Wanted: A Catalyst for growth

Though the GoI’sdetermined efforts to boost the construction sector is a plus, overallstructural reforms are vital to take the construction industry to the nextlevel of growth in the current economic slowdown. This would be possible onlythrough innovative solutions and the collective effort of the Government andthe stakeholders, write Vishnu Sudarsanand Megha Arora.


Vishnu Sudarsan, Partner, J Sagar Associates.

Megha Arora, Partner, J Sagar Associates.


The budgetaryallocation of `100-lakh-crores to the infrastructure sector overthe next five years clearly establishes that revitalizing the infrastructuresector is a priority with the Government of India. Notwithstanding this mandate,the infrastructure sector, including the Engineering, Procurement andConstruction (EPC) segment, is grappling with several challenges. This is theoutcome of the sharp decline in India’s economic growth, which fell to asix-year low of 5.0 per cent in April-June of 2019.

Owing to this economicslowdown, India’s fiscal deficit during this period (April-June 2019) reacheda dizzying figure of `5.47-trillion, which is 77.8 per cent of thebudget estimate for 2019-20. Fitch increased India’s?fiscal deficit forecast to3.6 per cent of the GDP for the current fiscal year (from 3.4 per cent in 2018-19).

In 2017-18, EPC companieswere maintaining strong order books. Most of these new orders were from thepublic sector and were largely government-driven. However, by mid-2019, theGovernment had begun curbing capital expenditure to meet the financial deficittarget for the year.

Such curbs adverselyaffect those infrastructure project models that require government funding,especially the EPC model, which requires 100 per cent government funding. Toaddress the impending crisis, the obvious macro-solution is to pump in morefunds into the EPC sector, which would be possible by energizing the economy asa whole.

The road segment isa classic example of slowdown in the EPC sector as a result of government’sreduced capital expenditure. The National Highways Authority of India (NHAI) awarded7,400 km of projects in the FY 2017-18, which declined to 2,200 km in FY2018-19. A CRISIL study has estimated that 30 per cent revenue growth of roaddevelopers in the EPC sector in FY 2018-19 could drop to 15 per cent in FY 2019-20and FY 2020-21.

Moreover, infrastructureprojects in India are also beleaguered with problems caused by time and cost overruns.The Ministry of Statistics and Programme Implementation (Infrastructure andProject Monitoring Division), in its report dated July 2019, stated that of the1,623 Central Sector Projects (`150-crore and above), 552 projects aredelayed in respect of their original schedule, and 73 projects have reportedadditional delays vis-à-vis their agreed date of completion. The report also notesan overall cost overrun of `388,112.62-crore (20.07 per cent of originalcost).

It is well-knownthat the typical factors contributing to time and cost overruns include delaysin land acquisition and in granting permits and consents, fund constraints,rehabilitation and resettlement issues of project-affected persons, right-of-wayissues, and contractual lapses, such as change in scope of work, deferredpayments, and procrastination in assigning pending work.


Seeking Solutions

Addressing the problemsof the EPC sector must be a multi-pronged approach. Though it is true that theEPC model requires 100 per cent government funding and is directly affected bythe Government’s cut-back on capital expenditure to meet its fiscal deficittargets, the overall slowdown of the infrastructure and construction sectorscan be reversed by adopting a combination of solutions. This will help tocounteract the current economic realities of stressed twin balance sheets (ofbanks and corporates) and the overall economic slowdown.

Apart from thedecreased public spending, a reason for the paucity of funds is the large sums ofmoney that are locked in stalled arbitrations relating to these sectors. Forexample, according to data published by the Confederation of Indian Industry,in the road sector alone, more than `70,000-crore is locked in various disputeswith NHAI. Freeing up of these funds can bring liquidity to the road sector andattract investment for its projects.

In this regard,certain amendments have been made to the Arbitration and Conciliation Act, 1996,for instance, provisions for timely conclusion of arbitral proceedings and for ensuringthat arbitral awards are implemented as in the manner of a court decree.

