Fast-tracking dues, arbitration, more EPC good
Given how the fear of the CVC and the CAG forces government officials to litigate any case—from tax disputes to simple contractual ones—right till the Supreme Court, the Cabinet has done well to decide, in the case of the construction sector, that if any arbitration award has gone against the government, 75% of that will be paid upfront into an escrow account even if the award is challenged. Since this can potentially release over R20,000 crore to cash-strapped construction companies, it will give a big boost to the construction sector that is the largest employer in the country. Construction companies who don’t get their money despite winning arbitration awards, in fact, end up getting hit twice over since, with limited ability to service funds, the banks breathe down their necks and this also limits their ability to bid for fresh contracts—the new policy will now release funds which will be used for clearing bank liabilities and to speed up execution of projects. While the government press release says that roughly R70,000 crore is stuck in arbitration—NHAI itself reports over R22,000 crore of arbitration claims—how much will get released will depend on how fast the cases get decided. In the case of HCC, whose shares hit the upper circuit filter of 20% after the Cabinet clearance, the company has already won R3,200 crore worth of awards and has another R4,500 crore or so of claims pending in arbitration courts. In a bid to further streamline cases, government departments and PSUs have been instructed to transfer pending cases to the amended arbitration Act—provided the contractor agrees—since this has expedited proceedings. PSUs and government departments have even been asked to set up conciliation councils so that a case need not even go to arbitration where, as a general rule, awards tend to be higher.
Interestingly, given how the ‘item-rate’ contracts lead to huge delays as well as corruption—a government engineer has to certify how much of cement and bitumen has, for instance, been used before a payment is released—the Cabinet has approved moving away from item-rate contracts to more transparent EPC contracts where the builder quotes a single number and is paid that on completion of certain milestones. While item-rate contracts are being phased out by NHAI, they remain a sizeable volume for other contracting agencies.
While some will argue that clearing 75% of arbitration awards is playing to the construction lobby, keep in mind the fact that the majority of awards go against the government and, given that the average settlement time for claims is more than seven years, the government ends up paying a very large amount as interest as well. In the case of NHAI, the government note says, of a total of 347 arbitral awards, just 38 went in its favour. This, of course, is the same argument used by finance minister Arun Jaitley when, after a Bombay High Court verdict against the taxman, he said the government would, by and large, not litigate matters where courts had already ruled. Wednesday’s decision, especially if implemented in other sectors as well, will go a long way in improving doing-business indicators.