It is not just an alarm bell but a veritable siren. According to the UN, the global economy could shrink by up to 1 per cent in 2020 because of the Coronavirus pandemic, a reversal from the previous forecast of 2.5 per cent growth. A global recession is looming and the impact can only be mitigated somewhat by resumption of economic activity. Intrinsic to this is construction.
With the prolonged lockdown in India already hitting us where it hurts, is a rapid return to normalcy possible? From the construction and infrastructure perspective, the National Infrastructure Pipeline (NIP) announced by the government has laid out a spend of Rs102 trillion on projects from 2020 to 2025, with Rs.19,503.97 billion allotted for FY2020-21. This includes the roads sector, which has been allotted Rs19.63 trillion or 19 per cent from FY20-25. With this slice of the pie and the ambitious Bharatmala Pariyojana, could the roads sector lead us to recovery? Much valuable time has already been lost this year and it is important to assess where we stand today.
The state of the economy COVID-19 has dealt a blow to the Indian economy, which was already battling a slowdown of sorts, impelling CRISIL to slash its base-case GDP growth forecast for FY2021 to 3.5 per cent. “We foresee India Inc’s credit quality deteriorating in the near term,” affirms Gurpreet Chhatwal, President, CRISIL Ratings, which has conducted a study of 35 sectors, both from manufacturing and services, which account for ~71 per cent of the debt (excluding financial sector) in CRISIL’s rated portfolio. “However, our study shows sharp variation in resilience. Strong balance sheets or continuing demand will support some sectors during the current lockdown, while others could be hampered by collapsing discretionary demand or high leverage.” For instance, while sectors like pharmaceuticals, power and gas and telecom are, quite logically, in the high-resilience category, roads and construction are rated in the moderate-resilience category, and real estate (see box) is in the low-resilience bracket.
In the financial services segment, the lockdown restrictions will have a near-term impact on both collections and fresh loan disbursements. While the RBI’s permission to banks to offer moratorium on servicing of bank loans until May 2020 is somewhat of a breather in the immediate term, challenges could emerge for NBFCs with high share of capital market borrowings, where no moratorium has been announced. That said, most NBFCs rated investment grade by CRISIL have high levels of liquidity or enjoy strong parentage. “Supportive measures from the government and RBI have eased cash flow pressures in various sectors for now,” points out Somasekhar Vemuri, Senior Director, CRISIL Ratings. “As the lockdown is lifted, credit profiles will be back to being driven by fundamentals, such as pace of economic recovery, demand resilience in respective sectors, and normalisation of working capital cycles.” However, the effects of the pandemic will continue to materially impact the credit outlook for fiscal 2021, with rating downgrades likely to far outnumber upgrades.
COVID’s impact on construction
Speaking specifically of the construction sector, the COVID-19 pandemic has created disruptions in the regional, domestic and overseas supply chain and resourcing, including availability of labour, plant, machinery, materials and capital. Pointing out that projects worth over Rs.59,000 billion are under development, a KPMG report titled Reviving the Construction Sector in India post COVID-19 calls the time period until June (before the monsoons) a crucial window of opportunity to ramp up activity, with adequate safety measures.
“Over 49 million people, close to 12 per cent of the nation’s working population, is employed by the construction sector,” says Chintan Patel, Partner and Leader-Building, Construction and Real Estate, KPMG in India. “Hence, to expedite recovery from the economic impact of COVID, revival is vital”. To this end, the report makes recommendations under four broad heads. As labour and capital would be in short supply, the first is to prioritise projects over a 30-45 day window, keeping in mind the immediate and incremental impact assessment of COVID-19, alignment of the project with the strategic intent and national priorities, interlinkages and dependencies on the success of other projects; and the ability to generate immediate and sustained employment across the value chain. The second is for project owners to revisit project definition and delivery strategy by chalking out a plan to minimise the impact of the pandemic; revisiting the strategic alignment of the project; reviewing labour availability and anticipating crew sizing; and exploring off-site, modular construction technologies to optimise time and resources, while proving labour a controlled working environment. The third is to build resilience by enhancing labour health and safety norms, using appropriate digital technologies where possible; strengthening project governance through the establishment of a high-powered task force and undertake capacity building by setting up independent, project monitoring units; and leveraging business continuity planning aided by a digitally enabled environment. The fourth key recommendation is to strengthen contractual provisions with clear guidelines for action and relief in extreme eventualities, and to minimise disputes.
