvestments, oil pricing and a road map for higher private sector participation. The increase in MAT from 10 to 15 percent of book profits has certainly affected growth of more than one sector. The increase in service tax imposed on transport of goods through the coastal and inland waters route, including National Waterways will adversely affect the Ports sector.

Government has recently declared seven-year tax holiday for gas producers in the current budget. How would this boost the growth of Hydrocarbon sector?
The extension of tax holiday has cleared the uncertainty hovering over this issue for the last 1 year, when the Finance Bill had permitted tax holidays only for the crude oil producers. This year, the inclusion of mineral oil as a hydrocarbon irrespective of oil or gas has benefited the explorers and the producers. This will certainly encourage the auction bids and provide an impetus to private sector participation. Further, the earlier deadline of 31st Mar 2009 for completing refinery projects had resulted in financial setbacks for the private players. The relaxation in the same to 31st Mar 2012 will certainly overcome this problem.
Also, the investments in cross-country pipelines carrying natural gas have been permitted to be set off in the next assessment year. Investment-linked incentive have been allowed 100 percent tax deduction of capital expense excluding land, goodwill or financial instrument but covering cold chains, warehouses for agricultural products, crude oil or gas or product pipelines has been made available from a retrospective date of Apr 2007 in case of natural gas pipelines and from April 2009 for other businesses.

How do you see the growth of Power sector in India and how would this benefit the growth of industries?
India is a trillion dollar economy, expected to grow further at least at a rate of 6-7 percent in the immediate future and around 8-9 percent thereafter. One of the important infrastructure requirements for the speeding up of growth is Power and Electricity, which needs large-scale augmentation to meet ambitious GDP growth targets. In order to cater to this need, the Government of India has taken initiatives to implement large-scale capacity addition for the power sector. Per capita consumption of Electricity is 704 Units (kWh) and Installed capacity as 30th June 2009 - 150,323.41 MW. June 2009 has seen the peak deficit of around 13.8 percent. Electricity being the vital inputs to industrial growth, it will create a market in itself due to the demand supply mismatch. As per the Ministry of Power for 11th plan, target is of  78,577 MW.

Though Government has tried to meet the demand supply gap through each 5 Year Plan, but has not been able to bridge the gap. How far can participation of private players or public partnerships help to meet the supply deficit?
Until the mid 80s, most developing countries relied on Public sector to finance and operate their infrastructure. The results of such dependencies were quite disappointing. Our budgetary resources cannot support such huge investment. Given the resource constraint at the government level, increasing the scope of private participation has become inevitable. The way forward would be to facilitate the PPP model.
 
Thanks to reforms and changes in policies, the last decade saw rapid expansion of Private Sector Participation (PSP) in infrastructure projects via the PPP models.  Developments of new BOT variants and model concession agreements have further attracted private investment in infrastructure. While, the private sector would bring in efficiency in timely delivery, cost control and project management skills, the government would compliment by playing the role of a facilitator, enabler and regulator. Although, the potential benefits from private sector participation are clear, the challenges and risks are often alarming, which impacts private sector participation.

PPP does not call for a total retreat or withdrawal by governments, but only involves a shift to good governance, and requires an upgrade of regulatory, restructuring, and monitoring roles. Without significantly improved governance, the shift to increased PPP could just mean monopoly powers being shifted to the well connected in the private sector and eventually become unsustainable. While transparency in operations at all levels is important, the risks would need to be clearly identified and shared in an appropriate manner. With increasing numbers of PPP models, mechanisms have to be in place to encourage maximum private sector participation.
 
All over the world, infrastructure is being promoted through various models of PPPs. Brazil, today boasts of highest level of PSP with investments worth USD 169 billion. Though India lags way behind Brazil with investments worth of only USD 51 billion, some sector specific models for private sector participation have begun to evolve.

How far are we in reality from the 'Nuclear Renaissance' even though the decision has taken a long time to come through and how do you see the growth of Nuclear Power plants in our country?
Nuclear Power Corporation of India Ltd (NPCIL) has envisaged installation of 20GWe power generation capacity by 2020 and 63GWe capacity by 2030.This will attract investment of around USD 27 billion in next 10 years. Russians are installing the facility in Kudankulam. Jaitapur has been allocated to French technology major. Once 10 CFR 810 (Code of Federal Regulations) clearance is obtained, US technology majors shall also take lead.

