While lauding the EPC mode, Arun Karambelkar, President & CEO, HCC E&C, reveals the roadblocks in the sector.
Could you talk about the growth in the roads & the highways sector over the last two years?
Roads and highways sector has observed a significant growth over the past few years compared to the other heavy civil engineering sectors such as power and water. The growth has come, especially in the EPC mode of the business, whereas PPP and annuity based projects have also witnessed a few bids. Overall, we can say that this sector is showing a steady and continuous growth.
Which policies and initiatives of the government have contributed to the growth of this sector? How well do you think they are being implemented?
The government intends to propel overall growth in the infrastructure sector. It is more visible in the transportation sector in which the ministry has played a significant role in intervening and changing the policies and initiatives. For example, due to economic slowdown, the PPP model was not gaining momentum. The government immediately switched to EPC mode, where they received a good response. The government has also shown willingness to conduct dialogues with the contracting community to resolve issues pertaining various trying contractual and commercial conditions imposed by govern¡ment agencies. These are all positive indica¡tions and they have definitely helped.
Besides, it has taken several initiatives for faster implementation of projects, which include the formation of NHIDCL body which is fully responsible for the implementation of projects in North East, taking major road projects from BRO to NHIDCL for implementation in EPC mode, formation of the Bharat Mala Project and distributing it in between NHAI and NHIDCL. NHAI and MORTH running their independent programmes have also given a boost to the project pipeline.
The government has ambitious plans of awarding Rs 3.5 lakh crore projects in the next six months. Despite this, why are investors shying away from making investments?
The investors are still shying away from making investments in this sector because of their experience in the last few projects. The maturity that the investors are expecting from the government in forming the concession agreement and a comfortable environment for investment has still not emerged. The long term funding options such as liquid bond market that distributes risks more widely is still not present in India. The Land Acquisition Bill is not getting through. As a result, the long term investors prefer to invest in brown field projects instead of greenfield projects. In order to lure the investors into greenfield projects, a different set of comfort in land acquisition and some parameters in the concessions agreement is required to reduce risk, which is still missing.
What is your take on the government´s claims of improvement in investor sentiment? What initiatives do you expect from the government to see the action on the ground?
With the formation of the new government, there was definitely an improvement in the sentiments of the people. But a lot of things have to be brought on the ground. The government is yet to create a scenario where people will start investing. If the Land Acquisition Bill and GST get through, it will create a confidence in the investors that things are moving and the government can really do something. The sentiments of people have definitely improved, but at the same time people are also looking at what is being achieved. Unfortunately, because of the current situation, the Land Acquisition Bill has not been able to see the light of day. Once it gets through, we believe many things will change.
What measures would you suggest to clear the roadblocks?
Before awarding infrastructure contracts, the government agencies should have investigation readiness of all aspects of the project, need to get all permissions and clearance and be ready with the basic infrastructure requirements such as accessible roads, bridges to the project sites, etc., so that the EPC contractor can just go and start working.
Few departments such as NPCIL own the full responsibility of the readiness before awarding the contract. All government agen¡cies should develop this sense of ownership before awarding the contract. Also, during the construction phase, quick decisions are needed on time as well as cost overruns due to any change in the scope of work need to be taken care of. Both government agencies and contractors have to realise that they are partners in the project development. Both entities have to synergise their efforts. This would have a very positive effect on project implementation.
How will ´Make in India´ help to drive the growth of the road sector?
If ´Make in India´ is coming, then there will be a huge demand for transport goods that are produced. For transporting goods, you definitely need a better infrastructure and connectivity to ports needs to be improved. Faster turnaround needs to be ensured, and that will call for high amount of road maintenance, giving an opportunity to both people who make roads as well as to them who maintain roads.
What opportunities do you see this fiscal and beyond with the government´s announcement of the coastal road development project Bharat Mala?
Bharat Mala is a wonderful project because that is going to cover the entire border area of the country. The geographical locations of the project will require some good contractors with lot of experience to work in such areas. It is a good opportunity for us to participate in it.
What changes in terms of reforms or policies do you expect from the government for bringing the sector on growth path?
Most of the infrastructure companies are in a lot of debt. The government has to think of policies or ways to relax these debts.
The money due from the government side to the infra companies should be promptly paid. A faster way to settle variations and claims should be determined. Also the reforms in the banking sector should be amended so that it would allow them to lend money freely to infrastructure companies. We believe that four to five such steps would be good for the projects.
What kind of challenges do you face during execution of road projects?
The government is awarding projects largely on EPC mode. EPC contract is a turnkey contract where the risks associated with the design, procurements of equipment and construction materials, execution, etc., are undertaken by the contractor. Despite sharing these risks with the client, there are various challenges faced by the EPC contractors today in India.
Preparation of faulty estimates: For most projects, the estimates prepared by the clients are based on old or outdated data. The DSR prepared are not based on the actual site condition for finalising the scope of work. Besides, design and drawings prepared are sometimes improper and the time period fixed for completion is unrealistic. The rates taken in the estimation are not based on actual market rates and other risks involved in the project execution are not adequately factored in. In most such cases, bids invited are found substantially higher than the estimate. As a result, the award of the project either takes a very long time as the client has to justify the high variation between bid prices and estimates, or the projects are rebid, thereby causing a delay in implementation.
Land-related issues: Delay in applying or issuing of NOC or clearance from statutory authorities and environmental clearance is another factor that hampers the progress of an EPC contract. Delays in land acquisition and corresponding MOEF clearances have held up implementation of most projects.
Poor decision making: Projects also suffer during the construction phase due to delays in decision making by government agencies on various issues. When the scope of the work is changed, these agencies allow the time extensions, but do not take decisions on the corresponding cost increases. These extra costs are then referred to arbitrations and then further challenged in courts. Due to these payment delays, the working capital requirements of most contractors have substantially increased in recent years. This also resulted in high leverage and stress on the balance sheets of most companies.