Thursday, April 02, 2009: 04:44:24 PM

Equipment

GEARED TO GROW

Rajiv Sethi expresses his views on the construction equipment rental industry in India

Over the past few years, the equipment rental industry has made significant strides but has not grown to its potential due to lack of support from both the government and construction practitioners. Traditional Indian construction companies believe in the maxim ‘own and use’. They fail to recognise that buying equipment ties up capital, which could be put to better use, either to expand their business or spruce up their balance sheets. It has been arithmetically and logically proven that the equipment rental model offers numerous benefits and allows a construction agency to focus on its core competencies such as construction management, rather than be saddled with technical and manpower issues related to plant and machinery. It is reassuring to note that the newer construction companies have readily embraced rental as they tend to deploy their capital for business expansion rather than tie it up in equipment purchasing. The advent of overseas contractors is an obvious boon as they are proponents of equipment rental.

Apart from these apparent financial gains, the benefits of renting equipment include overcoming equipment obsolescence, maintenance and upkeep, offering ready-to-use current and productive equipment, spare parts, inventory management, storage and mobilisation, deploying and training of specialised workforce and solving the issue of retention and attrition of the trained workforce.

A cause of lament is that larger players still tend to use rental only as an add-on for their existing fleet. This should be taken up as a challenge by organised rental to grow and offer ready availability of equipment across all classes of fleet all over the country.

This could be a big growth area once the changes are implemented by both sides, that is, assurance of equipment availability from rental companies and change in the rental policy by larger players. While construction companies tend to specialise in certain segments, many of them fail to recognise that equipment deployment and its maintenance and upkeep is a specialised activity, which can be easily and economically outsourced.

The government has a significant role to play in the success of the rental industry, which it seems to be ignoring currently. All rental companies have a common complaint that there exists different rules in different states, making inter-state transfers extremely difficult. Moreover, there are bureaucratic forms that need to be filled and submitted along with four sets of attested documents, photographs, affidavits, etc. We can perhaps emulate the practices of more developed markets. After all, if this industry penetrates to its expected 15-18 percent of the total construction equipment sold in the country, there is considerable revenue in the offing for the government to start paying heed. The developed markets have a rental penetration between 50-80 percent of the total construction equipment sold in their domain.

If construction companies and the government address some of these issues, it would be beneficial to the industry. India has a rental penetration of only 7-8 percent, and the industry is expected to grow to the 15-18 percent mark in the next three years. The estimated value of the rental industry in 2007 touched a base of $500 million.

A CII-KPMG report estimates that over the next eight years, an investment of about $1 trillion would be made in a slew of infrastructure projects. Such investment will clearly pave the way for the growth of the rental industry as there will be more demand for equipment for various projects throughout India.


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