In addition to India, countries like Romania, Turkey, Brazil, Vietnam, Kazakhstan, Indonesia, Thailand, UAE have announced plans to foray into nuclear power generation. Indian companies will have additional opportunity to support these markets.

L&T has tied up with Technology providers like GE Hitachi, AECL and Westinghouse for Nuclear Power Reactors. Can you throw some light on these tie-ups?
L&T has also signed MOU with Russian technology major Atomstroyexport for India and third countries for establishment of co-operation in the field of construction of Nuclear Power Plant (NPP) and, in particular, in the field of equipment production for completing buildings and facilities of NPP. With Westinghouse, L&T will take lead in construction and site specific engineering, construction management, and undertake to perform an estimate for the construction of the projects.

 In MOU with GE, L&T has expressed an interest to be associated with GEH in such an Advanced Boiling Water Reactors  (ABWR) nuclear plant project in India, or BWR & ABWR plants at any other mutually agreeable site. MOU with AECL will define responsibilities to implement a work plan for Advanced CANDU Reactors (ACR -1000) in India and the third World countries.

Which are the countries that are already using Nuclear Energy as a source of power and which are the new markets that will grow in the near future?
Across the globe, 30 countries are using Nuclear Energy as a source of power. 457 commercially operating Nuclear Power plants are generating 372GWe of power, which is 16 percent contribution to total energy generation in the world. France produces 78 percent & Lithuania produces 64 percent of their total domestic energy requirement from Nuclear Power. USA, China & India have planned to augment nuclear power generation facility. Romania, Turkey, Brazil, Vietnam, Kazakhstan, Indonesia, Thailand and UAE too have announced plans to enter into clear, safe & sustainable nuclear power generation.

Which are the current ongoing international and national projects L&T has been working on?
There are several ongoing projects various sectors. For APGENCO Thermal Power Station at Nellatur, Andhra Pradesh, L&T is executing the EPC work for Supercritical Steam Turbine Generators and Auxiliaries for 2*800 MW. L&T has also undertaken Civil and Structural works for 2000 MW (8 x 250 MW) Subansiri Lower Hydroelectric Project at Arunachal Pradesh for National Hydroelectric Power Corporation Ltd (NHPC). We are also working on Mumbai High South Redevelopment Phase for ONGC. In Rajastham we are setting up Terminal project for Cairn India and connecting pipelines to Salaya in Gujarat. We have the multiple EPC contract for Naphtha Cracker project at Panipat, Haryana for Indian Oil Corporation Limited.

In Qatar, L&T is doing Engineering, Procurement, Installation and Commissioning for 2 new offshore platforms for block 5 development for Maersk Oil Qatar AS. We are manufacturing 18 reactors and 4 separators to supply for Clean Fuel Project of Kuwait National Petroleum Company. There are multiple civil construction orders also in factories and building segments that we are working on and also few critical marine jobs for defense that are currently under execution.

Which areas would see the growth in the near future and what are the futures plans of L&T?
L&T is actively pursuing E&C projects from the promising sectors such as Power, Railways, & Marine ship building, besides the Hydrocarbon and infrastructure sectors, where in the Company has acquired capabilities to execute mega projects. Development and construction of Infrastructure Projects in the roads, bridges & urban areas continues to be thrust area for the Company.
 
In the medium to long term, L&T would focus on the emerging nuclear power projects and related equipment/forgings/component manufacture. Defense sector is expected to be another major opportunity for L&T as and when private participation is permitted. 

While the Company strives to contribute significantly to the nation building efforts, it is also aiming to establish itself as a global engineering and construction conglomerate by having footprints in the select developing economies, besides the Gulf region & South East Asia. Accordingly it has set itself a target of 25% revenues from the international operations in the medium term.

What would be your message to the industry?
We are passing through uncertain times as most of the developed world is in recession. However, the Indian growth story has continued, albeit at a slower rate since October 2008. The Govt. is committed to reforms; hence we can expect more clarity on the reform process during this fiscal year. India continues to be an attractive destination for investment as has been demonstrated by a consistent flow in FDI. This is perhaps an opportune time to reassess our business models and stress-test them for varying growth scenarios.

With multiple issues to be addressed - financial, polity, security, environment, growth, development, employment generation, every issue by itself is of immense importance and each calls for gargantuan efforts to address them. If we have the leadership which is capable, committed, fearless and ready to strive to mitigate the challenges ahead, then to my mind this year -2009 can turn out to be a watershed year, and has the potential to go down in the history of India as the one which marked beginning of many more new initiatives. This year will decide the direction of India's growth story.