Spends by the government and the country’s public sector corporations on infrastructure projects have risen by a modest 21% in the six months to September with contracts worth Rs 1,65,400 crore awarded. However, tenders were floated for Rs 2,68,000 crore, a jump of 50.5% over the corresponding period in the previous year and so it is possible more projects will be awarded in the second half of the year. It must be remembered that in FY15 the value of projects had fallen by some 13% to Rs 3.53 lakh crore, as estimated by Emkay Research, partly because the government needed to rein in expenses to be able to meet the fiscal deficit target and, moreover, companies were not really keen to add capacity.
Nonetheless, the fact that there is some traction, even if it is coming off a low base and even if the pace dropped in September, is encouraging. Much of the action is taking place in the roads and railways sectors.
Virendra D Mhaiskar, chairman and managing director, IRB Infrastructure Developers, told FE that most highway projects that were on offer have been taken.
“Competitive intensity to win a project is not as high as it used to be five years ago and has moderated,” Mhaiskar said, adding that smaller engineering, procurement and construction or EPC projects, however, continued to see fierce competition.
The amended model concession agreement (MCA), allowing 100% exit for all projects two years after construction irrespective of when they were bid out, seems to have given builders the confidence to participate in projects. KK Mohanty, managing director, Gammon Infrastructure, pointed out that a 100% exit policy will help developers sell assets more easily. “The success of the process will, however, depend on how fast the authorities give us approvals,” Mohanty said. As Nitin Arora, who tracks the construction space at Emkay, points out, in many instances, the government departments have extended the timelines for submitting bids to ensure enough participation.
Despite this, some projects have been cancelled, which is worrying since it means the capex cycle could take longer to turn at a time the private sector is unable and unwilling to add capacity. Already, gross fixed capital formation, a measure of investment in the economy, has fallen over the last few years from 33.64 % of GDP in FY12 to 28.72% of GDP in FY15. While the capital goods segment within the IIP jumped 10% year-on-year in July and 21% year-on-year in August, the numbers come off very small bases since the segment had negative grown in both July and August 2014.
September was a slow month for government business since the value of tenders dropped by about 8% to Rs 35,800 crore and the contracts awarded also fell by about 32%, with business particularly slow in the power equipment and distribution sectors.
Varun Mehta, chief financial officer, Sadbhav Infrastructure Projects, which constructs roads, believes that although the exit policy has been eased, some changes in working capital requirements and quality parameters might force companies to stay away. “NHAI (the National Highways Authority of India) is fixing the design and maintenance requirements but has tightened working capital rules which some contractors find difficult to meet,” he said, pointing out that disallowing contractors from billing NHAI before certain benchmarks are met in the initial phase is a disincentive. Other developers too say that the billing cycle could go up from 40-45 days to 80-85 days.