The road sector was severely affected by the Covid-19 pandemic. Reverse migration of labour and increase in prices of raw materials were just some of the challenges faced. However, the sector bounced back, with awards and construction picking up. Further, opportunities coming out of the National Infrastructure Pipeline, coupled with the Gati Shakti plan, are keeping stakeholder interest high. The year 2022-23 is expected to clock higher growth than 2021-22, although the third wave of Covid-19 could be a growth dampener.
Bidding environment
Competition persists in the road sector. There is aggressive bidding in the engineering, procurement and construction (EPC) space. Competition is relatively less intense for hybrid annuity model (HAM)-based projects, but is still greater than that in previous years. The bidding criteria, both technical as well as financial, have been relaxed, which has resulted in a heightened competitive intensity in the past one year. It has also resulted in the entry of new players.
Input costs
Cement, steel and bitumen prices have shot up by 40-50 per cent due to the pandemic. Though there has been a correction of around 10-15 per cent in raw material costs, the pressure on profitability remains high. The cost of labour has also increased due to mobilisation, demobilisation and social distancing norms. The price-adjusting formula has not fully covered the increase in input costs in the case of both EPC and HAM projects. In fact, the net project cost has risen by 5-6 per cent, which has had an impact on profit margins.
Cost optimisation
In order to deal with the rising input costs, road contractors/developers are focusing on value engineering. They are relooking at project designs and plans to optimise life cycle costs. Construction is being mechanised to reduce the dependence on manual labour. There has been an increase in the use of fly ash for highway construction. Companies are adopting new construction techniques such as precasting instead of casting in situ. The use of reclaimed asphalt from existing roads is another step towards cost control. Besides, central procurement of bulk material is being done to achieve economies of scale. With these measures, 2-3 per cent of the net impact on project costs can be mitigated.
Focus areas
Digitalisation is a key focus area for companies in the post-Covid era. The adoption of digital technology has helped enhance labour and equipment productivity, while reducing costs. A rising focus on the health and hygiene of workers will benefit the construction industry in the long run. These days, drone technology is being used for site surveys and monitoring of project progress. Building information modelling and LiDAR technology are game changers in the engineering and construction industry. Plants and equipment are connected via internet of things technology, and digital tracking of material has become a reality. In a first, the National Highways Authority of India (NHAI) will be deploying a 3D-automated machine guidance (AMG) module for the Lucknow-Kanpur Expressway. The 3D AMG technology will guide construction equipment during earthwork and data from various sources such as 3D-engineered models, bringing high precision and speed to construction work. NHAI has gone fully digital with the cloud-based data lake software, becoming the first such construction sector organisation. With advanced analytics, the data lake software will forecast delays and likely disputes, and give advance alerts, thus expediting decision-making. NHAI has also reduced project implementation timelines, necessitating construction players to adopt digital solutions for faster planning and construction.
In sum
With the setting up of conciliation committees comprising independent experts, a lot of disputes were resolved during 2019-20 and 2020-21. In 2021-22, the momentum slowed due to various reasons. Dispute resolution is one area that requires attention from NHAI, and further steps are needed to expedite the whole arbitration process. Going forward, with respect to the mix of implementation modes, interest continues to be high for EPC and HAM projects among developers. Greenfield expressway projects are lucrative opportunities in the road sector. States such as Maharashtra, Uttar Pradesh and Madhya Pradesh are being looked at for state-level highway construction opportunities.
Based on a panel discussion among R.K. Bansal, Head, Roads and Runways Business, L&T Construction; T.R. Rao, Whole-Time Director (Infra), and Board Member, PNC Infratech Limited; and H.M. Naqvi, Chief General Manager, NHAI