Reviving Activity

Key challenges and next steps for the construction industry

The construction sector offers many investment opportunities. However, it has been facing headwinds on various fronts. At a recent webinar organised by India Infrastructure Forum on “Reviving Construction”, industry stakeholders including Himanshu Chaturvedi, Chief Strategy Officer, Tata Projects Limited; T.R. Rao, Director, PNC Infratech Limited; Atul Sharma, Managing Partner, Link Legal India Law Services; and Suneel Vora, Partner, Major Projects Advisory Services, Infrastructure, Government and Healthcare, KPMG in India, shared their views on the current state of the construction sector and the measures needed to revive the industry. Excerpts…

  Himanshu Chaturvedi

The extent of the impact of Covid-19 on the construction sector depends on the type of industry and projects under consideration. Projects that have a greater precast component have been able to better insulate themselves from the crisis due to a focus on offsite construction. Except for the first quarter of 2020-21, we have been performing better than the previous year, with a higher component of offsite construction in our portfolio for the current fiscal. Despite some challenges posed by the pandemic, we expect our overall performance for the current fiscal to be better than the previous one. The central government has come out with numerous initiatives to ease the liquidity situation for contractors. Thus, contractors engaged in central government projects have benefited more during the pandemic compared to those dealing with the state governments. In terms of sectors, metro rail projects, bridges and process plants have performed better during the pandemic than the road and building sectors, which are more labour dependent. With enhanced liquidity in the system, the construction sector is expected to witness considerable growth in the last quarter of this fiscal. In order to enhance funds availability in the construction sector, arbitration procedures need to be improved. Besides, a discounting window should be made available by the Reserve Bank of India for government-approved invoices to bring in liquidity in the sector. For the construction industry to perform better there is a need to radically change its technological and digital framework, which is lagging behind compared to other industries.

T.R. Rao

The National Highways Authority of India (NHAI) has increased the pace of project award in the current financial year. So far, project execution has been impacted by the Covid-19-triggered lockdowns, disruption in supply chains and the exodus of migrant labour. Construction activity across the country in the second quarter of 2020-21 was further impacted by the active and prolonged monsoon.  Currently, the procurement of construction material is posing serious challenges to the revival of construction activity. Steel prices have increased by over 50 per cent during the past few months due to an acute demand-supply gap and even in the case of cement the situation has been very discouraging due to a steep price rise. While construction activity has been subdued during the first half of 2020-21 compared to the corresponding period last year, the performance in the third quarter has been at par with the previous year. Nonetheless, the performance in the fourth quarter of 2020-21 is expected to be better than in the previous year, both in terms of project execution and growth in revenues across the sector.

On the funding side, banks are more willing to finance projects, albeit with certain preconditions. However, we are not facing much difficulty in securing finances for both our fund-based and non-fund-based projects. Banks give a lot of weightage to the financial health and credit rating of road contractors/developers. While financing is not an issue for hybrid annuity model (HAM) projects, it continues to pose challenges for design-build-finance-operate-transfer (DBFOT-toll) and toll-operate-transfer projects, for which lenders demand a much higher equity contribution from developers and concessionaires in order to mitigate the traffic risks. Meanwhile, financing is easier for central government-sponsored projects as compared to state-sponsored projects. For the current HAM projects, developers are facing the issue of annuity payments and interest, being linked to the prevailing bank rates, which underwent sharp cuts post the outbreak of Covid-19 and the acute contraction of the economy. However, the new model concession agreement for new HAM projects takes care of this issue as the annuity and interest payments are linked to the marginal cost of fund-based lending rate.

The government has taken numerous initiatives to infuse liquidity into various sectors of the economy, including construction. Regarding the award of projects, a further increase in tender announcements will be appreciated, given the policy decision by the government that before inviting bids and declaring the appointed date, detailed project reports should be ready, at least 80-90 per cent of land should have been acquired, clearances and approvals should have been received and independent/ authority engineers should have been appointed in advance. Apart from this, the government needs to make some policy interventions to ensure adequate and uninterrupted supply of key construction materials such as steel, cement and bitumen at judicious price levels for alleviating shortages and ensuring sustainable construction operations.

Atul Sharma

From a dispute perspective, the Covid-19 pandemic does not hold much significance in the life cycle of disputes, which usually spans one to two years. On the whole, the construction industry has not developed on the technology front vis-à-vis other sectors. Moreover, technology and education in the construction sector have not kept pace with international standards. There is also the lack of a collaborative contract management regime. Most of the contract disputes arise in public procurement. There needs to be a complete revamp of the Indian contracting system. Contracts need to be structured in a standardised manner, where risk allocation is fair and the onus lies with the party that is more suited to handle it. There is also the lack of a binding dispute resolution system during the implementation phase. This highlights the need for a proper dispute resolution board.

The construction sector is not confined to development projects only. While BOT and other development projects have not been facing significant funding issues, no proper model of financing has evolved so far for simple contract-based projects. Equipment financing is yet to pick up. Contract agreements need to be standardised across the central and state governments. There is also a need for a law that specifies the mandatory clauses in a construction contract in order to ensure fair risk allocation. During the implementation phase, the process of troubleshooting difficulties, financially and otherwise, still has many challenges. Bringing in collaborative contracts can help in overcoming issues in disputes.

Suneel Vora

The construction sector has been facing various challenges such as non-availability of skilled manpower, issues in leveraging construction and digital technology, land acquisition, integrated planning, financing, inaccuracy in estimates, delays in timely approvals and clearances, and the Covid-19 pandemic. In view of these challenges, measures that can be of immense value include: investing heavily in pre-planning and site investigation, collaborative and agile planning, reforming procurement and strengthening contract management, lean construction implementation to improve productivity, embedding a culture for risk management, strengthening people management processes, augmenting organisational skill sets, deepening stakeholder management for land acquisition and regulatory approvals, establishing robust project management structure and leveraging digital technology. Besides, specific short, medium- and long-term measures need to be taken by the government, developers, contractors and financiers to mitigate the issues surrounding the construction sector.

While the road sector has been among the most impacted by the Covid-19 crisis, there has been an increase in competitive bidding for projects owing to relaxations in tender requirements. This might become an area of concern two years down the line. Meanwhile, renewables, metro rail, warehousing, supply chain, water, metals and mining and some select areas of manufacturing have been progressing well. In order to ensure funds availability and adequate cash flow planning, projects should be assessed on the earned value they create and measured transparently and following standard methods. Besides, collaborated contracting should be encouraged as a major game changer. There is also a need for increasing and enforcing a level of certification and qualification in the construction sector. Such quality standards are needed to attract participation and enhance overall skill sets in the sector. Technological advancements such as the use of business information models in the construction sector will also add value.

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