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08 September, 2016
The construction sector is very important for the growth and development of the Indian economy. It provides employment to millions of people across the country and is a major contributor in economic activity with a share of approx. 8% to the country’s GDP. After the services sector, it is the second highest industry responsible for the inflow of FDI. It is also the largest provider of direct and indirect employment generating jobs for over 40 million people. Thus having an exhaustive employment potential implying a higher multiplier effect of almost two times, it creates 2.7 new jobs for every investment of Rs1 lakh. Its forward connections to sectors like realty, infrastructure, manufacturing and backward connections with cement, steel etc help in stimulating economic activity of the nation.
The stagnating times between 2011 and 2014 led to adverse effects on the construction sector since many of its projects and launches got delayed during this time. The banking sector also got a hit since it had a large exposure of around 3 lakh cores to the construction industry out of which 45% of the bank loans are under tension.
As per the studies and researches done, it has been revealed that the main reason behind these problems in the construction sector is the delay on the part of government entities in clearing the claims. An approximate amount of Rs 70,000 crores is stuck up in the arbitration. There is a pendency of more than 85% of claims raised against government bodies out of which 11% is left with government agencies, 8.5% at the court level and 64% with arbitrators. It takes more than 7 years on an average to settle these claims and majority of them are not in favor of the government agencies.
The profits before tax and revenue growth margins have also come down considerably since most of the companies are unable to recover their interest expenditures from the earnings.
Thus the construction sector has been showing signs of stress and many of the problems are resulting in an overall decline in the country’s growth and investment. The main problems affecting the sector were discussed with the representatives of various banks, construction companies, NHAI and concerned department/ ministries. And on the basis of these in-depth discussions, multi-sectoral importance of the issues and greater and crucial economic importance, the NITI Aayog made a proposal suggesting various measures that need to be undertaken in order to address the issues of the suffering construction sector and how to revive the same.
Keeping the entire situation in view, the Cabinet Committee on Economic Affairs led by Mr Narendra Modi, has approved a multitude of measures to be followed in order to stimulate private participation and investments with an aim to revive the stalled projects in the construction sector which is at present under a lot of stress.
It has been announced that in those cases where the PSU has challenged the arbitral award, the government entities would pay 75% of arbitral amount in a secured account against the margin free bank guarantee. This secured account besides repaying the bank loans, shall be used for meeting the ongoing project commitments. This initiative has come up as a major move in ensuring that there is enough liquid provision for the otherwise capital intensive sector. Also this will speed up the loan recovery by the banks and help the construction companies in fast completion of the pending projects increasing their ability to look for new contracts. The resulting competition will help in containing the expenses of public works along with providing a boost to employment in construction sector.
The delayed projects increase the financial liabilities and stretches the recovery period bearing a major responsibility on financial institutions for the debt recovery. These new initiatives will reduce the financial stress on the funding institutions and will ensure that the liabilities are being managed, supply of funds remains healthy and loans are being recovered in time.
Since the construction sector is mainly driven by the private sector participation, this type of encouragement was much needed. In today’s scenario when there is lot of emphasis on increasing investments, infrastructure creation and boosting the realty sector, this type of initiative works well as morale boosters.
All these new initiatives have been taken by the government with an objective to enable the “ease of doing business”. Since the construction sector is so crucial for the country’s economic activity it becomes mandatory to remove any kind of hurdles that delay the construction of projects. Even the government itself realizes that the arbitration proceedings are too time taking and they play a major role in stalling the projects, escalating costs, pressurizing the lending institutions and keeping companies away from future engagements. So it is suggested that in order to get a timely redressal to the problems and that too during the project implementation phase, the government entities need to shift to new arbitration process but with the consent of the execution party. They need to set up Conciliation councils that include the independent subject experts to ensure fast disposal of pending or new cases.
Another positive initiative under this proposal is to substitute item rate contracts with EPC mode of contracts. Under the item rate contracts, the nodal agency provides the Bill of quantities that is required for the execution of a project, which includes a detailed design and estimation of quantities required for executing different work items. Payments to the contractors are done on the basis of measured work done with respect to very item. Inadequacies in project preparation and estimation might increase the costs and time delays.
Whereas under EPC mode, the contractor has the complete responsibility of the entire project starting from investigation, project analysis, construction and design and a lump sum amount is given to him via a competitive bidding process. This leads to greater liabilities and risk on the execution parties and the project implementation is done as per the specified standards and with a greater certainty of time and costs.
The government entities are thus suggested to adopt the EPC model since it has been designed as per the global practices followed and clearly specifies the risks involved and rewards in order to ensure a transparent and fair process through this contractual framework.
The prime goal being infrastructure capacity-building these measures will ensure that the ongoing disputes no longer stall the projects. Also quicker project execution with a good financial stability will help the industry and government objectives remain in sync with each other and move forward together.
Hence these initiatives are anticipated to improve the liquidity crisis and improve the construction sector, act as a stimulus for the economic growth and result in notable employment generation.