Indian subcontinent: investment and infrastructure

Introduction

The World Bank report, Reducing Poverty by Closing South Asia’s Infrastructure Gap, indicates that in recent years (i.e. from 2000 to 2012) South Asia’s economy has seen tremendous growth of 6.7% annually. The region’s growing demand, however, has enlarged the existing infrastructure gap. This gap is defined as the difference between South Asia’s development goals and its actual capacity to obtain those goals.

The region, which comprises Afghanistan, Bangladesh, Bhutan, India, the Maldives, Nepal, Pakistan and Sri Lanka, will require investments of about US$2.5 trillion over the next 10 years. Of this, one third will need to be spent on transport, one third on electricity, and the remainder on water supply, sanitation, solid waste management, telecommunications and irrigation. As Luis Andres, Lead Economist for Sustainable Development – South Asia Region, puts it, “If South Asia hopes to meet its development goals and not risk slowing down growth and poverty alleviation, it is essential to make closing its huge infrastructure gap a priority.” This presents enormous challenges for the region’s governments and for the construction and cement industries.

The following outlines recent developments in some of the countries that constitute the Indian subcontinent.

India

India’s new government, led by Prime Minister Narendra Modi, introduced a budget in July that promises a revival in manufacturing and building of new infrastructure to increase employment. Finance Minister Arun Jaitley announced that US$8.3 billion would go towards expanding and improving roads, ports and electrical supplies, plus tax exemptions to promote investment in small and medium-sized factories. India’s economic growth had slowed to less than 5% over the last two years after a decade of expansion that averaged 8%. The UN is predicting that the economy in the current fiscal year will turn out to be +5.5%, underpinned by solid expansion in industrial and service sectors and impetus to economic reforms by the new government.

Infrastructure expansion will be welcomed by the country’s cement producers, who could do with an injection of good news at this time. The major consuming sectors, housing and infrastructure, have enormous growth potential. Demand from the housing segment will be driven in the coming years by the increasing per capita income, nuclear families, rapid urbanisation and government stimulus to various rural and affordable housing schemes.

Earlier this year, Kumar Mangalam Birla, Head of the Aditya Birla Group, said that the country’s cement industry was tormented by excess capacity, tepid demand and rising costs. He considered consolidation as the new buzzword in the industry. The group includes India’s largest cement manufacturer, UltraTech Cement, whose production capacity is 59 million tpa. It is planning to add a further 20 million t over the next three years. India’s overall capacity is about 363 million t and an additional 52 million t is expected to come onstream by March 2017. The 12th Five Year Plan envisages a target of 479 million t by March 2017. This is based on an addition of 10% pa. Demand, however, is much lower, at 280 million t, with capacity utilisation below 75% of total consumption (in some regions not more than 60%). At the same time, a Citi report, Indian Cement Sector 2014, has predicted a growth rate in the cement industry of 6.5% in 2014 – 15 and 7.5% in 2015 – 16, nearly 1.2 times the GDP growth.

In August, Orient Cement, a C.K. Birla Group company, announced that it was in strategic discussions with three players over the acquisition of a cement plant with a capacity of up to 2 million tpa. The company is primarily looking for a plant in Madhya Pradesh or Chhattisgarh. The acquisition will help with Orient Cement’s strategy to triple its capacity to 15 million t by 2020. The plan also involves setting up greenfield facilities and expanding existing ones. Its 3 million tpa plant at Gulbarga, Karnataka will become operational by the first quarter of the next fiscal year. At present, the company operates in three regions of Maharashtra – Khandesh, Vidarbha and Marathwade – and in Telangana. The expansion programme will give Orient Cement access to markets not only in Karnataka but also in central India.

Pakistan

The Asian Development Bank (ADB) has said that GDP growth in FY14 in Pakistan will be 3.4%, slightly down on FY13. It is expected to be higher in FY15, at 3.9%. Investment has remained low, as energy shortages and security concerns continue to undermine investor confidence. The government has embarked on a programme of fiscal and structural reform, supported by an Extended Fund Facility Arrangement with the IMF. Pakistan has assured the IMF that it will reduce its inflation from the current 8.8% to 6 – 7% by 2015 – 16. Power outages have been averaging 8 – 10 hours per day, badly affecting production and employment. The country attracted some US$1.6 billion FDI during fiscal year FY14. Economists quoted in Business Recorder say that major inflows of direct investment have arrived in two sectors, including telecommunications and oil and gas exploration. This is a good sign for the developing economy, but they also say that adverse law and order and the energy crisis remain major hurdles for foreign investment.

Pakistan has a potentially big market, with a population of almost 176 million and significant wealth, reports Santandertrade.com. The poverty level has decreased by 10%, leading to higher purchasing power. The positive GDP growth rate over the past few years has resulted in the development of the country’s industrial and service sectors. The government has steadily raised development spending in recent years, including a 50% budget allocation for development.

Earlier this year China promised US$20 billion in energy investment that will go towards solar, hydropower and coal power plants. At the same time, Turkey’s Limak Group said it will explore investment opportunities available in various sectors, particularly energy, infrastructure, cement, airport and port construction.

In June 2014, Ghulam Abbas, writing in Pakistan Today, said that cement industry experts expect capacity utilisation for 2013 – 14 to be about 80%, as the cement sector had posted over 3 million t of despatches during each of the previous three months. Total despatches of cement in 2013 – 14 should reach an all time high as domestic cement demand increases as a result of development projects launched by federal and provincial governments. Reports in May suggested that construction costs will increase because cement prices had been rising since July 2013. One of the reasons is that instead of reducing excise duty on cement in line with stated government policy, it had levied a further Rs.50/t excise on cement manufacturers.

It seems that the excise duty could add Rs.2.5 per bag to the cost and the duty on coal will substantially increase the prices. The overall situation has worsened, with electricity rates having increased to historically high levels. The All Pakistan Cement Manufacturers Association (APCMA) issued figures in June of this year that confirmed domestic cement despatches from July 2013 to June 2014 were 34.281 million t. Exports totalled 8.13 million t, of which 3.66 million t were shipped to Afghanistan, 677 300 t to India and the remainder elsewhere.

At the time of writing, Bestway Cement announced that it had agreed to pay US$217.79 million for a 75.86% management stake in Lafarge Pakistan Cement Limited. Bestway’s total production capacity will increase to 27 500 tpd through this acquisition, making it the country’s biggest producer.

Read part 2 here.

Written by Paul Maxwell-Cook. This is an abridged version of the full article, which appeared in the October 2014 issue of World Cement. Subscribers can view the full article by logging in.

Sources

• Company news and press information
• Asian Development Bank
• World Bank
• Business Recorder
• Pakistan Today
• International News
• Dhaka Tribune
• Economic Times

Read the article online at: https://www.worldcement.com/asia-pacific-rim/24092014/indian-subcontinent-investment-and-infrastructure-547/