The Cabinet’s recent initiative to revive the construction sector will provide much-needed liquidity to developers by releasing the capital blocked in claims and also help them reduce debt and expedite execution, ratings agency Icra said.
“The recent initiatives put forth by the NITI Aayog and approved by the Cabinet Committee on Economic Affairs (CCEA) for revival of the construction sector are a key positive for the stressed construction sector,” Icra Vice President Shubham Jain said.
Under the proposal put forward by NITI Aayog and 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 the cases where the award is challenged.
Jain said a major respite is likely to come in the form of the release of the much-needed liquidity in short term from long-pending claims, which would also help reduce the leverage of construction companies and enable them focus on improving execution.
“This way, while the dispute resolution process may continue, releasing 75 per cent of arbitral award to contractors (against margin-free bank guarantees) will help improve their liquidity, and project execution,” he said.
Nearly Rs 70,000 crore claims are stuck in various stages of arbitration. For the National Highways Authority of India (NHAI) alone, as of March 31, 2015, 113 arbitration cases and 83 court cases involving Rs 22,426 crore were pending.
As per CII, pending claims constitute close to 1.5 times the debt of construction companies with average settlement time for claims being more than seven years.
In the case of NHAI, out of a total of 347 arbitral awards, 89 per cent (309) were in favour of the contractor or concessionaire.
However, many arbitration awards are contested in the courts, and though most the arbitration decisions are upheld by courts, this leads to delays in realisation of claims.
According to Icra, nearly Rs 19,946 crore worth of claims are filed by developers against the NHAI, while the authority has filed counter-claims to the tune of Rs 5,725 crore. Nearly Rs 1,603 crore worth of claims awarded by the Arbitration Tribunal are contested in court.
Stress in the construction sector is visible from the meagre 1.5 per cent growth in construction GVA (gross value added) in April-June quarter of 2016-17.
“Over the longer term, measures announced will also help in faster dispute resolution and lower blockade of funds in disputes,” Jain said.
However, this would require a sizable fund outflow from the government departments or PSUs for payment of 75 per cent of the arbitral awards made in favour of construction companies but contested at the next level.
Jain further said the move towards EPC contracts from the conventional item rate contracts will also help lower disputes.