Looking Up

Downturn in construction sector to reverse soon

As the economy stares at decelerating GDP growth, the construction sector has been hit hard. Headwinds in the past year curtailed the growth of the sector. A fall in road construction activity, the slow pace of award of road projects due to general elections and land acquisition issues, stalled housing projects, a decline in capital expenditure by the government, etc., were some of the crucial factors responsible for this slowdown. Further, non-banking financial companies (NBFCs) that are a critical lending source for the construction industry have become cautious. These factors combined have derailed the construction sector – it registered a growth of 3.3 per cent in the second quarter of 2019-20, down from 5.7 per cent in the first quarter. This is far below the 8.5 per cent growth posted in the second quarter of 2018-19.

The construction sector, however, is expected to show green shoots of recovery in the coming fiscal year (2020-21) on the back of a robust pipeline of infrastructure projects and government measures to address the concerns of contractors. Meanwhile, advancements in construction practices, both in terms of technology and materials, will gain traction to create sustainable infrastructure.

Construction equipment sales on a downtrend

While GDP growth has been on a downward trajectory since 2017-18, the drop has been more pronounced in 2019-20. The construction equipment industry, too, has been facing the heat, and saw a meagre 5 per cent growth in sales in 2018-19 vis-à-vis a 24 per cent growth the previous year.  According to industry estimates, construction equipment sales stood at over 97,800 units in 2018-19. Large construction equipment companies such as JCB and Tata Hitachi (which are primarily into manufacturing of backhoe loaders, excavators, cranes and forklifts) have cut production by 15-60 per cent since May 2019. Arbitration cases against contractors have also delayed payments to original equipment manufacturers (OEMs). Besides, there has been difficulty in obtaining loans from NBFCs for purchasing/leasing construction equipment. Almost 90-95 per cent of the construction equipment is financed. NBFCs are the largest players in this sector with a 70-75 per cent share of financing. As NBFCs are facing liquidity challenges, they have become cautious in lending. Even for those who are getting finance, the cost has risen by at least 200 basis points.

Uptake of fly ash and plastic waste in construction activities

The use of fly ash is being increasingly promoted in the road sector, where it is mostly used for the construction of roads, embankments and flyovers. It is also used by the cement industry as a pozzolanic material for manufacturing cement. Although the use of fly ash in the construction of highways and roads has witnessed positive growth over the years, offtake is still too low, as compared to other materials like cement and bitumen. The main reason behind the low utilisation is the reluctance of thermal power plants to bear the transportation cost of ash to the road construction site and lack of knowledge on fly ash usage. In August 2019, the NTPC Ramagundam (Telangana) project team, in association with NTPC Energy Technology Research Alliance, used fly ash-based geopolymer concrete to lay a road. The cement-free fly ash-based geopolymer provides for sustainable construction material with negligible carbon dioxide emission and low water consumption, besides paving the way for bulk fly ash utilisation.

Besides fly ash, plastic waste has also garnered significant interest. Of the municipal waste generated, plastic waste accounts for a significant proportion. Non-recycled plastic waste, which accounts for 40 per cent of total plastic waste, can be used for road construction.

The following are some of the use cases of plastic waste in road construction:

  • Kerala has so far used 9,700 tonnes of plastics for blacktopping 246 km of road.
  • In September 2019, Bangalore International Airport Limited began using plastic waste for road works. Plastic-coated bitumen will be used to build 50 km of roads within the airport campus.
  • Himachal Pradesh is developing the 7 km Taradevi-Gambhar road in Shoghi subdivision using plastic waste.
  • In January 2020, the Kalyan-Dombivli Municipal Corporation conducted a trial of using plastic shreds in road resurfacing work on a small stretch in Dombivli.
  • In Guwahati, the road at the Narangi military station has been built using approximately 1.24 tonnes of waste plastic. The road is constructed by mixing shredded plastic waste with heated bitumen.
  • The Lucknow Development Authority is using plastic waste to construct a road stretching from Gomti Nagar Police Station to the Indian Institute of Management, Lucknow.
  • The Aligarh Municipal Corporation in collaboration with a waste management company is developing eco-friendly bricks. Termed as “magic bricks”, they are made using garbage, concrete and cement and can be used in construction activities.

The construction of a regular road requires 10 tonnes of bitumen per km, while a plastic road requires 9 tonnes of bitumen and 1 tonne of waste plastic for coating. This implies a saving of 1 tonne of bitumen (approximately Rs 50,000) per km. When plastic is used as a binder, the quantity of bitumen that is normally utilised for laying roads can be reduced by 6-8 per cent. According to Central Road Research Institute (CRRI) specifications, the allowable percentage of waste plastic in bitumen is 0.8 per cent. Indian Oil Corporation Limited (IOCL), in partnership with CRRI, is experimenting to see whether this limit can be extended to 3 per cent. Incorporation of 3 per cent of waste plastic will save Rs 0.2 million per km for road construction as compared to currently used premium quality bitumen. Input costs will come down significantly by using indigenous waste plastic and reduce dependence on imported virgin polymers. If the experiment is successful, IOCL will approach the Ministry of Road Transport and Highways to make it mandatory for every bitumen aggregator to use waste plastic to the scientifically proven percentage.

Innovative technology solutions to transform construction practices

Private players have started embracing new-age construction technologies for ensuring faster progress, and achieving shorter project deadlines and better quality of construction. The construction industry is gradually witnessing the use of technologies such as 3D printing, drones, cloud computing, modular building, wearable safety devices, and building information modelling (BIM) that are changing the way projects are managed and implemented. The application of BIM in prefabricated construction has multiple benefits – it helps ease the design flow and also provides data-centric information based on design specifications and construction issues. In addition, BIM can also enable developers to track time, errors and cost. Further, the industry also recognises the contribution of modular technologies in meeting green goals.

Healthy project pipeline to keep the construction sector going

The slowdown in the construction industry, especially in the past two quarters, is expected to bottom out with a huge pipeline of infrastructure projects yet to be awarded. New order inflows are expected to improve in 2020-21 as the government plans to increase spending in the infrastructure sector in the next five years. The government has set a tall investment target of Rs 102 trillion between 2019-20 and 2024-25 across infrastructure sectors. While political developments in states like Karnataka and Andhra Pradesh led to lower order inflows and cancellation of some projects, respectively, nevertheless, the order book position of most of the construction players is currently adequate to provide medium-term revenue visibility, as per ICRA.

The government’s ambitious programmes including Housing for All and the Smart Cities Mission have necessitated the adoption of innovative technology solutions for faster project implementation. Prefabrication will be a key enabler in this. The focus is now on making construction both sustainable and energy efficient through the use of advanced technologies.

Apart from the road sector, many state governments are focusing on irrigation and affordable housing projects. City gas connection infrastructure is also expected to come up in the next couple of years.

In sum

India presents a host of opportunities for various stakeholders in the construction sector. Railway station redevelopment, freight corridors, expressway development, greenfield airports, etc. are some of the key areas that are receiving constant government attention and will set the ball rolling for construction players. The construction industry is going through a phase of transition. The slowdown is temporary and the fall in equipment sales has started showing signs of reversal. Besides, the Insolvency and Bankruptcy Code and recent measures taken to expedite the release of contractors’ payments stuck in arbitration are expected to bring some cheer to the sector.

 

 

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