Towards Normalcy: Industry players expect a swift recovery

Industry players expect a swift recovery

The onset of Covid-19 has ravaged the Indian economy and led to a significant 23.1 per cent fall in GDP for the first quarter of 2020-21. This decline was brought about by the extremely stringent lockdown that was imposed and the complications arising due to it.

At a recent India Infrastructure webinar, sector experts attempted to identify ways to fast-track road development during the ongoing pandemic and discuss the future road map for the sector. Excerpts…

The impact so far

The Covid-19 outbreak caused widespread disruption in the road sector. While the impact on planning and operations could be mitigated through the adoption of new technologies (the use of e-office and switching to digital payments), construction took a big hit during the most productive months of April, May and June. Construction activity was further affected by an above average monsoon in the country. As a result, the National Highways Authority of India (NHAI) constructed only 850 km during April-August 2020, a fall of about 34 per cent in comparison to the same period last year. The drop in the construction rate has meant an increase in time and cost overruns for developers that can further hamper growth in the sector. Apart from construction, revenue too took a hit. Due to the stringent nationwide lockdown, both commercial and passenger traffic levels fell drastically, leading to large revenue losses for toll operators. Hence, for most companies in the road sector, whether public or private, the lockdown led to a halt in construction and revenue-generating activities, resulting in a subdued first quarter.

The shock from Covid-19 has tested the robustness of model concession agreements and the degree of flexibility available to stakeholders for handling such an event. There was a significant improvement in mediation and litigation during the pandemic. Some relief to developers in terms of time extensions has been provided, though there is still no clarity on cost-related issues. A number of developers also considered invocation of the force majeure clause.

Getting back to work

The gradual lifting of restrictions has led to considerable improvement in construction activities as well as revenue generation in the sector.

NHAI as well as private contractors resumed construction activity, which was facilitated by the easier movement of goods and labour. NHAI resumed work on 290 sites of the total 350 where work was under way. Private sector developers also resumed construction activity, which is expected to reach pre-Covid levels during October 2020. This increase in construction activity was made possible due to labour availability returning to pre-Covid levels. A major fallout of the pandemic has been a loss in labour productivity arising out of the need for physical distancing. On the revenue side, the return to normalcy has been more rapid, with toll collections for NHAI reaching 87 per cent of pre-Covid levels in the last 15 days of August. The private sector has also seen a rebound in commercial traffic with toll collections reaching 90 per cent of pre-Covid levels. However, passenger traffic has taken a big hit, and this may hamper growth of toll collections in the future.

A positive development has been that the pandemic has not halted the award of new projects. NHAI awarded 840 km of road projects till the end of August 2020. The private sector has also been resilient in terms of its order book due to more-than-expected project awards by the authority.

Lessons learnt

A key lesson learnt from the pandemic is that road projects are very vulnerable to the excessive reliance on labour-intensive construction methods. However, a move towards more mechanised construction is going to be a slow and prolonged process. A change in the construction policy will not only require approval of a large number of stakeholders but will also require both developers and contactors to create capacity to implement such measures.

Another lesson learnt has been realising the rigidity of long-term contracts to deal with unexpected events like Covid-19. With no provision made for black swan events like a pandemic, there is a growing need to establish more flexible long-term contracts to provide greater assurance to developers and operators. On its part, NHAI did relax contract conditions to facilitate timely payments to contractors and ensure better liquidity in the industry. The authority has set up an online bill payment system where every bill must now be submitted online and will be cleared within a week. Such initiatives will enhance the authority’s monitoring abilities and result in prompt payments.

There are also some prudent initiatives that may last beyond the pandemic. The advantage of the work-from-home model and its ability to speed up decision-making and reduce administrative costs will be sustained. Further, the increasing use of sensors to automate supervision of construction activity for achieving higher labour productivity can also have beneficial long-term implications.

Revival strategies for the BOT model

In order to revive interest in the build-operate-transfer (BOT) model, a host of issues need to be resolved. There needs to be a review of the cost structure of this model. The biggest issue in the cost structure is the process of termination payment. Developers are of the view that this should be made similar to that of the hybrid annuity model (HAM) or the toll-operate-transfer (TOT) model. A change in policy on the termination payment mechanism will also provide increased assurance to banks, thus leading to greater availability of project finance.

Further, the BOT model severely restricts the use of new innovative methods that can increase efficiency and reduce costs. This is because under the existing framework, unutilised funds need to be returned, thus giving the developer no incentive to innovate and reduce costs. For instance, emergency call boxes (ECBs) have become obsolete due to the increasing use of mobiles. Hence, eliminating ECBs would reduce costs for the developers and would increase efficiency as well. However, NHAI will view the removal of ECBs as a change in scope and would demand restructuring of the entire cost of the BOT project.

There are multiple issues with the designing of the agreements within the engineering, procurement and construction (EPC), BOT, HAM and TOT models. Change of scope has emerged as an important issue for private developers and needs comprehensive re-evaluation.

One of the other items on the developers’ wish list is a reduced lock-in period for speedy monetisation of assets to generate liquidity for investments in new projects. Apart from reducing the lock-in period, developers also want the change in management clause to be simplified in order to allow speedy disinvestment of assets. The current framework requires a long-drawn process of getting approval for the change in management which takes up to six months from the date of sale. This can be shortened if NHAI creates a shortlist of certain institutional investors (like sovereign wealth funds and pension funds) that regularly invest in such assets and are amply experienced to take over the project.

Therefore, the way forward requires a holistic effort by NHAI and the private sector to work together for achieving future goals of the sector.

The way ahead

Overall, the private sector expects NHAI to continue the support it has been extending with regard to the payment schedules in order to avoid further stress on corporate balance sheets. Further, the government will need to be more flexible and adaptable with respect to how concessions are interpreted in a pandemic. It needs to issue a policy circular that aims to give some additional relief to concessionaires and provide a framework on how a change in law is dealt with. The government should also be more transparent about certain interpretations in contracts like the force majeure clause.

Going forward, issues being faced by the private sector will need to be addressed. Land acquisition has always been a major bottleneck and plays a key role in project delays and increasing costs. For its part, NHAI has been following a new policy wherein guaranteed land acquisition is now a precondition before a project is awarded.

The private developer also incurs a huge cost in shifting utilities (like transmission lines) by relying on external contractors for the job. There is also a need to increase the availability of skilled labour, particularly engineers specialising in highway and road projects in order to increase long-term efficiency. Besides, the private sector requires NHAI to have a predictable approach towards dispute resolution for early settlement and mediation. There is also need for a holistic review of the role of project directors in supervising projects. Often, the project director has a background not in administration but in engineering and thus focusses on resolving the technical issues rather than resolving administrative issues like land acquisition and utility shifting. w

Based on a panel discussion among

R.K. Bansal, Head, Roads and Runways Business, L&T ECC; SudhirHoshing, Joint Managing Director, IRB Infrastructure Developers; R.K. Pandey, Member (Projects), NHAI; T.R. Rao, Director (Infra) & Board Member, PNC Infratech; and Vishnu Sudarsan, Partner, J. Sagar Associates, at a recent India Infrastructure webinar