Government Comes to the Construction Sector’s Rescue

The cabinet committee on economic affairs on Monday approved a slew of measures aimed at reviving the construction sector, by improving liquidity and reforming the contracting regime.

Arun Jaitley informed reporters that the cabinet committee on economic affairs chaired by Prime Minister Narendra Modi has accepted the proposals of NITI Aayog (National Institution for Transforming India Aayog), the think-tank of the government, on easing of arbitration norms.

“These short and long-term initiatives seek to destress the stressed assets in the real estate and infrastructure sectors,” Finance Minister Arun Jaitley said in a press conference.

New Norms

As per the new norms, the Cabinet has asked government agencies and public bodies to pay 75 percent of the arbitration award to the contractors upfront against a margin free bank guarantee. This has been hailed as the key change.

Jaitley said the amount then received by the contractors should be used to complete the project and settle dues of banks and financial institutions.

This comes as a huge relief to the industry that is currently battling mammoth debt. The Cabinet also has made provisions to transfer pending disputes between the contractors and public institutions to the new arbitration process. This can help companies opt for cheaper and quicker resolution.

“Wherever there are disputes pending under the old arbitration act, which was time consuming, there will be an option with consent to shift over to the new arbitration procedure, where it will be cheaper and faster arbitrary process,” Jaitley said.

The finance minister also informed that in all new contracts pertaining to construction, there will be a conciliation board provision that would consist of subject experts.

“This is done so that when commercial circumstances changes and public servants are reluctant to participate in the re-negotiations, there will be a contractual mechanism under which those terms could be renegotiated without bringing projects to a standstill,” he added.

Further, he said contracts entered into by public bodies, item rate contracts would be replaced by turnkey contracts.

Lastly, the Department of Financial Services and Reserve Bank of India would prepare a policy on how to deal with those companies that have lost stressed assets.

The decision will boost the government’s schemes such as housing for all, Amitabh Kant the chief executive officer of NITI Aayog told BloombergQuint in an interview. “This is a major decision by the government to ensure liquidity for the companies,” Kant added.

Welcome Move

Industry, as well as industry experts, have welcomed the move as it provides relief to the bleeding sector.

Gulabchand said that the changes in norms are a huge relief for HCC. About Rs 3,200 crore worth of arbitration awards were owed to HCC by various government agencies. Of this Rs 2,300 crore will be paid out immediately due to the new norms, he added.

“This will set the pace for the construction and realty industry,” he added.

Manish Agarwal, partner and leader, infrastructure at consulting firm Pricewaterhouse Coopers (PwC) agreed. “It is a good step for the industry. This will give some certainty to the arbitration process.”

According to analysts, this move can lift the sector, give it the required push, “With this, the investment climate in the country will be improved,” said Agarwal. The spending in infrastructure sector can also boost the overall economy.

Gaurav Karnik, partner and leader, real estate and infrastructure at consulting firm EY India said, “This is beneficial to the entire sector overall. The money released would be used to pay out the other obligations. Thus it also has a potential to address the NPA situation.” NPA refers to non-performing assets.

Issues With Old Arbitration Act

The infrastructure sector contributes about 8 percent to India’s GDP. It is also one of the largest direct and indirect employment generators in the country, employing about 4 crore people and creating 2.7 new jobs indirectly for every Rs 1 lakh invested, as per the press note released by the government.

However, in recent years, several projects have been impacted due to an economic downturn, unviable contracts and high debt, leading to stagnancy in the sector between 2011-2014. This had led to a decline in overall investments and growth in construction. Delayed government payments and large amounts stuck in arbitration have added to the woes of construction companies.

The government’s press note stated that an estimated Rs 70,000 crore is tied up in arbitration. A majority of the awards have gone against government agencies. But the companies are yet to receive the payments for the awards they have won.

85 percent of the claims are still pending, and that amounts to approximately 150 percent of the debt these companies owe.

The settlement time has also been a worrying factor, the average time taken to settle these disputes is 7.5 years. Even the awarded claims payout is delayed on an average by 2.5 years.

However, with the new arbitration act and these changes in norms, these delays could be minimised providing much-needed capital to the sector.

Karnik said, “It can impact the economy in a good way. The stuck infrastructure projects would be kick-started, which can start the economic activity in the country.”