Contractor Perspective: Experience so far, impact of Covid-19 and upcoming opportunities

Experience so far, impact of Covid-19 and upcoming opportunities

The railway sector accounts for about 12 per cent of the projected infrastructure investments of Rs 1.11 trillion during the five-year period 2020-25 under the National Infrastructure Pipeline. A substantial chunk of the planned investment falls into the category of long-haul rail projects. In addition, Indian Railways has identified large-value projects to be implemented on an engineering, procurement and construction (EPC) basis. This presents immense investment opportunities for stakeholders, specifically in mega projects such as the dedicated freight corridor (DFC) and high speed rail (HSR) projects.

While the sector is growing at a rapid pace, with projects involving huge investments under implementation or in the planning stage, the contractors’ experience has been mixed. The outbreak of Covid-19 has further added to the worries of these players, halting project execution and adding to the costs incurred.

Indian Infrastructure takes a look at the experience of contractors, key projects undertaken, issues faced by them due to the pandemic and upcoming opportunities in the sector…

Experience so far

Despite being a core infrastructure sector player for over five decades, Afcons Infrastructure Limited has recently ventured into the railway sector. It is implementing some landmark railway projects involving the construction of bridges and tunnels. One such project is the Udhampur-Srinagar-Baramulla rail link project of Konkan Railway Corporation Limited. So far, Afcons has completed construction work on multiple broad gauge single-line railway tunnels on the Katra-Laole section of the project. It is currently in the process of completing the bridge across the Chenab river. Once completed, the bridge will span the Chenab river at a height of 359 metres (1,178 feet) above the river, making it the world’s highest rail bridge. Besides, it will have a design life of over 100 years. Currently, the project is in advanced stages of execution, with the arch of the bridge expected to be completed by March 2021. The company is using sophisticated equipment in project implementation such as computer numerical controlled cutting machines, flux core arc welding equipment mounted on trolleys, and ultrasonic testing machines. The bridge is being constructed by Afcons in extremely challenging geological and climatic conditions due to the fragile and unpredictable nature of the Himalayas.

Larsen & Toubro (L&T) has been in the infrastructure sector for about three decades. It is executing an EPC contract for the Western DFC project being developed by Dedicated Freight Corridor Corporation of India Limited. It has also been awarded the contract for the 237.1 km long stretch of Package C4 of the Mumbai-Ahmedabad High-Speed Rail (MAHSR) project by National High-Speed Rail Corporation Limited. The package represents about 46.6 per cent of the total length of the HSR project, making it the longest amongst all the packages. The elevated stretch runs from Zaroli on the the Maharashtra-Gujarat border to Vadodara station with four stations en route. L&T has recently won another mega contract worth over Rs 70 billion under Package C6 of the MAHSR project. It involves the construction of an 87.57 km long stretch, representing 17.2 per cent of the total project length. The elevated stretch runs from the outskirts of Vadodara to the outskirts of Ahmedabad in Gujarat and has one station. The HSR project is expected to offer huge opportunities for contractors in the upcoming packages as well.

Ircon International Limited, a leading turnkey construction company, has recently bagged a Rs 4.05 billion work order from National Capital Region Transport Corporation Limited for the Delhi-Ghaziabad-Meerut rapid rail transit system (RRTS) corridor. In addition, it has also received a Rs 3.18 billion contract for designing, supplying, installing, testing and commissioning of receiving substations and associated works on the viaduct and tunnel from Sarai Kale Khan to Duhai. Meanwhile, another two corridors have been planned under Phase I of the Delhi-Ghaziabad-Meerut RRTS, namely, the Delhi-Panipat RRTS corridor and the Delhi-Gurugram-SNB (Shahjahanpur-Neemrana-Behror) RRTS corridor. The detailed project reports have been prepared for the projects and are awaiting approval from various authorities. Once approved, the project will open up doors for investment by contractors.

Megametro Engineering Private Limited has been associated with metro construction projects for the past 20 years. It has recently ventured into management and design consultancy services as well. The company has been involved in different phases of the Delhi metro project. There has been considerable improvement in project implementation in the EPC mode, saving both cost and time. In addition, the contract conditions have evolved and have been modified over the years in favour of contractors. Initially, the risks and responsibilities were unevenly distributed between the contractors and implementing agencies. However, with the modifications in contract conditions over the years, the risks and responsibilities are now being shared between the two parties. Nevertheless, there remains plenty of room for improvement as some of the issues faced by contractors still remain unaddressed.

The Covid fallout

The outbreak of the Covid-19 pandemic presented significant challenges for contractors, delaying the pace of project implementation. Although the contractors were given time extensions on account of the Covid-induced lockdown, it was insufficient as they incurred huge overhead expenses, in addition to the issues faced on account of difficulties in material procurement and transportation. Productivity levels also fell due to the need to ensure adherence to physical distancing norms during construction work. The contractors also faced labour mobilisation issues as each state had its own restriction guidelines on movement within the state.

The transition to recovery has been longer than anticipated by the contractors. So far, they have managed to get back to 80 per cent of the pre-Covid execution levels. However, the remaining 20 per cent of the activities continue to suffer due to the outbreak. Overall, there has been a delay of about six to nine months in project implementation, resulting in huge losses for which the contractors have not yet been fully compensated.

Contractors were unable to undertake any construction work during the April-June quarter. Even after that, despite orders from central government authorities, work could not start due to restrictions imposed by local authorities. As a result, construction work was affected for longer than the lockdown period. Although work has now resumed to a considerable extent, there has been a major setback in the project implementation process.

What lies ahead

The construction industry works at a margin of about 5 per cent, not leaving much elbow room for contractors to use cash deposits or reserve surplus in difficult times. Lack of cash flow due to the sudden halt in construction activity has been a major issue for contractors during the pandemic. While the government has certainly taken measures in terms of release of guarantees and additional money, these have been largely inadequate. Hence, there is an urgent need to provide direct compensation to the cash-strapped contractors on an actual loss basis to help them recover quickly.

While the pandemic has adversely affected works in the railway sector, the future outlook remains positive on account of the huge investment planned by the government on some big-ticket projects such as new DFCs, the semi-HSR project, RRTS corridors, the MAHSR project and 100 per cent electrification works, to name a few.

Based on remarks by Akhil Kumar Gupta, Executive Director, Operations, Afcons Infrastructure Limited; Sushil Kumar Gupta, Director, Mega Metro Engineering; Ashok Kumar, Chief General Manager, Ircon International; and C. Sankaralingam, Vice President and Head, Special Projects, L&T Construction, at a recent India Infrastructure conference