According to Oxford Economics, the world would need $94 trillion between 2017 and 2040 to construct infrastructure that can improve lives. PwC estimates the annual demand at $3.9 trillion. While the figures vary depending on the area of study, it is evident that infrastructure development is a lucrative industry.
This indicates that there is an opportunity to construct high-quality infrastructure in order for economies to develop, flourish, or even survive. There is an opportunity for infrastructure-building project exports to generate a substantial profit, and India can significantly contribute to this objective. However, what are project exports and why are they important? According to India Exim Bank, project exports involve the execution of specific construction contracts and the export of engineering products on deferred payment terms. These exports, which fall under the four general categories of civil and construction projects, turnkey projects, consultancy services, and supply contracts, have a great deal of potential to demonstrate India's technical expertise. In other words, these corporations construct airports, roads, bridges, and seaports in foreign nations. According to experts, Indian companies are making their presence felt in this market segment.
In May 2022, the Minister of Commerce and Industry, Piyush Goyal, exhorted project exporters to diversify and enter developed-world markets, and to not limit themselves to government or developed-world employment. To put this into perspective, the African Development Bank estimates that by 2025, the African continent will require $170 billion per year to revamp its infrastructure, with two-thirds of this amount required for new infrastructure. The potential is not limited to Africa alone.
According to the Global Infrastructure Hub, a G20 think organisation, the global infrastructure financing gap is projected to be around $15 trillion by 2040. It was determined that Asia, in particular, has the greatest infrastructure demands, requiring nearly $51 trillion of investments between 2016 and 2040, which represents more than half of the global infrastructure investment requirements.
In FY17, it was estimated that project exports totaled $8.27 billion, but in FY20, that number dropped to $4.23 billion. According to the Project Export Promotion Council, there has been some improvement since then. The value of contracts secured by the council's members increased from $3.2 billion in FY22 to $4.5 billion in FY23. That is a 39% increase in a world emerging from Covid that needs to strengthen its infrastructure to maintain a high growth rate. According to the PEPC, the segment experienced a decline during Covid but has since grown.
According to a report by Nabard, project exports account for between 1.4% and 3.0% of merchandise exports.
These initiatives, according to Parag Verma, Chairman of the Project Export Promotion Council (PEPC), are an integral part of India's export portfolio because they reflect the technical maturity of the engineering industry. "They establish aftermarkets for these products and services and contribute to the stability of currency fluctuations by generating a constant flow of foreign currency from their projects. Moreover, they increase employment opportunities, generate foreign currency, and contribute to the development of the exporting nation, he says.
The China aspect However, India's exports of projects continue to face resistance on a number of fronts. Funding and government support are viewed as the most significant deterrents. Balmukund Somani, Vice-President-Finance & Head Treasury at Tata Projects, a technology-led engineering, procurement and construction (EPC) company, which has transmission projects underway in Ethiopia, Mali and Burkina Faso, says that China takes a lead in such exports because of a more holistic approach. "An complete ecosystem develops around it. There are funding agencies, EPC companies, and government support, and they all work in tandem. They have access to lower financing, which is unavailable in India. "If we are to compete with China, government support is insufficient," he says.
To resolve issues in international initiatives, the government must adopt an aggressive stance. According to Somani, the quickest factor that has aided their counterparts in other nations is government intervention to quickly resolve problems. If New Delhi adopts this strategy, exporting projects would become a viable business for Indian companies.
Currently, 5–7% of Tata Projects' revenue originates from international projects; the company aims to increase this to 15% within the next three years. The company has a significant presence in the transmission and distribution (T&D) sector outside of India, with an average project duration of 18 to 36 months.
Other project exporters reiterate these sentiments, stating that the export potential of such products from India must be exploited more effectively.
Paramasivan Srinivasan, managing director of the Mumbai-based construction and engineering firm Afcons Infrastructure, asserts that project exports represent a negligible portion of the Indian market. It has tremendous potential. For instance, a 1x project export is equivalent to at least 2.7x revenue due to the employment and remittances it generates. This is likely understood, but not to the extent that is required," he says.
