"Demand is more than supply, with an increasing thrust on infrastructure. Also, costs have seen an increase for the organised labour contractors, on account of better facilities being provided in terms of habitation, health care and food, among others. Further, the new goods and services tax (GST) on labour contracts raises costs, though the increase is a pass-through," said Shubham Jain, vice-president at ratings agency Icra.
The higher labour cost would not impact construction of new roads, as these have been taken into consideration in the concession agreements. However, an unexpected rise will impact margins of developers with a portfolio of operational projects, where the developer needs to absorb the rise in these costs for road maintenance.
"In the past few years, minimum daily wages have moved up from Rs 200 to Rs 300-400. This has led to certain developers and private equity (PE) firms to look at short-term operations and maintenance contracts to manage overall costs efficiently," said Ratnam Raju, associate director, India Ratings and Research.
Cube Highways and Infrastructure and Brookfield Asset Management are two PE entities that have taken stakes in road projects in the past two years. Sector experts say these foreign PE firms also have access to more advanced technologies, which could help cut on manual labour requirements.
"Most PE players are hands-on with operations and, hence, they are looking at short-term contracts with smaller contractors. Such players are also bringing in higher mechanisation, in a bid to cut down labour involvement and, thereby, costs," said Jain from Icra.