In a webinar hosted by Construction World and FIRST Construction Council yesterday, experts churned the Union Budget 2021-22 to decode what it means in funding and implementation of projects.

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Construction World  and FIRST Construction Council organised a webinar with prominent analysts and industry captains on February 2, the day after Finance Minister Nirmala Sitharaman’s Union Budget 2021-22 speech.

The speakers were:

·         Deepto Roy, Partner, Shardul Amarchand Mangaldas & Co

·         Dip Kishore Sen, Director, L&T

·         Hemal Mehta, Partner, Deloitte India

·         Pradeep Singh, former Vice Chairman & MD, IDFC Projects

·         Sandeep Singh, MD, Tata Hitachi

·         Sumit Banerjee, former MD & CEO, ACC Ltd

The 90-minute session was moderated by Construction World’s Editor-in-Chief Pratap Padode.

Budgets over the years have emphasised on infrastructure, but this budget hit the bull’s eye by specifically allocating funds for infrastructure. Governments have dabbled in public-private partnerships (PPP) in infrastructure projects, and experimented with different methods of the workings of PPP. Arbitration mechanisms take forever, and often, government-related issues such as land acquisition are tricky for the private contractors and partners.

But as the industry finds itself in the throes of a post-pandemic pain, these finance-, execution-, and related issues take an even more significant role. Did the Union Budget 2021-22 make a difference to how projects will be implemented? What were some of the hits and more importantly, some misses? What are some loopholes and potential pitfalls?

In this article, we report on what experts on our panel said about project execution.

Project acceleration

Order book positions seem to be in a promising mode as the companies are expecting a huge amount of order to swell up their books post-pandemic. Which sectors do the experts see most promising from the contractor’s perspective?

 

DK Sen, Director, L&T, says order books are growing in infrastructure--railway, roads, aviation, and metro. But it would be a combination of industries, Sen said, thanks to the new economic corridors that the FM announced:

“The corridors will be the engines of growth not just in terms of logistics itself, but in terms of other commercial and residential opportunities. These are long corridors that connect important cities and pass through underdeveloped, and that should lead to development along the corridor.” The government has announced several corridors such as Delhi-Dehradun, Kanpur-Lucknow, Chennai-Salem, Raipur-Visakhapatnam. All these corridors are about 500-600 km long and will connect several major cities.

The government’s announcement of new Dedicated Freight Corridors (DFCs) and high-speed rail is welcome. It seems that the authorities are fully prepared--tender papers are ready, and since it is all JICA-funded, this looks good, Sen said. “Whether they will be able to get the money from the market through monetisation is doubtful. Yet, emerging from a pandemic year, investment of Rs 5 lakh crore is a very good move. It’s a tall order, but the FM’s attitude is one of confidence.”

 

Sen added, “Apart from this they also have ambitious high-speed rail where they have just awarded two packages. And now there are a whole load of packages because the whole outlay is about Rs 100,000 crore out of which only about Rs 35,000 crore have been awarded. There will be huge scope in that and the way the government is going the high-speed rail authority is very is fully prepared as they have been working on this project for a long time.”

As Deepto Roy, Partner, Shardul Amarchand Mangaldas & Co, a law firm, said in the webinar, the government seems to have realised that one of the key drivers of this government’s new slogan Atmanirbharta—or self-reliance—is world-class infrastructure, and is identifying sectors to make significant capital allocations.

Roy said, “Previous budgets used to talk in more hypothetical terms. But this budget identifies certain sectors, and a roadmap has been laid down for each of those sectors.”

The emphasis was given to transportation, in particular, roads, railways, and urban infra. All this specific identification and funds allocation according to Roy, “gives the impression that the government intends to do much in a very short while.”

He goes on to add that a fair amount of emphasis has been laid on the power sector reform, particularly on the distribution side. The government has identified discoms as a piece of the “electricity puzzle”, which needs urgent intervention especially in modernising distribution infrastructure on the energy side.

