Cabinet approves measures to revive stalled construction projects
01 September 2016
The Cabinet Committee on Economic Affairs (CCEA), chaired by the Prime Minister Narendra Modi on Wednesday approved a slew of measures proposed by NITI Aayog for reviving the construction sector, which has been undergoing stress.
Under the proposals, approved by the CCEA, government agencies would pay 75 per cent of the arbitral award amount to an escrow account against margin free bank guarantee, in those cases where the award is challenged.
The escrow account can be used to repay bank loans or to meet commitments in ongoing projects.
This is a major step, which will allow recovery of loans by banks and allow construction companies to speed up execution of ongoing projects. 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. This measure will provide a stimulus to the construction industry and to employment.
Government departments and PSUs have also been instructed to transfer cases under arbitration to the amended Arbitration Act, which has an expedited procedure, with the consent of the contractors.
In the long run, other measures are also under consideration, including changes to bid documents and model contracts, and increased use of conciliation. NITI Aayog will also examine the idea of creating "claim take out funds" financed by private sector investors, while the Department of Financial Services will examine a suitable scheme for addressing stressed bank loans in the construction sector.
The move is based on a realisation of the need to have a slew of short-term and long-term initiatives to address the issues ailing the construction sector. The construction sector is a major contributor to economic activity accounting for about 8 per cent of GDP.
It is the largest creator of direct and indirect employment, employing about 40 million people. It is a highly employment intensive sector with a strong multiplier effect, creating an estimated 2.7 new jobs indirectly for every Rs1 lakh invested. It has major forward linkages to sectors like real estate, infrastructure and manufacturing and backward linkages to steel, cement, etc. Thus, this sector is critical for stimulating employment and economic activity.
In recent years, the construction sector has been affected by the large number of projects which got stalled during the period of stagnation between 2011 and 2014. The banking sector also has a large exposure to construction, estimated at over Rs3,00,000 crore. About 45 per cent of the bank loans in the sector are under stress.
Studies have shown that a key factor behind the difficulties facing the construction sector is the pendency of claims from government bodies. An estimated Rs70,000 crore is tied up in arbitration. Over 85 per cent of the claims raised against government bodies are still pending of which 11 per cent is pending with the government agencies, 64 per cent with arbitrators and 8.5 per cent with courts.
The average settlement time for claims is estimated at more than seven years. A majority of arbitration awards have gone against the government agencies. In the case of the National Highways Authority, out of a total of 347 arbitral awards, 38 went in favour of the authority and 309 went in favour of the contractor/concessionaire.
Out of the arbitral awards in NHAI cases, more than 90 per cent were unanimous awards in which all arbitrators including the one appointed by NHAI had concurred in the decision. In many cases, arbitration awards are contested in the courts, even though a large majority of arbitration decisions are upheld by the courts.