With the uptick in road construction activity and increased support from the government, contractors seem to be upbeat about the sector. Issues such as faster dispute resolution, bank guarantees, timely clearances and shifting of utilities still persist. However, contractors are hoping that the government will resolve these issues with the same seriousness that others such as land acquisition are being dealt with. At a recent India Infrastructure conference on “Road Development in India”, industry experts highlighted the key issues faced, their expectations from the government and future areas of opportunity…
Issues and recommendations
One of the biggest impediments facing the road construction industry is unrealised arbitration claims. Dispute cases worth Rs 700 billion-Rs 800 billion are pending in the courts. Of these cases, 40 per cent are genuine cases, implying that close to Rs 350 billion is stuck in arbitration. This huge amount could otherwise have been put to use towards construction activities, thereby generating employment. For the revival of the construction sector, in 2016, the government allowed public sector undertakings to pay 75 per cent of the arbitral award to the contractor against a bank guarantee. However, not much has happened on this front. It has become a practice that every arbitration award is challenged in the high court or the Supreme Court. By the time the apex court ratifies that the contractor has won the arbitration claim, the latter may not be in a position to collect the amount as it may be facing liquidation. Banks are also not willing to provide guarantees. If furnished, these guarantees are against a 100 per cent margin. Therefore, a pragmatic view must be taken for dealing with dispute resolution.
The Arbitration and Conciliation (Amendment) Bill, 2015, has been able to fast-track arbitration proceedings from the five-seven years taken earlier to 18 months. The Arbitration and Conciliation (Amendment) Bill, 2019, introduced in the Rajya Sabha, aims to further improve the timelines for dispute resolution. The amendments in 2015 also brought down the number of arbitration cases with each arbitrator, thus moving closer to a viable dispute resolution mechanism. These measures have reduced the disputed amount to some extent. However, a lot depends on the bank guarantees submitted by concessionaires.
Detailed project reports (DPRs) prepared by consultants should be comprehensive and anticipate issues related to land acquisition, environmental and forest clearances and shifting of utilities. This would lead to fewer disputes post the contract award. Although the quality of DPRs has improved slightly in the past five to eight years, a lot still needs to be achieved in this area. That being said, everything cannot be anticipated during DPR preparation; some issues are faced during the construction phase, particularly in mountainous regions. In such cases, the National Highways Authority of India (NHAI) should also assume a portion of the risk to reduce disputes.
Local projects are subject to greater political risks. The project is highly likely to be stuck in disputes if the political regime changes during the construction phase. In contrast, if the political regime remains the same during the majority of the course of the project, it is likely to be completed. To reduce risks, contractors are carrying out more due diligence and conducting field visits prior to bidding for projects. Dispute rates have reduced slightly for new engineering, procurement and construction (EPC) contracts. Meanwhile, faulty/incorrect data furnished at the time of bidding results in litigation issues for the bidder.
Land acquisition has become an area of focus for NHAI. The issue is being discussed by the authority and taken seriously while awarding projects. Earlier, projects were awarded to contractors without proper land availability. Delays in land acquisition led to increases in interest during construction, rendering projects unviable in 80 per cent of the cases. This practice discouraged large players who then decided to bid more carefully for road projects. In fact, big construction companies such as L&T ECC refrain from bidding for projects till most of the issues, including land acquisition and clearances, are resolved. The multifold increase in the land cost post the Land Acquisition Act, increases in land value, declaration of some villages as special villages, use of agricultural land for residential and commercial purposes, huge costs involved in land compensation, etc. continue to act as impediments for project promoters. However, NHAI’s decision to fix the appointment date after 80 per cent of the land has been acquired is expected to improve the scenario.
Earlier, during the move from item rate contracts to public-private partnerships, a few small construction companies bid for build-operate-transfer (BOT) projects, driven by the reward mechanism for these projects, and thereafter burnt their fingers due to lack of prior experience with implementation of BOT projects. Adding to the woes of contractors was the delay in land acquisition. The scenario has changed today. Only serious players are in the business. However, BOT (toll) projects are completely off the radar of developers.
In the case of centrally sponsored projects, lack of support from state governments hinders effective project execution. As land is a state subject, delays in possession, shifting of utilities, securing forest and other clearances, etc. further add to the delay. In this respect, contractors are better placed to implement a state project rather than a central project, as in the former the state government ensures
timely clearances, thereby increasing the probability of project completion. For example, the six-lane Agra-Lucknow Expressway project was completed one year ahead of schedule as it was implemented by the Uttar Pradesh government. In addition, lack of support from district administrations, lack of political will and poor coordination between the central and state governments are some of the other challenges faced by contractors in implementing centrally sponsored projects.
