NEW DELHI: The Cabinet Committee on Economic Affairs, chaired by Prime Minister Narendra Modi has approved a proposal by NITI Aayog on the construction sector which directs government and public sector bodies to release 75% of the arbitral award amount to a construction contractor against a margin free bank guarantee in those cases where it is challenging the award in court.
The move will help construction companies take stranded infrastructure projects forward and also service their debt taken from banks and financial institutions.
“Today, one of the key problems is that there are a large number of awards where payments have not been made. Consequently the contractors have not been able to pay the bank and it has adversely impacted the balance sheets of the companies as well as the banks. And the projects have come to a halt,” said finance minister Arun Jaitley said at a press briefing after the cabinet meeting.
The 75% amount released into an escrow account will have to be spent by the contractor in completing the project and in discharging the bank and financial institutions’ dues.
It will also increase the ability of these firms to bid for new contracts, helping containing the costs of public works due to higher competition. This measure will provide a stimulus to the construction industry and to employment.
Jaitley said that wherever there are disputes pending between public bodies and construction contractors under the old arbitration act, which was time consuming, there will be an option, with consent, to shift to the new arbitration laws where there is a procedure for a cheaper and quicker arbitration process.
Going forward, in all new contracts relating to construction, there will be a provision for a conciliation board, which will comprise of independent subject experts.
“This is done for the reason that when commercial circumstances change and public servants are reluctant to participate in the renegotiation, there will be a contractual mechanism under which those terms could be renegotiated without bringing the projects to a standstill,” Jaitley explained.
Also, in contracts which are entered into by public authorities and bodies, the item rate contracts would be replaced by a turnkey contract and a model draft turnkey contract proposal will be circulated soon.
Department of Financial Services, in consultation with Reserve Bank of India, may evolve a suitable one-time scheme for addressing stressed bank loans in the construction sector.
These initiatives are expected to help in improving the liquidity in the short run and reform the contracting regime in the long run, the government said in a statement.
“Given the significant multiplier effect the construction sector has on the economy, these measures are expected to give a major boost to economic growth. As the sector provides the largest segment of direct and indirect employment, the revival of the sector would also help in significant employment generation,” it said.
Gaurav Karnik, partner and leader – real estate & infrastructure at EY said this will enable contractors to service their obligations, which would help reduce bank NPAs.
“At the same time, the contractor would be able to restart the project, which will be good for the infrastructure sector on the whole. All these disputes are a key issue for the industry as litigation can go on for years and stall projects,” he said.
With these stalled projects getting restarted, there will also be a multiplier effect on sectors with linkages to construction such as cement, steel etc and also labour.
A report commissioned by the Cll indicates that: (i) Pending claims from government bodies are key factor behind burgeoning debt of construction companies, accounting for -150% of the debt; (ii) Over 85% claims raised are still pending of which 11% are at the level of employers, 64% at arbitrators and 8,5% in Courts; (iii) Average settlement time is 7.5 years; (iv) “Awarded claims” do not get settled after the Arbitrator’s decision; (v) Almost all court orders uphold the arbitrators’ decisions and referring claims to courts leads to delayed pay-out by about 2.5 years; and (v) Only about 8% of total claimed amount (among settled claims) was agreed for and paid out by NHAI in FY15.
“This is a positive announcement and will hopefully lead to faster completion of pending projects. This will also help banks reduce their outstandings,” said Anshuman Magazine, chairman, India and South East Asia at property consultancy CBRE. “The conciliation board in new projects will also ensure issues are resolved early.”
Chandrajit Banerjee, director general, CII said, “This decision by the government will translate to a huge liquidity boost into the system which would save many of the companies from being declared NPAs.”
“This will also allow recovery of loans by banks and allow construction companies to speed up execution of ongoing projects. Further, it will also increase the ability of construction companies to bid for new contracts and the resulting competition will be beneficial in containing the costs of public works,” he added.
Ankur Dhawan, Chief Business Officer, PropTiger said, “It is a welcome move in the direction of improving ease of business and will primarily help push infrastructure projects. It will also bring liquidity with construction players and attract more professional players in construction industry which is struggling with limited good quality contractors. Development of infrastructure forms an important growth driver for real estate industry and will also help distress home buyers who have bought homes in expectation of infrastructure development but are awaiting completion of projects.”
Credits ET Realty