Challenging Times

Issues facing the construction industry and necessary steps

The construction industry faces numerous challenges nationwide, and the Covid-19 pandemic has added to its woes. At the recent Infrabuild India event organised by Indian Infrastructure, leading industry players including Vinayak K. Deshpande, managing director, Tata Projects Limited; S. Paramasivan, managing director, Afcons Infrastructure Limited; and Sandeep Reddy, managing director, Gayatri Projects Limited, shared their views on the emerging trends in the construction industry, the key challenges faced by contractors, and the way forward. Excerpts…

Vinayak K. Deshpande, Managing Director, Tata Projects Limited

Vinayak K. Deshpande, Managing Director, Tata Projects Limited

The Covid-19 pandemic has substantially impacted the construction industry, with the impact sustaining till the end of August 2020. While construction activity remained hampered with the exodus of migrant labour in initial months, it has started recovering since September 2020. The months of October and November witnessed normalcy in operations. Recovery has been made possible with a combination of labour returning to construction sites and productivity enhancement initiatives being taken up by contractors. Given that we have a good order backlog, we are planning to look at double-digit growth in our turnover in 2021-22. As an industry, we need to push ourselves to do better and further enhance our productivity in the coming times. Private investment in different sectors of the construction industry will depend on the strength of the government’s push to these sectors. The government is expected to focus more on high-speed rail and the oil and gas sector. Besides, roads and metro rail will continue to offer huge opportunities in the coming years. The buildings sector, which is largely driven by private investment, will take some more time to grow. Overall, at least for the next couple of years, growth will be driven by the government.

Construction companies should try to complete projects before schedule, with innovations in construction technology, supply chain and labour force management. The Indian construction industry is moving quite aggressively in terms of digital technology adoption. Implementation of enterprise resource planning (ERP), 3D modelling and clash detection systems is gaining importance. However, we are still lagging behind global standards, since India’s ecosystem is yet to be developed to be able to fully embrace technologies such as 3D modelling. Apart from this, metro rail corporations are placing greater focus on pre-cast construction, with 60-70 per cent concreting now happening using pre-cast methods. While we are moving ahead on the technology front, contract management between contractors and the government as well as between contractors and their sub-contractors continues to face serious challenges. So far as clearances and approvals are concerned, the central government has been proactive in ensuring timely clearances; however, the experience at the state level remains a mixed bag. State governments should also provide payment guarantees to contractors to ensure timely payments and a neutral cash flow for contractors. There is also a shortage of core skills for on-ground construction because of which construction companies are now switching to pre-cast techniques. The construction and infrastructure industry is also lagging behind in terms of overall project management skills.

S.Paramasivan, Managing Director, Afcons Infrastructure Limited

S.Paramasivan, Managing Director, Afcons Infrastructure Limited

The first quarter of 2020-21 had been severely impacted by the pandemic. However, we have been decently recovering since then. Our presence in 15 countries outside India has helped us insulate ourselves from the crisis, since some of these countries witnessed lesser impact of the pandemic, compared to India. Overall, our performance in the first three quarters of the current fiscal has been only marginally lower than the pre-Covid levels and we expect to reach complete normalcy or even surpass the previous year’s performance in the fourth quarter. Taking into account the incurred costs on remobilisation of labour and additional safety measures during the pandemic, our overall performance has been reasonable. The year 2021-22 is expected to fare better for the construction industry, compared to 2019-20 and 2020-21. In the coming years, border infrastructure and hydro energy sectors are ex-pected to offer high growth opportunities. While roads and urban rail will continue to offer opportunities in the next two to three years, opportunities in these sectors are likely to dry up thereafter. Although the oil and gas sector has immense opportunities to offer, it suffers from issues such as limited number of domestic players and poor contract conditions.

Over the past few years, contractors have changed the way they have been working. Substantially, structures have been professionalised in many set-ups. Besides, substantial investments are happening in capital equipment for increased automation. Companies are also engaging with various institutions for skill development in the construction industry. Organisations are also moving towards digitisation and implementation of knowledge management platforms. Having said so, contract administration in the construction industry needs significant improvement, especially from the client side. We are also witnessing projects under the state governments being delayed on account of finance-related issues. We are also facing difficulties with respect to some of the mega projects that have come up recently, where clients as well as contractors lack prior experience with such projects, leading to delays in decision-making. Besides, financing of engineering, procurement and construction (EPC) projects is also facing issues, since banks are not forthcoming to provide performance bank guarantees to contractors. Arbitration is another area where hardly any improvements have been made over the years. During the Covid-19 pandemic, there has been a significant increase in raw material and fuel prices. Steel prices have witnessed an abnormal increase of over 50 per cent in the past few months, while cement prices are also soaring due to cartelisation in the raw material industry. In addition, restrictions have been imposed on the import of steel, adding to contractors’ woes, in the absence of any compensation from the government. Besides, in some sectors, the qualification criteria for bidders has become extremely loose, allowing potentially inefficient contractors to bid for projects. The industry is also suffering from unfair risk allocation between the client and contractors.

Sandeep Reddy, Managing Director, Gayatri Projects Limited

 Sandeep Reddy, Managing Director, Gayatri Projects Limited

Our operations were severely affected by the pandemic during March-June 2020. By September 2020, construction activities reached normalcy, with supply chains recovering and labourers returning to their sites. Projects in some states suffered more than in others, due to more restrictions imposed by the respective state governments, coupled with difficulty in arranging labour force to work on sites. We have a large order backlog and expect to have some growth in the upcoming financial year. New opportunities are set to come up, beginning March 2021, with a large number of projects currently in the pipeline. The central government has been forthcoming in providing performance bank guarantees to ease financial constraints faced by contractors; however, the state governments are yet to follow suit. The buildings sector, due to its high labour dependency, has suffered relatively more amid the pandemic, compared to other sectors such as roads and heavy civil infrastructure, which are relatively more mechanised.

Construction companies, primarily owner-driven companies, are now moving towards increased digitalisation and technological upgradation. The use of technologies such as ERP, and internet of things (IoT) for monitoring equipment and fuel consumption is gaining importance. However, despite the initiatives, the construction industry in India continues to be majorly human resource driven. Over the past few years, the construction industry has significantly improved on the productivity front, with increased mechanisation and better planning. Contract management, however, needs to be worked upon to fast-track project implementation. The process of dispute resolution needs to be improved as well. However, the National Highways Authority of India’s reconciliation process is a positive move in the direction of fast-tracking dispute resolution. In the irrigation sector, some states do not even have a proper arbitration formula in the contract agreement and any disputes that arise need to be taken to the court for resolution. Profit margins in the EPC space have not improved much over the years, due to the ever-increasing competition in this segment. However, many construction companies are now trying to become highly capital intensive by taking ownership of infrastructure projects, which eventually leads to suboptimal capital allocation and unhealthy balance sheets because of funding issues and poor management.

The way forward

Primarily, contract management framework in the construction industry continues to lag behind, and this calls for governmental intervention to streamline the same. The government should also introduce strict timelines for dispute resolution through arbitration, in order to avoid project delays. There also needs to be a formal framework in place for payment guarantee to contractors. Besides, performance bank guarantee conditions need to be somewhat eased and retention money should be released with the submission of bank guarantees. Such initiatives from the government have become necessary in order to ease the liquidity situation of contractors and to ensure timely project implementation.

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