The government has taken exemplary steps during Covid-19 to boost the liquidity of construction players and fast-track dispute resolution. Besides, the National Infrastructure Pipeline (NIP) provides a plethora of opportunities for the construction industry. The setting up of a new development financial institution, the launch of the National Monetisation Pipeline (NMP), the encouragement of infrastructure investment trusts (InvITs), and the strategic sale of public sector units are all examples of alternative fundraising modes being tapped. Gati Shakti is a significant initiative by the government to expedite clearances. Thus, the government has created a healthy infrastructure pipeline, expanded financing sources and fast-tracked clearances.
Key trends
A notable trend over the past few months has been that of all the ministries, except railways, moving towards engineering, procurement and construction (EPC) contracts. Competition continues to be high, especially in the road sector. There are a minimum of 20 bids for each government EPC contract. Similarly, there is high competition in the metro rail sector, particularly for elevated corridor contracts. To this end, one of the recommendations is to grade contractors based on their credentials. Even the scope of work can be categorised into mega works, big works, medium works and small works. There could be different qualification criteria for each category. More time could be given to contractors for bidding. This will ensure that only serious players enter the market. Metrics such as timely delivery, safety measures and cost control could be used to identify potential bidders.
Other key trends include the uptick of digital technology to monitor project progress during the pandemic, localisation of labour procurement, and capability development. The government has been focusing significantly on infrastructure, as is evident from the higher allocation to the sector under the 2021-22 Budget. At the same time, the approach and attitude of banks towards infrastructure companies has changed. Banks are reluctant to lend to EPC players and issue bank guarantees, primarily due to the failure of a few EPC companies in the past. To address this issue, the Insurance Regulatory and Development Authority of India has released final guidelines to ensure orderly development of the surety insurance business in India.
In the ongoing year, companies have a healthy order book owing to the government’s focus on infrastructure and international construction orders. In fact, the order books for a few companies could be some of the highest in the ongoing fiscal. Thus, the construction industry is expected to grow at over 15 per cent during 2021-22, given the low base effect and robust order inflows. Growth for 2022-23 is likely to be 10-15 per cent for the sector.
Around 500 projects are stuck in arbitration. The dispute resolution process is slow and time-consuming. Fundamental changes are required in this area to release private capital which can, in turn, be used for infrastructure creation. Arbitration cases should be resolved within the stipulated time frame. Special dedicated courts must be formed for dispute resolution.
Raw material costs have risen. Steel prices have shot up by 60 per cent and cement prices by 27 per cent since June 2020. Around 50 per cent of EPC projects have an escalation clause, while the rest do not. Reverse migration, shortage of skilled labour and Covid-related safety protocols have dampened productivity. Contractors are adopting greater mechanisation to keep costs in check. The government should consider giving reasonable compensation to contractors for the high cost of production.
In sum
With regard to the NIP, only a small amount has been spent by the government so far. The majority of the capex would only be seen in the coming years, highlighting the upcoming opportunity. As far as the financing of the NIP is concerned, of the Rs 111 trillion capex, only Rs 6 trillion is slated to be realised through the NMP. The private sector’s share of 20 per cent of the NIP target seems far-fetched, given the subdued greenfield investment by private players in infrastructure projects. Even private equity firms, sovereign wealth funds and pension funds are interested in risk-free operational assets. Therefore, the government has to expedite project execution to make them operational and sell them to private investors.
The Covid-19 pandemic taught three important lessons to the construction industry. First, employee health and safety are paramount. Second, planning out logistics at the beginning is essential as contractors realised upon facing difficulty in international movement of goods during the first wave of Covid-19. Third, digital platforms can be used for continuous engagement with employees and for monitoring projects.
Based on a panel discussion among D.K. Sen, Whole-Time Director and Senior Executive Vice-President (Development Projects), Larsen & Toubro;
S.Paramasivan, Managing Director, Afcons Infrastructure; and Pawan Maini, Regional Director, India, Mace Group