In a major respite to the construction sector, the Cabinet Committeeon Economic Affairs (CCEA) has recently accorded its approval to certain proposalsof the NITI Aayog with respect to arbitrations instituted by – or, against – GovernmentEntities. Accordingly, it has been decided that if a Government Entity is tochallenge an arbitral award, 75 per cent of such award will be paid by theGovernment Entity to the contractor/concessionaire against a bank guaranteeonly for the said 75 per cent and not for the interest component.

Further, a Government Entity is permitted to initiate proceedings forsetting-aside an arbitral award or prefer any appeals, only based on theopinion of the Attorney General of India/the Solicitor General of India/theAdditional Solicitor General of India, in consultation with Department of LegalAffairs. This positive step would safeguard the contractors from frivolouschallenges and appeals and bolster the aim of infusion of liquidity in theconstruction sector.

Another measure ofrelief could result from a scheme to attract investment and participation bythe private sector and, thereby, reduce over-dependence on the EPC model. Thiscan be achieved by ensuring an ideal mix of project models that reduces the relianceon government funds. Based on the thrust of the specific sector, the adoptionof public private partnership (PPP) models, such as BOO, BOT, BOOT and HAM, wouldattract investments from private industry players.

Further, measures shouldbe taken to attract global participation in the infrastructure industry. Globalsentiment on doing business in India could be bolstered by introducingstructural reforms in the process of procurement of infrastructure contracts toensure transparency and efficiency in the process.

For example,detailed project reports may be mandated, dedicated contract monitoring teamsmay be engaged, and the procedure for procurement, payment, and disputeresolution could be monitored by committees formed for the specific purposes. Withinthe EPC model itself, the bid criteria of awarding the project to the L1bidders need to be reconsidered: the financial strength of the EPC players,their technical capability and creditworthiness, their track record ofcompleting projects on time, and their ability to get reputed sub-contractorson board should be given due weightage.

To ensure properenforcement of the contractual rights of the construction sector, a dedicatedconstruction law is also the need of the hour. A specific codified lawregulating the EPC industry will go a long way in providing the much-needed certaintyin interpretation of the contract conditions and will balance the risk-allocationbetween the contractors, the owners of the project, and the other stakeholders.

Thecurrent levels of urban infrastructure fall short of the demands of the ever-increasingurban population. These growing demands need sustainable and affordableinfrastructure in urban areas and the creation of new, inclusive smart cities. Emerging funding sources, such asInfrastructure Investment Trusts, Masala Bonds, FPIs, insurance funds, andpension funds should be tapped to monetize assets and reduce the burden ongovernment expenditure.

In a welcome move, theGovernment has already taken some steps to monetize its road assets. Recently, theCCEA has accorded its approval to amendments proposed by the NHAI to the TOTproject model. It is proposed that certain publicly funded national highwayprojects that have generated toll revenue for at least one year will bemonetized through the TOT model and the funds so generated will be re-purposedby the Government for upcoming highway development projects and operation andmaintenance of existing national highways.



Theconstruction industry remains a crucial sector in India due to the demand forreal estate and infrastructure projects. Though the Government of India’s determined effortsto boost the construction sector is a plus, overall structural reforms are vitalto take the construction industry to the next level of growth in the currenteconomic slowdown. This would be possible only through innovative solutions andthe collective effort of the Government and the stakeholders. With these reforms,the construction sector will, hopefully, bounce back with vigour and be acatalyst in aiding India’s progress story.


“Apart from thedecreased public spending, a reason for the paucity of funds is the large sumsof money that are locked in stalled arbitrations relating to these sectors.”


“Within the EPCmodel itself, the bid criteria of awarding the project to the L1 bidders needto be reconsidered: the financial strength of the EPC players, their technicalcapability and creditworthiness, their track record of completing projects ontime, and their ability to get reputed sub-contractors on board should be givendue weightage.”

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