One of the tasks for the future is the digitalization of the construction site

100% tax exemptions for sovereign wealth funds for their investments in infrastructure sector is expected to give a boost to the infra investments in India.

Rajesh Nath, Managing Director, VDMA

What has been the investment scenario in the roads sector in the last couple of years? 

Huge investments have been made in the road sector with total investment increasing more than three times from Rs 51,914 crore (US$ 7.43 billion) in 2014-15 to Rs 158,839 crore (US$ 22.73 billion) in 2018-19. The Ministry of Road Transport & Highways is expected to award road projects with a total length of around 4,500 km worth Rs 50,000 crore (US$ 7.15 billion) in 2020.

As per Union Budget 2020-21, Rs 100 lakh crore (US$ 1.41 trillion) is to be invested on infrastructure over the next five years and plans to invest Rs 15 lakh crore (US$ 214.62 billion) in the road sector in the next five years. The Government of India aims to construct 65,000 km of national highways at the cost of Rs 5.35 lakh crore (US$ 741.51 billion) by 2022. Under the Union Budget 2020-21, the Government of India has allocated Rs 91,823 crore (US$ 13.14 billion) under the Ministry of Road Transport and Highways. The Ministry has allocated Rs 3,150 crore (US$ 450.71 million) for maintenance of roads and highways in FY20, also allocated Rs 280 crore (US$ 40 million) towards road transport and safety. The Government of India has set a target to complete one road projects every two days as a part of 100-day plan.

The Central government recently announced Rs 20 lakh crore economic stimulus package, The New Deal for Aatmanirbhar Bharat - a resilient India, comprises of around 10% of India's GDP and focuses on land, labour, liquidity and laws. Extension of up to 6 months (without costs to contractor) to be provided by all Central Agencies (like Railways, Ministry of Road Transport & Highways, Central Public Works Dept, etc) was announced as part of the package. This will cover construction/ works and goods and services contracts and obligations like completion of work, intermediate milestones etc. and extension of Concession period in PPP contracts.

Where does the money come from? What are the funding options?

National Investment and Infrastructure Fund (NIIF) is India's first sovereign wealth fund that was set up by the Government of India in February 2015. It manages over $4 billion of capital commitments across three funds. Apart from NIIF - the country's only sovereign wealth fund, India has already seen a large pool of infrastructure investments by global sovereign wealth funds such as Singapore based GIC, Temasek Holdings and Middle East based Abu Dhabi Investment Authority.

In the Union Budget 2020, the government has emphasised the role of private investment and the PPP route for funding the developmental infrastructure programme. The Finance Minister has also relied on doubling of divestment target including successful monetisation of assets such as 6,000 km of roadways for meeting the resource requirements. Acknowledging the need for efficient implementation of the various programmes, the budget announces the formation of an end to end investment clearance cell.

The decision of central government to grant 100% tax exemptions for sovereign wealth funds for their investments in infrastructure sector is expected to give a boost to the infra investments in India. Besides the exemption, abolition of dividend distribution tax (DDT) is also will give benefits to the global yield-seeking infrastructure investors in India.

The almost 'dried up cash flow' is said to be a major challenge in the sector, especially the contractors not receiving money from NHAI which has a crippling effect down the stream.

In recent times, NHAI has been battling many odds — its debt is mounting, its land acquisition costs have gone up four-fold over four years. Sitting on a Rs 1.8 lakh-crore debt, as on March 2019, NHAI's debt-servicing obligation is on the rise. In the current fiscal, it has Rs 5,573 crore debt-servicing obligation, Rs 6,600 crore in FY21 and Rs 4,700 crore in FY23. On top of that, it has to pay around Rs 15,000-crore interest annually for its outstanding debt.

Project awards by NHAI in the 2018-19 fiscal dropped to its lowest in four years to 2,222 km from 7,400 km in 2017-18. In each of the previous two years, NHAI had awarded around 4,300 km highway projects. In the absence of private investments, there is a big and increasing reliance on EPC projects, which in turn burdens the fiscal and contributes to rising overall public debt.

At present, around 35% of NHAI's annual expenditure goes into construction of national highways, 30% into acquisition of land, 16% in extending grant for projects under HAM, 15% in debt servicing and the remaining 4% into payment of annuity. But soon, with increasing EPC contracts, the NHAI's debt also ballooned from Rs 24,000 crore in FY14 to more than Rs 2.3-lakh crore in FY20. This was because the only sources of funds for the NHAI are budget allocations and market borrowings.

Given the current state of NHAI's debt position, coupled with the increasing fiscal pressure on the Centre, most analysts expect the NHAI to turn back to HAM- or BOT-based contracts — passing on the burden of raising finances on to the private players. However, this might not be a welcome move, given the debt profile of most companies and reluctance of most banks to offer loans to road contractors.

'Stressed projects' is another major concern among the major stakeholders. How do you assess the impact of the same?

