Policy Changes

Sector-specific measures leading to construction upswing

The pick-up in construction activity across the country has been aided by various reforms and initiatives taken by the government in the past two to three years. A slew of measures ranging from removal of pre-construction bottlenecks in the road sector to implementing sewage projects under the hybrid annuity model (HAM) have provided an impetus to the construction sector.

Indian Infrastructure details some of the sector-specific initiatives that have been instrumental in increasing the construction momentum…

Roads

In the past two-three years, government initiatives to increase the pace of road construction activity have augured well for the engineering, procurement and construction (EPC) sector. A new model was approved in 2016 to revive the public-private partnership (PPP) model. HAM has revived project award activity, which, in turn, has opened up opportunities for contractors. Meanwhile, proactive steps were taken to accelerate land acquisition. Comprehensive guidelines on land acquisition for national highways were issued in December 2017 to simplify the complex land acquisition process. Bhoomi Rashi, a web portal, was developed for online processing of land acquisition notifications to accelerate highway infrastructure development projects. In addition to these, steps such as launching INAM-Pro (which has eased procurement of construction materials and equipment), ensuring inter-ministerial coordination, and repackaging and reawarding languishing projects have been taken to expedite project implementation.

Urban infrastructure

India’s urban transport segment received a major push when the government announced the new Metro Rail Policy, 2017. The policy aims to solicit private participation for either complete provision of metro rail projects or for some unbundled components. The policy also requires the states to clearly indicate in the project report the measures to be taken for commercial/property development at metro stations and on other urban land. Details of how metro projects should be developed, funded and sustained have been well thought through and spelt out in the policy.

In a paradigm shift in the sewage sector, HAM was introduced for awarding sewage projects. In the past year, work on six sewage treatment plants (STPs) (in Varanasi; Haridwar; Mathura; Kanpur, Unnao and Shuklaganj; Farrukhabad; and Allahabad-Jhushi, Naini and Phaphamau) has been started under this mode. Other STP projects sanctioned under HAM are in Mirzapur, Gazipur and Moradabad in Uttar Pradesh; Digha, Kankarbagh and Bhagalpur in Bihar; and Kolkata, Howrah, Bally, Kamarhati and Baranagar in West Bengal.

Gas

Emphasising infrastructure creation, the Petroleum and Natural Gas Regulatory Board changed regulations in January 2018 for granting authorisations for setting up city gas distribution (CGD) networks and natural gas stations. The bidding criteria have been revised such that 80 per cent weightage (as compared to 0 per cent earlier) is assigned to infrastructure creation so that gas network penetration is maximised. Participation of more players is incentivised with the extension of the marketing exclusivity period for authorised entities to eight years (extendable up to 10 years), as compared to five years earlier. The new bidding criteria will ensure that the focus is on expanding the piped natural gas pipeline and compressed natural gas network.

Ports

In early 2018, the central government approved amendments in the model concession agreement (MCA) for PPP-based port projects. Besides other salient features, the MCA amendments envisage the constitution of the Society for Affordable Redressal of Disputes – Ports as a dispute resolution mechanism similar to that in the highway sector. Meanwhile, the government has accorded infrastructure status to the logistics sector. This will, in turn, give an impetus to infrastructure development at ports since the new status will make infrastructure finance available on easier terms and with enhanced limits.

Railways

Indian Railways (IR) has identified around 600 stations across the country for redevelopment. These stations have a footfall of approximately 25 million passengers per day and are located on 2,700 acres of prime real estate land and encroachment-free land. The total investment requirement for developing these 600 stations (including commercial establishments in the surrounding areas) is Rs 760 billion for commercial development and Rs 340 billion for station development. Bhopal’s Habibganj station is the first redevelopment project to be awarded on a PPP basis. Overall, the station redevelopment programme offers immense opportunities for commercial development around stations.

Goods and services tax

In a major departure from the long-existing tax regime, the government finally implemented the goods and services tax (GST) across the country in July 2017. The period from its conceptualisation to firming up of guidelines has been a long-drawn one, marked by many hurdles owing to disagreements between states and the central government. In the past, while construction firms have been able to take advantage of various tax planning opportunities, this time the sector has been plagued by disputes. Aggressive tax planning has often undermined key commercial imperatives. The implementation of GST has helped overcome some of these issues prevalent in the EPC sector.

Withdrawal of exemptions under GST for road, water supply and sewerage projects sponsored by the government and local authorities is expected to increase government spends. However, the availability of a higher pool of input tax credit in the hands of the contractors could help neutralise such increases. Under the previous tax regime the benefit of input tax paid was not fully available to contractors. Under the GST regime, the benefits arising from input tax credit on raw materials will result in an overall neutral tax incidence for construction services.

On the flip side, the service tax applicable for construction companies is generally around 6 per cent (assuming that, of the contract, 40 per cent is the services portion). However, many construction activities (construction of roads, dams, etc.) are under the service tax exemption list and thus do not have to pay service tax. The value added tax payable varies across states from 1 to 15 per cent and is applicable on the supply of the goods portion of the contract. Thus, the effective tax incidence for an average construction contract in the pre-GST era is typically in the range of 11-18 per cent, which is lower than the GST rate of 18 per cent on composite supply of works contracts.

Therefore, the introduction of GST seems to be a mixed bag for the infrastructure sector – predictability and efficiency being the key advantages, while non-inclusion of subsectors, higher rate and certain restrictions are some of the negatives.

New arbitration guidelines

In a significant push to the construction sector, the Cabinet Committee on Economic Affairs, in 2016, cleared several measures proposed by NITI Aayog to revive the construction sector. A notable step was the plan to set up conciliation councils by state-owned companies and government departments to ensure the speedy disposal of pending cases as well as new ones. Government agencies and public bodies have been mandated to pay 75 per cent of the project cost to contractors against margin-free bank guarantees in case of any dispute, to clear liabilities and to ensure the completion of projects. The payment may be made into a designated escrow account with the stipulation that the amount so released will be first used for payment of lenders’ dues, second, for completion of the project, and then for completion of other projects of the same public sector undertaking (PSU)/department. In case the subsequent court order requires a refund of the money paid by a PSU/department against a bank guarantee, the amount shall be refunded by the contractor/concessionaire along with the appropriate interest charge.

The move has been welcomed by construction companies as the amount they will receive from the government will be enough to reduce their debt burden considerably and make their balance sheets lighter. A case in point is Hindustan Construction Company Limited which won arbitration claims amounting to Rs 51.6 billion (on September 30, 2018). Of these, the company has already collected claims worth Rs 17.87 billion, while the remaining amount of Rs 33.73 billion is yet to be received.

In sum

While there are significant construction opportunities across sectors, the actual progress on the ground will hinge critically on factors such as effective and timely execution of projects, better financing arrangements, credit metrics of construction players, as well as project viability. Constant hand-holding by the government will remain crucial in weeding out issues pertaining to clearances and land acquisition. While sectors such as roads have shown exemplary performance with respect to the revival of stalled projects, other sectors need to catch up.

 

 

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