Srinivasan also points out how players from China get certain advantages because that government works on a different model. They invest heavily in international markets, particularly Africa. Typically, they engage into a barter agreement." Nevertheless, he claims that there is a growing preference for Indian companies over Chinese ones due to the value-added factor. "Chinese companies contribute nothing to the economy because they employ no locals. The entire material comes from China, so not even a single rupee value gets added to the exporting country. Africa increasingly wants to have more participation of African nationals, their subcontractors, and others.”
This is where Indian firms can excel. Afcons, for example, hires 70-80% of the workforce for a project from the local market, says Srinivasan. Indian companies with such policies will get preference; and with some help from the government, Indian entities can land more projects abroad. The company has projects in markets such as Africa, Middle East and neighbouring countries which constitute 30% of their revenue. It is looking to amp this up to 50%.
The PEPC — an apex nodal co-coordinating agency designated by the government to promote and facilitate project exports as well as export of project construction items — reiterates there are reasons to be positive on this segment. Verma says while the orders secured in Africa by PEPC members saw a Y-o-Y growth of 76.35% in 2022-23, the overall order flows from Asia saw a growth of 78.15%. “Power T&D has emerged as the major contributing sector for project exports from India. While the Russia-Ukraine war and fears of prolonged hawkishness from global central banks may lead to geopolitical and economic headwinds, India’s lines of credit, NEIA & BC-NEIA (Buyer's Credit under the National Export Insurance Account) may help Indian project exporters to achieve a growth of 15-20% y-o-y basis for the next three years,” he says. Moreover, with a clear emphasis on sustainable development goals globally, Indian companies have a window of opportunity to construct infrastructure such as schools or hospitals and also grab a pie of the wallet size coming into infrastructure, says Davinder Sandhu, Co-Founder & Chairman, Primus Partners.
The Export-Import Bank ofIndia (India Exim Bank), a specialised export credit agency focusing on facilitating and promoting international trade, has taken up several initiatives. Highlighting some, Tarun Sharma, Deputy Managing Director, India Exim Bank, says as on March 31, 2023, the bank has extended 303 lines of credit (LOCs) covering 68 countries with credit commitments of over $31.85 billion to support development priorities of partner countries. Besides this, the LOCs have created opportunities for over 300 Indian companies across traditional and emerging sectors, along with a multitude of MSMEs that are suppliers, partners or subcontractors to the large project exporters. Downstream linkages have created a sound industrial ecosystem and employment generation.
Sharma roots for disaggregation of products so that the opportunity for project exports is more clear. “For instance, if there is a hydro project being built in Africa, it will need a lot of civil work and critical equipment.
So, if an Indian company gets the order to manufacture those turbines and generators, that will form part of project exports. But it is now a part of merchandise exports. We have been pointing out such data-related concerns. Unless we have such disaggregation, a dedicated ecosystem for project exports will not take shape,” he says.
The Deputy Managing Director, India Exim Bank, also advises that players have a local presence in the country of the project as this enhances the probability of success in securing the contract. “Local presence helps contractors to interact with the market players and assess their competitive position at an early stage.
At present, such joint ventures are largely in developing countries. Indian companies should be encouraged to form joint ventures and wholly owned subsidiaries in developed markets as well,” he says. What will also hold project exporters in good stead is a focus on diversification. Areas such as renewable energy, sustainable infrastructure, education and healthcare are gaining traction and must be looked at more proactively.
“We want India to focus more on such areas as this will lead to more economic growth for the nation. If we don’t diversify, we won’t go up in the value chain,” Sharma adds. With more focus on sustainable infrastructure projects in developing, emerging and advanced countries as well as financial institutions looking at investing in various infrastructure segments, the scope of opportunities in this segment is immense. Rising to the challenges will be imperative to not miss the bus.
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