During the initial years of public-private partnership (PPP) in road and highway construction, the Centre mostly awarded contracts under the build-operate-transfer (BOT) model. Under this model, the developer had to bear the cost of construction, and the returns (toll revenue for a given period) only flowed in after the completion of the project. Companies had to borrow heavily to finance the construction cost.

The BOT model soon turned unviable for the private developers. While on one hand, order books flourished, on the other hand, execution suffered due to poor availability of land and prolonged delays in getting other approvals. Soon, companies were in a debt trap, unable to meet the surging interest burden.

Hence, in a bid to revive the appalling state of PPP projects, the Centre introduced the Hybrid Annuity Model (HAM). HAM came into being in 2015-16. Eight projects, measuring 343 km, were awarded in the first year, followed by 2,059 km in 2016-17. Project awards through HAM reached a peak in 2017-18 at 3,236 km. Under HAM, developers get 40% of the project cost upfront from the NHAI and remaining 60% over a period of 15 years.

However, the pace of road construction and awards has fallen drastically during 2019-20. Construction of highways slowed to 27 km a day during April-January in the current fiscal, from 29.7 km a day achieved in all of 2018-19. Also, awards of new projects in the first 10 months of 2019-20 were only 35% of the targeted 10,000 km for the whole fiscal.

Lately, HAM has also hit a roadblock with only one project having been awarded under this model, till January end in the last fiscal. In FY19, the projects awarded through HAM slowed down to around 880 km of 2,222 km of projects awarded by NHAI. This is majorly due to delays in Right of Way and financial tie-ups. Adding that the appetite of the private players has reduced due to a large number of HAM projects bid out in FY18-FY19.

While the introduction of HAM was expected to ease the debt burden of the private companies, it could only help a bit. This is because the developers still had to arrange for 60 per cent of the project cost, and for the remaining 40 per cent, the NHAI would reimburse the company in five instalments, based on the stage of project completion. Also, the annuities (a compensation for toll revenue) only flowed to the developers after the completion of the project, akin to the BOT model.

Hence, with mounting debt on their balance sheets, companies could not accept more HAM contracts. Due to this, the engineering-procurement-construction (EPC) contracts — which had been the norm before the introduction of BOT — began gradually picking up steam from FY18. EPC contracts are plain-vanilla construction contracts in which the developer is paid solely based on the stage of project completion and receives absolutely no share in the toll revenue of the highway constructed. From sub-50 per cent in FY18, the share of EPC contracts surged to 72 per cent in FY20, in the contracts awarded by NHAI.

Labour issues is a major challenge while kick starting the activities in the road sector. How this can be sorted out?

According to KPMG, total construction projects worth more than Rs 59 lakh crore are under development, most of which would have been impacted severely by Covid-19. The Indian construction sector employs over 49 million people, close to 12 percent of the nation's working population. Further, it has a multiplier effect on nearly 250 allied industries.

As the ministry of home affairs (MHA) made way for lifting curbs on certain sectors to get economic activity restarted, construction activity is still crawling, though it has started across various districts. There are different issues cropping up at different project sites. Inter-state movement of new, additional labour is an issue where more labourers are needed, while at some project sites they are anticipating a shortage in inventory and raw materials.

A major hindrance to the resumption of construction activities is about getting labour back to work from their hometowns. There is only a handful of labour at the sites to start the construction post-approval. Till the time inter-district and state movement restrictions are imposed it is difficult to get the construction work back in full swing.

Construction companies should look at incentivizing the labourers to bring them back and that the need of the hour is a real time collaboration between contractors, labourers, and OEMs for quick revival of the stalled projects and minimizing the liquidity crunch.

What are your suggestions in the area of technology adoption in the roads & highway sector?

Road building activity has been important as a driver to the industry. India plans to spend US$ 1.4 trillion on infrastructure in the next five years to have sustainable development in the country. All villages in India will be connected through a road network by 2019 under Pradhan Mantri Gram Sadak Yojana (PMGSY) also to upgrade the 1,25,000 kms of road length over the next five years, the estimated cost of Rs 80,250 crore (US$ 12.03 billion) is envisaged under Pradhan Mantri Gram Sadak Yojana-III (PMGSY). 

The revival of road sector is crucial to our growth of the CE industry. Road construction – As a thumb rule, 25% of the construction equipment is required in a specified time. Evolution of technology for the better quality of roads is necessary. With the help of technology driving systems, IOT, augmented reality, biometrics, machines can communicate and help in increasing productivity and predictive maintenance of machines.

New German technologies for reducing CO2 are ready. Construction machinery also contributes in part, while building material plants can have a major impact too. The BSIV CEV regulations are to be effective from 1 Oct 2020. Almost all ideal manufacturers of construction machinery have been working tirelessly for the past few decades to bring their machines up to date and reduce the emissions.

One of the tasks for the future is the digitalization of the construction site. Although this is currently on everyone's lips, it has so far made little impact in the real world. A digital construction site is the vision of a fully digitalized, highly automated and customizable construction site.

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