India’s public sector corporations and the government are spending more than they did last year in a move that could help economy recover faster. The value of projects awarded to build roads, railways, mining infrastructure, irrigation systems, water supply systems and power plants between April and August has increased by nearly 43% to Rs 1.37 lakh crore while the amount for which tendering has taken place rose an even sharper 67% to Rs 2.32 lakh crore.
It must be remembered that in FY15 the value of projects dropped by some 13% to Rs 3.53 lakh crore, as estimated by Emkay Research, partly because the government’s finances were tight and companies were not really keen to take on new projects.
Nevertheless, the government has recently amended the MCA (model concession agreement) for roads and has also allowed 100% exit for all projects irrespective of when they were bid out two years after construction. KK Mohanty, managing director, Gammon Infrastructure, observed that the 100% exit policy would help developers sell assets.
“However, the success of the process will depend on how fast the government and authorities give us the necessary approvals,” Mohanty said.
While changes to the rules in some segments are helping, the pace of ordering needs to be quicker, say some.
R Shankar Raman, chief financial officer, Larsen & Toubro, recently observed the speed and scale of reforms required to push the economy towards an investment-rich momentum was of a much higher order than being seen.
Also, some managements say there remains a lag between announcements and the tendering. Arjun Dhawan, president & chief executive, HCC Infrastructure, believes the terms of the exit policy could have been a little more lenient. “Perhaps the government could have allowed an exit immediately after construction is complete,” Dhawan told FE.
Varun Mehta, deputy general manager (finance), Sadbhav Engineering, which constructs roads, said changes made by the National Highways Authority of India in working capital requirements and quality parameters might force some companies to stay away. Mehta pointed out that NHAI is fixing the design and maintenance requirements but has tightened working capital requirement for companies, which some contractors find difficult to meet.
“In the initial construction phase contractors can bill NHAI only after certain benchmarks are met. This effectively means that the earlier billing cycle of 40-45 days has now become 80-85 days, forcing contractors to have more working capital,” he explained.
Among the segments that saw a fall in project value last year were power equipment, railway equipment, pipelines, water and irrigation systems and real estate projects. The private sector opted to complete projects before taking on new ones while some were not able to cobble together the necessary finances. The value of tenders issued in FY15 across sectors was lower by 23% than in the previous year at just short of Rs 4 lakh crore.