Further, industries who are financially sound enough to provide industrial campuses for their workers and staff to live and work in safety should be encouraged to commence operations, in the view of Pratap Padode, Founder & Executive Director, FIRST Construction Council, and Editor-in-Chief, CONSTRUCTION WORLD. For instance, the Hiranandani Group is hosting over 6,500 workers while the Brigade Group is hosting 9,500 workers during this crisis, providing them food and shelter. As Dr Niranjan Hiranandani, Chairman, Hiranandani Group, tells us, they are now waiting for permission to recommence work. In fact, Deepak Nitrite has restarted its plant operations in Gujarat after a greenlight from the Vadodara administration and the Brihanmumbai Municipal Corporation is carrying out pre-monsoon work, including sea wall construction, completing reclamation and bringing activities to a ‘safe stage’ to ensure there is no flooding.
Jumpstarting project work is the need of the hour. In the words of Nitin Gadkari, Union Minister for Roads, Highways and MSMEs, “Infrastructure project pace has to be expedited by doubling or trebling it.” Work could be expedited on metro-rail projects – underground or in low-traffic areas – by incorporating safety protocols as well as road projects in unpopulated and low-risk areas with minimal COVID-19 cases. Gadkari said he had already requested the release of funds to the tune of `400-500 billion from the Ministry of Finance into the accounts of contractors to bring back confidence.
Meanwhile, Padode’s list of recommendations to the Finance Minister to help the construction industry and real estate (to be implemented with immediate effect) include a waiver of interest on mobilisation advances for the next three months; release of payments of all the retention money of the past six months without bank guarantee with immediate effect; automatic extension of time of three months to be provided for all projects; pending bills to be paid within seven days by the Centre and states for immediate cash flow requirements at sites; support to states with funding to release pending payments; facilitation of the `300 billion cess fund lying with the states; deductions on running account bills, such as recovery of mobilisation advance and retention money, to be withdrawn for the next few months; covering salaries and wages for tax-paying SMEs (see box) for three months if employees are not laid off; adjustment of possession timelines of projects as defined by RERA; deferment of all EMIs payable by residential homebuyers and developers by three months (already announced by the RBI governor); and zero stamp duty for six months and removal of property tax for the next year.
Can the pipeline deliver?
Now, more than ever, all eyes remain on the NIP to spur economic recovery. “The NIP, launched this year by Finance Minister Nirmala Sitharaman, is the framework on which the Prime Minister proposes to transform India into a $5 trillion economy by 2024,” said Padode, speaking at a webinar titled ‘National Infrastructure Pipeline – the Rs.102 trillion opportunity’ hosted by CW on March 31. “Of the total expected capital expenditure of Rs.102 trillion, projects worth Rs.42.7 trillion (42 per cent) are already under the implementation stage and about 19 per cent are under development. So, the critical ones are the projects worth Rs.32.7 trillion (32 per cent), which are at the conceptualisation stage – this is where the opportunities lie. However, the pandemic has disrupted the plan.”
The plan had envisaged a huge spike in spending in FY2021-22 and FY2022-23 to the tune of Rs.19.5 trillion and Rs.19 trillion respectively; measures to contain the pandemic and support the flagging economy may now consume the bulk of the attention this year despite the windfall in terms of low oil prices. That said, India’s time-tested PPP programme, if professionally managed, could still attract foreign investors. But they need to be approached with bankable, fully incubated projects that are free from land acquisition and permission issues, which are perennial bugbears in India that lead to delays and derailment.
While the realisation has set in that the spend on social infrastructure, notably healthcare and education, needs to be upped, the energy and roads sectors still hold great potential. “The NIP is definitely aggressive in the amount to be spent on the energy sector,” said P Uma Shanker, Former Secretary, Ministry of Power, at the webinar. “I expect the bulk of it to come in the renewable sector, with `9 trillion to be spent there.” Added Arun Goyal, Former Secretary, GST Council, “Under the NIP, we find that little amounts have been set aside for social infra – just about 3 per cent. But there is now a realisation that more needs to be done in healthcare and the social sector.” And Raghav Chandra, Former Chairman, NHAI, underlined, “The roads and highways sector is a great opportunity and urban infra is the biggest opportunity.”
For these opportunities to be realised, the litigation and arbitration process in India needs to become more systemic and smoother, without unnecessary appeals. Specific to the roads and highways sector, Chandra added, “A key factor in the success of roads has been the model concession agreement. While it is a modern framework, the rigidity and detailing built into it has become cumbersome. Further, with regard to the prequalification criteria for bidding, life-cycle cost, technical qualification of contractors and net worth of contractors and developers is also taken into consideration. The L1 is the simplest, but it is not being followed. This is something Union Minister Gadkari is looking into.”
