The past year has not been particularly good for the construction sector. Decline in construction activity in sectors such as roads and real estate, lending squeeze from non-banking financial companies, contractors’ money stuck in arbitration, etc., were some of the factors pulling the sector down. However, the government and regulators have tried to resolve some of these issues during the past few months. Besides, the much-awaited National Infrastructure Pipeline (NIP) will be a boon for the construction industry.
Arbitration awards
In a bid to boost the economy and revive the construction sector, the government has directed all ministries and departments to expedite pending payments to construction companies. The Cabinet Committee on Economic Affairs (CCEA), in 2016, cleared several measures including government entities required to pay 75 per cent of the arbitration award to the contractor/concessionaire against a bank guarantee. However, the insistence on a bank guarantee for the interest component on the aforementioned 75 per cent has been a dampener. As a result, contractors continued to be under financial stress. Thus, in November 2019, the CCEA approved the following measures, proposed by NITI Aayog, for the effective implementation of its 2016 decision:
- In case a government entity has challenged an arbitral award, as a result of which the amount of the arbitral award has not been paid, 75 per cent of such award will be paid by the government entity to the contractor/concessionaire against a bank guarantee only for the said 75 per cent and not for its interest component.
- Government entities will take the decision to initiate proceedings for setting aside of an arbitral award, and any related appeal after taking the opinion of a law officer (such as the Attorney General of India, Solicitor General of India, or Additional Solicitor-General of India) in consultation with the Department of Legal Affairs.
This is applicable to all public sector undertakings of the central government, autonomous organisations of the central government and special purpose vehicles where 50 per cent or more of the paid-up share capital is held by the central government or central government departments.
These approved measures will help in ensuring that the challenge/appeal is resolved in a prudent and judicious manner. The objective is to infuse liquidity in the market and create more job opportunities.
Construction ban relaxation
As a relief to the construction sector, the Supreme Court has partially relaxed the construction ban in the National Capital Region giving the go-ahead for allowing work during the day from 6 a.m. to 6 p.m. The apex court has allowed construction activities to restart in Delhi on the condition that rules for dust control, setting up barriers, etc. are followed.
The ban had been previously imposed due to the threateningly high pollution levels in the city, primarily a result of construction dust and waste. This, in turn, resulted in the majority of government and private projects being stalled with locked-up capital, time and cost overruns and reorganising of labour.
National Infrastructure Pipeline
The government recently unveiled the NIP, entailing an investment of Rs 102 trillion to be spent over the period 2019-20 to 2024-25. Over 70 per cent of this amount has been allocated towards four infrastucture sectors – energy (24 per cent), roads (19 per cent), urban infrastructure (16 per cent) and railways (13 per cent). Projects constituting around 50 per cent of the total investment requirement are in the development and conceptual stages. Typically, infrastructure projects have a construction intensity of 60-80 per cent, which would result in order inflows of at least Rs 60 trillion for the construction sector over the next five years. This will provide immense opportunities to construction players.
Global Housing Technology Challenge
The centre, in January 2019, launched the Global Housing Technology Challenge (GHTC) among stakeholders, a move aimed at introducing the best technologies for constructing affordable houses in a shorter period of time at a lower cost. GHTC is a platform which can help elevate the country’s construction ecosystem to international standards. The government declared that the April 2019 to March 2020 period will be observed as the Construction Technology Year. The government has emphasised that there is a need to look for new emerging, disaster-resilient, environment-friendly and cost-effective construction technologies.
In sum
The continuous thrust from the government to revive construction activity is a big positive for the industry. Mega programmes such as Bharatmala, the Smart Cities Mission, Housing for All and Sagarmala along with the recently launched NIP have opened up vast opportunities for stakeholders. While the feeble economic growth has resulted in a gloomy sentiment, regulatory measures and an infrastructure push will bear fruit in the long term.