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Can Release Of Arbitration Dues Revive Fortunes Of Construction Firms?

Nearly 15 percent of the revenue of the top six construction companies by market value is held up due to arbitration.

Motorists ride a flyover in India. (Photo: Bloomberg)
Motorists ride a flyover in India. (Photo: Bloomberg)

Indian construction companies face crises ranging from high debt to a credit crunch among non-bank lenders hurting financing, among others. But one, chronic reason, that predates these is revenue stuck due in disputes with government clients.

Nearly 15 percent of the revenue of the top six construction companies by market value—or around Rs 6,000 crore—was held up due in arbitration in the year ended March, according to an analysis by BloombergQuint. Such claims, the analysis revealed, are stuck with central and state government agencies and the National Highways Authority of India.

Non-payment of dues to construction companies has been a rising problem. Hindustan Construction Company Ltd. has the highest number of arbitration claims against government agencies followed by NCC Ltd., according to disclosures in their annual reports.

That comes even as the government set Oct. 15 as deadline for central public sector undertakings to clear dues to vendors. Finance Minister Nirmala Sitharaman said the central government would quickly clear dues to infrastructure developers, many of whom face financial distress led by ongoing arbitration with government.

The is not the first time the government has been prompted to action. The same problem had in 2016 too resulted in the issuance of circular by the Niti Aayog to all central government departments that in case of claims where the arbitral award has been challenged by the government entity, 75 percent of the award should be paid to the contractor against a bank guarantee, with no prejudice to the final court outcome.

The arbitrations are due to disputes over project fees, often due to cost escalation on account of delays or other reasons. It has often been the case that government agencies refuse to pay awards against it and pursue further litigation. The 2016 circular was intended to relieve cash flow for contractors pending a final outcome to the litigation. But the implementation has been inconsistent.

For instance, the government-run NHAI is among those agencies with mounting dues to infrastructure firms that have also been contested legally.

NHAI’s dues, on account of cases in litigation, rose nearly eightfold to over Rs 55,000 crore in the year ended March 2018, according to highway agency’s annual report. That amount has risen to Rs 70,000 crore as on date.

“An amount of Rs 70,000 crore has been claimed against NHAI by road builders while NHAI has counterclaimed Rs 35,000 crore,” NM Sinha, chairman of NHAI, told BloombergQuint over the phone. “However, the arbitration awards stand to the extent of Rs 16,000 crore.”

The increased number of claims against NHAI, NM Sinha, the chairman, said, is because supplementary agreements aren’t being honoured. “Arbitrators often don’t honour the sanctity of supplementary agreements signed during construction period where both the parties have to forego the right to claim and that law of land was made very clear by the Supreme Court.”

On the other hand, companies are struggling with cash flow constraints and the inability to pitch for new projects. Financial institutions are refraining from making fresh commitments for funding new projects as they worry it may aggravate bad loans in the sector, PNC Infratech Ltd. said in its annual report.

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Solutions At Hand

Still, settlement of claims may provide relief as it’s a major overhang for infrastructure companies despite facing several other challenges.

Agreeing, Alok Deora, vice president at Yes Securities, said release of such claims would “place these companies in a much better financial position as they could use the funds to either repay debt or bid/execute projects”.

“A lot of companies have filed for arbitration claims with NHAI due to various reasons out of control of the contractors,” he said. “Some of these claims aren’t just significantly large but also several years old and haven’t been resolved yet, resulting in cash flow constraints.”

A change in process on the part of NHAI may go a long way, Natarajan said. If NHAI plans to award BOT (build operate transfer)/HAM (hybrid annuity model) projects in a big way, it has to make arbitration process not just timely but also swifter, smoother and predictable, he said.