Paving the Way

Road sector progressing at a fast pace

The past 12-15 months have been a mixed bag for the road sector. The second wave of Covid-19 was a huge setback for the road sector, as well as the entire construction industry. Following the months of March and April 2021, the sector showed tremendous re­si­lience and bounced back to meet its construction targets. There has been aggressive bidding in the engineering, procurement and construction (EPC) and hybrid annuity model (HAM) spa­ces. However, the sector is yet again witnessing a setback due to the external effects of the Ukraine-Russia war, which is leading to a rise in the prices of raw material and fuel.

Progress thus far

Covid-19 impacted projects majorly in the urban areas, while in rural areas, some prog­ress was made. However, there was a shortage of raw material and delays in supply due to Covid-19-related restrictions. The prices of raw material also increased significantly. The sector faced a shortage of human labour, as workers returned to their home towns following the out­break of the pandemic. In the initial six mo­nths of 2021-22, when the country was hit by the second wave of the pandemic, the road se­c­tor witnessed a disturbed cash flow and delays in project completion. However, the last six months of 2021-22 saw the supply chain returning to normal and new technology for effective implementation of projects coming up.

There were losses in toll revenue collections during the first wave of the Covid-19 pandemic, but toll collections rose starting in Sep­tember 2020, and by December 2020, they were back at pre-Covid levels. The third wave of the pandemic has not impacted toll collections much, and construction projects in the road sector have also regained pace. Now, only serious bidders who have the required technical qualifications are seen placing bids.

The years 2014-19 saw the rise of rigid pav­ements, creating a huge amount of capacity within the system both in terms of eq­uipment and cement supply. The government has been rethinking this line of development be­cause of the huge capex involved in rigid pa­vements, and is slowly moving to flexible pa­vements. The last one and a half years have seen a transformation with the rise of flexible pavements, mostly in expressways, as well as the introduction of perpetual pavements.

The Bharatmala Pariyojana has laid down a strong roadmap for expressway construction. Many expressway projects are under development. They will connect major parts of the co­untry, reduce travel time and increase convenience. Smaller cities will also be connected to big ones, making transportation faster and mo­re con­venient. The aim of constructing the­se expressways and highways is to make point-to-po­int connections.

State-wise, Uttar Pradesh has performed the best in construction projects. It is set to have the highest number of expressways in the country. Madhya Pradesh has also done phenomenal work in the sector. Many projects have been awarded to contractors and developers in the past 24 months. A substantial length of projects has been awarded in this financial year, so that work may continue in the next 12 months.

Challenges

  • Shortage of manpower: With the increasing number of projects in the road sector, it is facing a shortage of both skilled and un­skill­ed manpower owing to the pandemic.
  • Availability and cost of raw material: The cost of raw material has been increasing at a significant rate, especially for steel, cement, bitumen and fuel (diesel). This has adversely impacted contractors.
  • Delays in project implementation: Though the­re has been an uptick in EPC projects, th­e­re ha­­ve also been delays in the completion of pre-co­nstruction activities such as allocation of land. This is leading to an extension in time­li­­n­es, while also adding to project costs, as in­te­­­rests on loans increase with any such extension.
  • No balance between flexible and rigid pavements: A huge amount of capacity has been developed vis-à-vis rigid pavements either due to frequent changes in government policies or deliberate underutilisation of contractors. There has to be a healthy balance bet­we­en rigid and flexible pavements. At the same time, the cement industry needs to realise that prices need to be kept at a moderate level. The current situation cannot be used as an opportunity to raise prices unreasonably and unjustifiably.

Key recommendations

Digitalisation can greatly benefit the construction sector. Due to Covid-19, labour has been remobilised multiple times. The digitalisation of labour details across all projects in the entire industry would help in connecting directly with labourers. Connecting all equipment via a digitalised channel would help in better utilisation, better movement across sectors, controlling the cost of diesel and manpower, and lowering the cost of maintaining equipment. The use of better technology would also help in improving the speed and quality of works.

Price flooring must be implemented by the government to avoid unrealistically cheap bids. This is necessary because of the very high competition in the sector. The aggressive bids that the sector has been seeing will ultimately compromise the quality of the projects. These have already reduced the capex in the road sector by around 26 per cent.

While there is an intent to adopt green technology, implementation still remains a grey area. There is resistance from stakeholders and workers. Workers should be given proper training and stakeholders must be incentivised to invest in the use of green technology. Apart from green technology, new technologies should be adopted within the construction process.

The road ahead

The government has announced various changes in the contractual framework, such as the reintroduction of earnest money deposits and changes in the technical qualification criteria, the results of which are yet to be seen. The National Highways Authority of India and the Ministry of Road Transport and Highways have also come up with ambitious targets for awar­ds. Construction activities are expected to pick up pace, as the order book is robust.

Toll revenue collections have already surpassed the collections expected in 2021-22. As far as traffic is concerned, double-digit growth is expected in the next 12 months, during which time toll revenue collections are expected to fare better than they have in the past three years.

Technical capacity is also changing with the change in financial capacity. Small players in the construction sector, who have been wor­king on one or two projects, may not be able to bag more till they raise their financial and technical capa­cities. This will help in reducing the competition, which has been high in the past 12 months. In terms of project models, EPC will dominate, followed by HAM and build-operate-transfer (BOT).

The industry seems optimistic, as the number of projects and the availability of raw material are pacing up. The industry is expected to shape up very well in the next 12 months. BOT bids have increased, and the BOT space is being revived. HAM is witnessing a downfall in bids, but is expected to improve given the new framework and rules brought in by the government.

Based on a panel discussion between R.K. Bansal, Vice President and Head, Roads and Runways Business, Larsen & Toubro; Sudhir Hoshing, Joint Managing Director, IRB Infrastructure Developers; Ajay Kumar Mishra, President, Dilip Buildcon; and Pawan Saluja, Chief Operating Officer, MKC Infrastructure, at a recent India Infrastructure

GET ACCESS TO OUR ARTICLES

Enter your email address