Accelerating Pace: Government’s infrastructure push to revive the construction sector

Government’s infrastructure push to revive the construction sector

The construction sector is one of the major contributors to economic growth, accounting for about 8 per cent of the country’s GDP. The sector has critical forward and backward linkages, with most of the construction activity originating from the infrastructure, industrial and real estate sectors. The construction sector is slated to benefit from a slew of recent policy measures announced by the

government. These include new arbitration guidelines, the National Steel Policy, 2017, and increased emphasis on infrastructure projects under Union Budget 2017-18.

New arbitration guidelines

In September 2016, the Cabinet Committee on Economic Affairs cleared several measures proposed by NITI Aayog to revive the construction sector. A significant step was the plan to set up conciliation councils by state-owned companies and government departments. These councils will have independent experts to ensure the speedy disposal of pending cases as well as new ones. Further, public sector undertakings (PSUs)/government departments may seek the consent of contractors/concessionaires to transfer arbitration cases initiated under the pre-amended Arbitration Act to the amended Arbitration Act, wherever possible. In case of claims where the PSU/government department has challenged the arbitral award, 75 per cent of the award amount is to be paid by the PSU to the contractor/concessionaire against a margin-free bank guarantee.

In addition, it was decided that item-rate contracts between parties could be substituted by engineering, procurement and construction (EPC) contracts. Model bidding documents and model EPC contracts, suitably revisited or modified wherever required to suit the requirements of particular sectors, will be adopted by PSUs/ government departments for construction works. Although the move is aimed at providing an impetus to construction companies to enable them to pay off their debt, the actual settlement of claims appears to be a challenge.

National Steel Policy, 2017

In May 2017, the central government approved the National Steel Policy, 2017. The policy envisages the more than doubling of domestic steel production capacity to 300 million tonnes by 2030-31. The creation of this additional capacity will require a capital investment of about Rs 10 trillion. Further, the establishment of steel plants along the coastline under the aegis of the Sagarmala programme will be undertaken. These plants will be based on the premise that scarce raw materials will be imported and steel products exported.

In addition, the Ministry of Steel also plans to promote a cluster-based approach, particularly for micro, small and medium enterprises, with common infrastructure for optimum land use, easy availability of raw materials and economies of scale. The necessary policy environment will also be provided to promote gas-based steel plants, electric/induction furnaces and other technologies which will bring down use of coking coal in blast furnaces.

Key budget proposals

Union Budget 2017-18 reiterated the government’s thrust on infrastructure development in the country, identifying the sector as one of the 10 distinct areas to achieve efficiency, productivity and better quality of life. The total budgetary allocation to infrastructure was increased significantly, from Rs 2.21 trillion in 2016-17 to Rs 3.96 trillion in 2017-18. Higher outlay for sectors such as railways, roads, irrigation, and housing will pave the way for abundant opportunities for construction activity.

For 2017-18, the total capital and development expenditure of the railways has been pegged at Rs 1.31 billion. Some of the yearly targets for infrastructure creation have been 3,500 km of railway lines to be commissioned in 2017-18, award of at least 25 stations for redevelopment, and elimination of unmanned level crossings on broad gauge by 2020. Further, the multimodal logistics policy which envisages the construction of 35 multimodal logistics parks and 10 intermodal stations is also expected to drive construction activity.

In addition, the Bharatmala programme which involves the development of around 51,000 km of road length comprising economic corridors, coastal roads and expressways will provide a further boost to the construction sector.

The way forward

Despite government initiatives, perennial issues such as land acquisition, securing regulatory clearances, shifting of utilities, inadequate financing arrangements and the paucity of a skilled workforce continue to impact the sector’s growth. The demand for construction activities is replete with a strong pipeline of projects. However, actual progress on the ground will hinge on factors such as effective and timely project execution, better financing arrangements, credit metrics of construction players, as well as viability of projects.