It could be argued that these problems present greater roadblocks than the issue of money. As Vijay Agrawal, Executive Director, Equirus Capital, said at the webinar, “Investment is not a challenge – government is. Allocation has been increasing consistently for various sectors, such as railways and roads. Long-term investors also see the opportunities and the capital is available. If we are able to create an additional chain for funding of infra projects – such as bond guarantees, INVITs, etc – it will help. We can also create suitable pension funds. A good system will solve issues.”
On another positive note, Chandra added that the PMG and the PRAGATI initiative have been helpful in executing projects. And observing that FY2021-22 will be the golden years of infra spending, Padode remarked, “We need to spend 8 per cent of our GDP on infrastructure annually. The project pipeline has to be constantly fuelled with newer projects.”
All eyes on roads
This brings us back to the question: Can this fuel set the roads sector afire again? After all, apart from providing employment to millions, this infrastructure activity connects and accelerates economic momentum between large hubs of economic activity and the centres that lie in between. However, the pace of road construction and awards fell drastically in 2019-20. Construction of highways slowed to 27 km a day from April to January in the current fiscal, from 29.7 km a day achieved in all of 2018-19.
As Padode said in another webinar hosted by CW on April 21 titled ‘Roads to Recovery’, “2019-20 has not been able to hold up to 2018-19. However, the Bharatmala Pariyojana is among the most promising infrastructure projects that can help drive India’s GDP growth.” The project covers 53,000 km with a fund provision of Rs.5.35 trillion for Phase-1. “A total of 255 road projects with an aggregate length of about 10,699 km have been approved till October 2019 under Bharatmala with a total cost of about Rs.2.65 trillion,” he added. The target for completion is 2021-22.
That said, the spectre of delay continues to hang heavy over projects. Of 1,698 central-sector infrastructure projects worth Rs.1.50 billion and above, 578 projects reported delays, 400 projects reported cost overruns, and 202 projects reported both time and cost overruns, as in November 2019. “Every year, we are losing at least `1 trillion in projects due to delays,” rued Padode.
COVID-19 has only exacerbated the situation. “Transportation is a major factor and the supply chain for materials is the biggest problem,” shared Devendra Jain, Executive Director & CEO, Dilip Buildcon, at the webinar. “Another challenge is manpower and labour. Labourer morale is low and they would probably want to go to their villages once transportation picks up. After that, the monsoon will be here.” In complete agreement, Sandeep Garg, Managing Director & CEO, Welspun Enterprises, added, “It will be difficult for us to get the workforce back because of their fear of the COVID-19 pandemic. So, there is going to be a longish U-recovery, or may be an L-recovery.”
Affirming that health and safety on site is a priority, Hardik Agrawal, Executive Director, Dineshchandra R Agrawal Infracon, said, “We want to request the government to ensure transportation of labourers after proper testing by contractors. Allowing interstate movement of labourers will be beneficial for the highways sector as well as the market.”
Highlighting that equipment players are an important part of the construction and infrastructure value chain, Deepak Garg, Managing Director Sany South Asia & India, and Vice President, Sany Group, said, “While we are prepared in terms of inventory, the challenge is logistics and transportation in terms of drivers available. We are also affected by the MSME side, where manufacturers of small parts are not supplying. We are working with them to ramp up and see if we can start supply for industrial units. Another challenge is that the cost of imports has gone up drastically with the dollar going up.”
For his part, RK Pandey, Member (Projects), National Highways Authority of India (NHAI), said, “March-April is the peak season for road construction, in terms of physical and financial progress. While the pandemic has had an effect, we have taken measures to ensure that at least our financial progress does not suffer. We have made payments of `100 billion. As on March 31, we have crossed 10,500 km of construction and would have constructed another 500-600 km if not for the last few weeks of March lost due to COVID.”
What lies ahead?
Sharing that NHAI has prepared a plan for the way forward, Pandey said during the webinar, “The target is in terms of awards as well as construction. While it is difficult to give a concrete number as we don’t know how long the COVID crisis will continue, we have got permission to start construction. In fact, just yesterday, we reviewed 375-400 projects where road construction works can commence. However, logistics is a major concern.”
