Road Construction Sector Poised For Growth; Competition Set To Intensify

On November 12, 2020, the Ministry of Finance’s Department of Expenditure came out with an office memorandum listing out relaxations for the construction sector to alleviate the financial crunch faced by the industry due to the Covid-19 pandemic induced restrictions. These included relaxations like exemption of Earnest Money Deposit (EMD) and reduce Performance Guarantee clauses in government contracts till 31st December 2021.

Earlier it was predicted that with these relaxations coming to an end, 2022 will witness competition between firms with high liquidity. Abhishek Gupta, Assistant Vice President & Sector Head, ICRA Limited had noted, “As the relaxations under the Atmanirbhar scheme are likely to be gradually removed in 2022, there could be an increase in working capital intensity and BG requirement. However, most large construction companies will have adequate liquidity cushion to absorb this. Nevertheless, small and mid-size companies could witness some pressure with increased BG requirements.”

However, in a surprise move, the Department of Expenditure extended the relaxations related to reduced Performance Guarantee till March 2022. Explaining the intention behind extending these relaxations, Poonam Kaura, Partner- Government and Public sector Advisory, Nangia Andersen LLP, said, “The government wants to give relief to sectors like construction, manufacturing, and other services. This extension will give further relief to the sector to deploy additional resources in project execution and to deliver them on time. The government’s experience in the past year has been that projects are completed on time and in the given budget.”

Among the construction sector, the road construction sector is expected to dominate India’s infrastructure growth story as according to a report by credit rating agency Crisil, the National Highways Authority of India is expected to award contracts for about 4500-5000 Kms in the coming financial year. The report further noted that 45-55 per cent of these contracts will be awarded on the Hybrid Annuity Model (HAM).

Kaura while commenting on this affinity for the HAM model said, “This was introduced in the year 2016. It’s a risk-sharing model, where the government pays 40 per cent during the construction stage and shares the responsibility of revenue collection while the private partner accepts the operational and maintenance risks. As firms don’t have to look for initial funding under this model, it is a win-win situation for both the government and firms.”

However, the report from Crisil had also noted that due to these relaxations and eligibility criteria, mid-sized regional players will grab a large chunk of these projects which has raised concerns in some avenues over difficulties in financial closure leading to delays in project completion. 

“I would say that these relaxations are giving a collaborative slant to the sector. International firms are coming with tested and tried state of the art technology, which is cost-effective, environment friendly & time-saving. This is creating a space for Indian companies & local manpower, which in turn is cost-effective & beneficial for all concerned stakeholders,” said Kaura

Sector experts have predicted a positive year for the roads sector not only from the construction perspective but from a toll collection perspective as well. Vinay Kumar G, Assistant Vice President & Sector Head, ICRA Limited had observed that “Overall, the toll collections are expected to witness 12-14% growth in FY2022 on the back of low base and inflation-linked increase in toll rates. The revenue growth is expected to sustain double-digit growth in FY2023 on the back of significant increase in inflation-linked toll rates.”

As the government gets ready to present the Union Budget, Kaura suggested that every state should be given a per cent of state funds with an incentive for the road construction and road infrastructure fund allocation should be linked with other infrastructure development projects like tourism, health, education and water.