From timely payments to a boost to public capex, Budget FY23 has many things that could give the sector a fillip
The construction sector in India is facing a major challenge in the form of heightened competition, resulting in aggressive bidding. Given the limited fiscal bandwidth that the states have, new tendering activity has remained muted in the last two years. Similarly, real estate and the industrial segments, too, have witnessed moderate new order inflows.
Limited investments across these segments have driven many of the EPC players towards infrastructure projects that are funded by the central government, especially railways and roads, which have seen several new players competing over the last two years.
Why state capex is important
State governments will play a critical role in the National Infrastructure Pipeline (NIP). Almost 40% of the Rs 111 trillion investments targeted under the NIP is expected to be implemented by the states, followed by the Centre (39%) and the private sector (21%).
With the decline in revenues, many state governments resorted to a lower-than-required infrastructure spending over the last two years. In this context, the increase in assistance in the form of the central loan to states for capital expenditure—to the tune of Rs 1 lakh crore in FY23, from Rs 15,000 crore in FY22 RE—is a major positive.
This is expected to provide more head-room to the state governments for increasing the capex. It not only arrests the widening gap in NIP due to lower spending by states but also provides broad-based opportunities to the contractors, resulting in a much-needed ‘cooling’ of aggression evident in the bidding/competitive intensity.
Robust infra allocations to support contractors
The gross budgetary support towards capital expenditure has been increased significantly,with the infrastructure sector being the key beneficiary. The capital expenditure is budgeted to increase to Rs 7.5 lakh crore in FY23, which is 24.4% higher than the Rs 6 lakh crore in FY22 RE (35.4% higher than the Rs 5.5 lakh crore in FY22 BE). The overall capex, including grants and aids for creation of capital assets, is budgeted to increase by 27%—from Rs 8.4 lakh crore in FY22 RE to Rs 10.7 lakh crore in FY23 BE, which is estimated at 4.1% of GDP. This is expected to support the order inflow for contractors.
Major focus areas: Transport and drinking water
The capital expenditure in key infrastructure segments like the railways has been budgeted to increase to Rs 2.45 lakh crore in FY23 (rising by 14% over the FY22 BE); for roads and highways, it will rise to Rs 2.08 lakh crore (marginally higher, by 4.8%, than the FY22 BE). That for metro and the MRTS projects remained stagnant at Rs 19,100 crore.
Drinking water supply is another major segment which witnessed good growth in allocation under Jal Jeevan Mission; the allocation for this has been increased to Rs 60,000 crore in FY23, from Rs 45,000 crore in FY22 (RE).
Cashflow support to contractors
With the aim to provide succour to the contractors during the pandemic, the Union government had initiated a slew of relief measures such as shift from milestone-based billing (typically ranging between 45-75 days) to monthly billing and release of retention money/performance security in proportion to the work already executed, among others.
These measures have supported the contractors significantly—their cash-conversion cycle has reduced while they have also started getting the performance guarantees and associated margin monies released for the executed portion of the projects. Given most of these relief measures are set to expire by March 2022, the budget—with a view to continue supporting the cash flows of contractors—made two major announcements: (1) on the mandatory release of 75% of running bills within 10 days, which will support the cash-conversion cycle significantly, and (2) pertaining to allowing the use of surety bonds from insurance companies as a substitute for bank guarantees in government procurements.
Currently, the margin money/collateral requirement for mid-sized contractors ranges between 45-75% of what is availed from the banks. This high collateral requirement limits their ability to secure additional funding. With the relief measures expiring in March 2022, challenges for the contractors, with relation to funding their growth, would have continued. In this regard, though more expensive, surety bonds will reduce the collateral requirements drastically. However, the shift from bank guarantees to surety bonds, though a step in the right direction, is unlikely to happen anytime soon and may take a couple of years to roll out.
To conclude, the budget addresses core issues faced by the construction sector and is a big positive for the construction contractors.
https://www.financialexpress.com/opinion/budget-2022-budget-bounty-for-construction/2430751/