In terms of awards, the aim of Bharatmala is to cover 26,000 km of roads of which 12,000 km has already been awarded, according to Pandey. “It is said that 54 per cent of delays in projects is due to land acquisition,” he acknowledged. “So, we have changed our strategy; we are not awarding works till the majority of the land is owned by the government.” What’s more, NHAI has DPRs of works worth over Rs.200 billion available for this year. “This year, we have kept a target of 4,500-8,000 km; while I cannot give an exact figure, NHAI can comfortably award at least 4,500 km.”
As for force majeure clauses in contracts, Pandey said it was an issue for BOT projects, not so much for budgetary-supported ones. “This aspect is under active consideration in the ministry. Tender terms may be relaxed if required to cope with the COVID crisis.” He was also positive while addressing the issue of dispute resolution. “We have referred 86 cases for conciliation in the past two years and about 43 have been resolved. We are laying emphasis on this method.”
The money angle
Now comes the trillion-dollar question: Will finance be a concern?
“A bit of smart work – in terms of stuck projects – and hard work – in terms of awarding new projects – will go a long way,” said Sandeep Upadhyay, Managing Director-Infrastructure Advisory, Centrum Capital, at the webinar. Pointing out that returns are better for projects that are 70-80 per cent complete, he suggested, “NHAI could possibly have an SPV formed to deal with stuck projects. The other option is to monetise them through an INVIT.” In terms of greenfield projects, investor sentiment continues to back players in the EPC and HAM space. “It is also time to add a bit of BOT to this,” he observed. As for pension funds, Upadhyay remarked that there was a good amount of traction, except for greenfield projects.
In terms of financing road projects, Jain expressed the view that bankers are looking positive. While agreeing that there has been some facilitation, Agrawal pointed to a “higher need”, with relaxation on HAM and BOT projects. Here, he suggested tender documents could be relooked at with regard to the payment and interest rate and marginal cost of funds-based lending rate (MCLR). Pandey added that bank guarantee may also need to be considered at this time.
All considered, the need of the hour is a positive, proactive mindset. “We need to be optimistic,” Agrawal iterates. Echoing the sentiment, Padode affirmed, “The road to recovery seems to be on the way. I think it is only time, until after the monsoon.”
Evidently, this road will be rocky, but it is vital for the government and key stakeholders to keep their hands upon the wheel and not lose sight of the destination.
The ‘Real’ Deal
Real estate, which has cyclically followed a course of booms and troughs, has been hit hard by the Coronavirus pandemic, with unsold inventory, project delays, over-leveraged balance sheets, and rising stock of affordable housing. Further, the commercial real-estate segment is reeling with malls, theatres and offices under lockdown.
Even before COVID-19 struck, the government had announced a rescue package of `250 billion to revive stalled or unfinished projects, said Pratap Padode, Editor-in-Chief, CONSTRUCTION WORLD, and President, FIRST Construction Council, at a CW webinar on ‘The Real Estate Challenge’, held on April 14. To this, Ramesh Nair, CEO & Country Head, JLL India, responded, “About 4.5 lakh units have been stalled. While the government has started disbursing the amount, it also needs to start looking at a one-time settlement.” Other options, according to him, are to have a subsidy, akin to that for affordable housing projects, and, in terms of the Alternate Investment Fund (AIF), allowing private players for last-mile funding.
Commencement of commercial activities is critical. “We have to start construction as soon as possible,” affirmed Sangeeta Prasad, Managing Director & CEO, Mahindra Lifespaces, at the webinar. “We are taking care of workers at many of our sites. Our fear is that they will leave once the lockdown is lifted to go to their villages. We also need to see how the supply side works and whether cement and other materials are being delivered.” In complete agreement, MR Jaishankar, Chairman & Managing Director, Brigade Group, added, “We will have to see what happens. November to April is the golden period of construction and we have already lost one-and-a-half months. The supply chain is equally important. About 70-80 per cent of sectors need to be working because so many are related to construction.”
Following the crisis, as Dhruv Agarwala, Group CEO, PropTiger.com, Housing.com, Makaan.com, pointed out, there will be a fundamental shift in consumer behaviour with the increased adoption of technology. Other post-pandemic trends include a preference for buying a home instead of renting and multifunctional design to enable working from home.
For his part, Dr Niranjan Hiranandani, Co-Founder and Managing Director, Hiranandani Group, and President, ASSOCHAM and NAREDCO, says in another video interview with CW, the economy of the sector will be impacted in the months to come owing to difficulty in paying worker salaries. “Liquidity is an issue,” he adds. “All credit limits outstanding as in March 2020 should be reconsidered. The government also needs to reduce GST at least between 25- 50 per cent in the next 6 to 12 months.”
