Relief For Construction Projects Stuck In Government Disputes, But...
Construction projects locked in arbitration disputes with the government have got some reprieve. If a government department or a ministry decides to challenge an arbitration award, 75% of the amount awarded will need to be released to the contractor, the new rules notified by the Department of Expenditure say.
This idea of releasing money against arbitral awards was first mooted by the Niti Aayog in 2016. In 2019, the cabinet committee approved the proposal, applicable to all public sector units and autonomous organisations of the central government, special purpose vehicles in which the government held 50% or more and all central government departments.
The relief, much delayed, also comes with certain riders.
First, the contractor will need to give a bank guarantee equivalent to 75% of the arbitral award but not the interest which may accumulate.
Until disputes related to arbitration awards are not resolved, money isn't available to these contractors. This certainly prompted the government to put the new rules to effect, Ramanathan Chandrasekaran, partner at Fox Mandal, said. But the guarantee requirement will pose a challenge for them, he added.
It's like giving from one hand and taking from the other. To get the 75% arbitral award, the contractor will have to deposit an equivalent amount to get the bank guarantee. Some large contractors may be able to negotiate with lenders for better terms for these bank guarantees but most won't.Ramanathan Chandrasekaran, Partner, Fox Mandal
The second rider has to do with how contractors can use the 75% amount.
The payment will be made into a designated escrow account. From it, the lenders will have to be paid first. The balance amount can then be used for the completion of the project and later, for the completion of other projects of the same ministry or department.
This will help in clearing outstanding dues of financial institutions and completion of projects, Raj Panchmatia, partner at Khaitan & Co., told BloombergQuint.
The government will, however, have to clarify the mechanism to secure monies when projects are completed by the contractor or in an event when the contractor has been terminated for non-performance.Raj Panchmatia, Partner, Khaitan & Co.
The other challenge is that the rules don't distinguish between public private partnership (PPP) contracts versus engineering, procurement, and construction (EPC) contracts.
Chandrasekaran explained, under a PPP contract, there is already an escrow arrangement between the lender, authority and the borrower. No separate escrow mechanism is warranted under this contract. But that is not the case when it comes to an EPC contract.
He pointed out that large companies don't raise funding separately for different EPC contracts. They avail working capital facilities by mortgaging, giving security based on the strength of the balance sheet etc.
"Why should an EPC contractor be asked to pay the lender first under the 75% payout? These contractors are not availing loan from banks for particular projects. This distinction between EPC and PPC contractors is required to eliminate this challenge.Ramanathan Chandrasekaran, Partner, Fox Mandal
That said, while the rules are meant to address the liquidity issues and unfinished projects in the construction sector, they will indirectly benefit lenders as well, both experts said.