Financial stringency is another challenge as banks and other financial institutions are wary of funding projects. Companies such as PNC Infratech have faced challenges in implementing hybrid annuity model (HAM)-based projects. However, owing to its financial credibility, PNC Infratech was able to achieve financial closure for its projects on time.
There is a common perception that there is a direct relation between the growth in GDP and traffic volumes. However, factors such as changes in policies on mining and ban on mining in certain areas by the National Green Tribunal have a direct impact on the movement of bulk material, thus affecting traffic numbers.
Outlook and expectations
Contractors hold an optimistic view on the upcoming construction opportunities in the road sector. While EPC will continue to remain the dominant mode of project award, the hybrid an-nuity model (HAM) will also gain some traction. While margins are relatively low in the roads business vis-à-vis other sectors, the prospects are bright. Measures such as effective due diligence, hiring of independent engineers, setting up of an independent highway regulatory authority, timely approvals, amendments in concession agreements to make contracts feasible, introduction of innovative funding mechanisms, and reduction in the cost of bank guarantees are required. NHAI must look at construction companies as partners and assess their risks properly. Meanwhile, a disclaimer clause in the bid documents that says that any error in the data/ concession agreement/DPR will be the responsibility of the bidder should be changed. The government has started to pay heed to the concerns of contractors. The employer-contractor relationship should be dropped and mutual partnerships should be fostered. The government is taking steps in this direction.
State governments need to extend full support to centrally sponsored projects to ensure timely completion. An effective and relentless coordination mechanism is required in all states to monitor and ensure that the clearances are given in a time-bound manner. The approval and decision-making process at the project promoter level needs to be expedited and decentralised to the maximum extent possible. Timely release of payments, construction grants and annuity is also required to maintain robust cash flows for projects. Besides, sanction and approval of estimates for utility shifting, forest clearances, valuation of obstructing structures, and appointment of an independent engineer before the declaration of the appointment date is expected to go a long way in ensuring timely project execution.
NHAI alone cannot generate sufficient funds to carry out large road projects. BOT should be brought back and foreign direct investment in the sector must be encouraged. In addition, the government must explore innovative funding mechanisms. NHAI or state governments can partner with a private player for equity contributions in a special purpose vehicle. This has been tried in some states such as Rajasthan and Jharkhand and can be replicated in other states as well. The scheme can be tried for financially viable expressway projects.
Expressway projects are being looked at as a major opportunity for the construction industry. In the first stage, a number of expressways are coming up in states such as Uttar Pradesh and Maharashtra. In the second stage, connecting roads will be constructed around these expressways, a big positive for local contractors. Opportunities at the state level are increasing due to the uptick in road construction activity. States such as Bihar, Maharashtra, Andhra Pradesh, West Bengal, Uttar Pradesh and Madhya Pradesh are being favoured for expressway development.
(From left) R. Prakash, President, Roads, Gammon Infrastructure Projects; Ravi Singhania, Managing Partner, Singhania & Partners LLP; Lieutenant General Anil Malik (Retired), Vice President; Business Development and Corporate Affairs, HCC; Sanjay Minglani, General Manager and Head Special Initiatives, L&T ECC and (inset) T. Raghupati Rao, Executive Vice President, Infrastructure, PNC Infratech
“The employer-contractor relationship should be dropped and mutual partnerships should be fostered. The government is taking steps in this direction.”
Lieutenant General Anil Malik (Retired), Vice President, Business Development and Corporate Affairs, HCC
“NHAI or the state government can partner with a private player for equity contribution in a special purpose vehicle. This has been tried in some states such as Rajasthan and Jharkhand.” Sanjay Minglani, General Manager and Head, Special Initiatives, L&T ECC
“A disclaimer clause in the bid documents, which says that any error in the data/concession agreement/DPR will be the responsibility of the bidder, should be changed.”
R. Prakash, President, Roads, Gammon Infrastructure Projects
“An effective and relentless coordination mechanism is required in all the states to monitor and ensure that the clearances are given in a time-bound manner.”
T. Raghupati Rao, Executive Vice President, Infrastructure, PNC Infratech