As for prices, Hiranandani avers, “You cannot sell at less than 10 per cent of the ready reckoner rate.
If prices are reduced, both the buyer and seller will have to pay a tax amount of about 35 per cent of the ready reckoner value and the price at which you are getting the product. Also, in terms of unsold inventory, on one side we want to increase the housing stock and, on the other, if your house is empty for over two years, you have to pay notional rent. The law itself is a contradiction. So the government has to amend it and revise the ready reckoner rates.”
Weighing in further in another video interview, Jaishankar says, “I don’t see any deferring of real-estate prices, particularly in some areas, because it has always been a very affordable market. As far as demand is concerned, everybody would like to wait and watch.” He adds that construction sites are probably safer than labour colonies or tenements as long as safety precautions
So when will the sector bounce back? While Jaishankar pegs it the end of the quarter of the current fiscal, Hiranandani is more circumspect. “I think it will take about a year to completely recover,” he believes.
Strategies for SMEs
MSMEs, the backbone of the country, are in trouble. At a webinar organised by Industrial Products Finder (IPF) magazine on April 16 to explore recovery strategies for SMEs, moderated by Pratap Padode, Editor-in-Chief, IPF, and Founder, FIRST Construction Council and ASAPP Info Global Group, Rajive Chawla, Chairman, IamSMEofIndia, said, “MSMEs are the worst hit. About 99 per cent of businesses have not generated any revenue in the past month and have also been told to pay wages on time. But interest on their loans have not stopped and their debt burden will keep going up during the lockdown.” Saikat Roy, Director-West, CARE Ratings, added, “Along with cash flow and liquidity, demand disruption and supply chain challenges are worries.”
“Finance is the biggest worry and funding options are very limited,” underlined Rachana Bhusari, Vice President-SME, National Stock Exchange of India (NSE). “The debt trap is very real. Listed SMEs can look at raising funds and also use TReDS, which facilitates the financing of trade receivables of MSMEs through multiple financiers. The government should incentivise the listing of SMEs on the stock exchange.”
While compliance with the Disaster Management Act is a must during the lockdown and wages need to be paid, Advocate Mohit Kapoor recommended that the government can take measures to aid employers, as seen in other countries. “For example, the Danish Government has announced it will cover 75 per cent of wage bills,”
The government has announced a relief package, as Bhavesh Thakker, Partner (Tax and Regulatory), Ernst and Young LLP (EY), pointed out.
It includes extension for filing GST returns; no late fee, penalty or interest for companies with turnover of up to `50 million; and a direction to large companies to clear payments of their supplier MSMEs. “But these can only be availed if they have Udyog Aadhar, which only 20 per cent of MSMEs have. In India, relief measures account for a share of around 0.88 per cent of GDP; in the USA, it is around 10 per cent. We need to support MSMEs as a larger portion of them drive businesses in India. We are still waiting for larger measures.”
For his part, Chawla said, “These measures may burden MSMEs with further liabilities as their loan will be extended; if they fail to pay it, they will be in a flux. Provident fund relief is also conditional. Additional loans by banks will serve as an added burden as banks will make good business depressing all the SMEs at the receiving end.”
Meanwhile, Subba Bangera, Director, PMMAI (Plastics Machinery Manufacturers Association of India), and Chairman, Active Biz Solutions, said, “MSMEs would like the government to extend support for the next six months through social security funds. If given the right support, MSMEs will restructure, upgrade, come out with flying colours. The only demand is short-term government support via its different channels – loans, waivers, extensions, etc.”
Here are Padode’s recommendations for a relief package for SMEs:
- Deferment of tax payment deadlines by a month.
- A three-month extension to defaults on contracts expecting execution by March.
- A three-month extension to corporates/firms paying taxes of less that `50 lakh.
- A six-month extension to loan defaults triggered from January to March 2020.
- Extension of the Vivaad Se Vishwas amnesty scheme by two months and release of all dues back to the taxpayer once settled.
- A three-month interest payment holiday for borrowers bearing loans from January to March 2020.
- Alignment of GST rates to two slabs.
- A tax deduction of 25 per cent of tax payable to all employers with a turnover of less than `2.50 billion who do not retrench staff from March to June 2020.
- Release of tax refunds and exporter drawbacks held up on an urgent basis.
- Leniency in legal compliances for PF/GST/TDS for April 2020.
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