Revenue mobilisation strategy

The government is deploying a strategy to eliminate the problem of infrastructure financing faced by the Indian infrastructure sector. REITs (Real Estate Investment Trusts) and InVits (Infrastructure Investment Trusts) will now be open to debt financing by foreign players. to set up a development financial institution (DFI). The FM sees this opening up to be a major enabler in financing real estate and infrastructure projects to accelerate growth in these sectors. But will they?

Pratap Padode, Editor-in-Chief, Construction World, pointed out, “Private capital was shy even before pandemic. Public spending needs to be high and the stage needs to be set. Yet with asset monetisation, InvITS, REITS and other processes, is the stage set for private monetisation to come back? This is an operation clean up but why does the situation reach this point? Is it because of the risk associated with projects?”

Sandeep Singh, MD, Tata Hitachi, said the production-linked incentives, or PLIs, which the government has recently announced for a few industries, are already in place. “States will do very well with their own incentives--especially states like Tamil Nadu and Karnataka, which have been aggressive in rolling out the carpet for investment.”

Hemal Mehta, Partner, Deloitte India, said he believed PLIs are “good for new manufacturing units, not so much with existing ones.”

Pradeep Singh, Former Vice Chairman & MD, IDFC Projects, said, “Revenue mobilisation strategy is good news and bad news. It relies on monetisation of government assets including infrastructure projects, especially brownfield projects.”

Roy believes that the “‘InVitisation’ risk could be hedged by investing and exiting later, with a professional O&M coming in.”

“This Budget is a mixed bag,” Singh went on to say. “The government’s commitment to monetisation of assets, especially brownfield, is a renewed and bold move especially in the face of criticism that the government leans towards the corporate sector. “Disinvestment, which is on the same continuum disinvestment in public sector undertakings, including significant land holdings, has been again identified very clearly as an intervention.” A special purpose vehicle (SPV) is proposed to be set up to be able to mastermind that transaction.

Bringing in the private sector into infrastructure is welcome, Singh said, but the experience has been mixed—with a rise in NPAs and even failures among players.

The PPP strategy as previously envisaged, too, Singh believes, seems to be getting lost, perhaps because of that mixed experience:

He further added, “So the government seems to be pragmatically accepting that the development and execution risks associated with infrastructure projects are just simply too high for the private sector. Bringing in the private sector to brownfield projects, which are projects developed by the government executed by the government to monetise those projects to recycle the capital, but in the process, bring private sector efficiencies and management for the operation and management and maintenance of those very projects, and take some residual commercial risks of the future revenue generation and the management of costs of all those projects. So in that sense, it's good news that the government being pragmatic.” 

But the flip side to this is that in the process, the government seems to be no longer focusing on addressing the fundamental challenges that lead to these failures of PPP in its full form, where the commercial projects are developed and financed by commercial capital. The good things about the PPP strategy seem to be getting lost. Many of these underlying challenges are in the domain of public policy. Singh adds, “The government should also bite the bullet and start addressing those challenges, rather than just throwing away the baby with the bathwater and focusing on brownfield monetisation, which by itself is welcome."

Mediation, not arbitration?

India ranks 163rd in the enforcement of contracts in ease of doing business, although India’s rank in ease of doing business is 63rd, where does the problem lie? How effective is arbitration as a choice of dispute resolution?

Enforcing a contract is nothing but a resolution of disputes in one way or the other. And India does have a strong legal framework in place but the problem is with the execution of the rule of law. 

For dispute resolution, the government has taken a few positive steps like making mediation mandatory. But according to Banerjee, “there remain few flaws in that law, which doesn't make it mandatory. And people are bypassing it by taking injunctions etc,” Every commercial dispute should go through mediation, not arbitration because Banerjee feels that arbitration doesn't solve anything as arbitration can also be long-winded and ultimately land up through the whole court route into the Supreme Court. It adds more years to the resolution process. He added, “Mediation is the one which in western countries have become fashionable. And so in India, also we have to make it fashionable.”