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NITI Aayog Proposals to Boost Construction Sector
Oct 22, 2016

With an aim to resolve a number of issues being faced by the stalled infrastructure sector, the Cabinet Committee on Economic Affairs (CCEA) recently cleared several measures proposed by the NITI Aayog to revive the construction sector—such as easier norms for faster settlement of disputes between contractors and government departments, and partial deposit of funds by government agencies, if they appeal against arbitral awards.

Even as the Centre had amended the arbitration law last year for easier dispute settlements, the industry had sought higher government intervention that would ensure early release of funds locked with various government agencies. The funds that were locked, especially those awarded in arbitration, made it difficult for construction companies to keep up with the interest payment on borrowed finances.

According to this decision, in cases where the arbitration decisions have gone against government agencies or public sector companies, these firms would have to pay 75 per cent of the arbitral award amount to an escrow account against margin free bank guarantee, if the award is being challenged.

While the government expects the release of these funds will help reinvigorate stalled infrastructure projects, due to which a number of issues pertaining to other sectors–real estate, steel, cement, etc— would be addressed, it is also likely to help the banking sector. The financial services sector’s exposure to the construction industry currently stands at over Rs 3 lakh crore, and 45 per cent or Rs 1.35 lakh crore of the loans are under stress.

According to Niti Aayog’s proposals, the Department of Financial Services and the Reserve Bank of India will consider giving one-time scheme for stressed bank loans in the sector.

Given the significant multiplier effect the construction sector has on the economy, these measures are expected to give a major boost to economic growth. As the sector provides the largest segment of direct and indirect employment, the revival of the sector would also help in significant employment generation.

It has also been approved that in all new contracts, there will be a provision for conciliation board, which will comprise of independent subject experts. This is being done for a reason that when commercial circumstances change and public servants are reluctant to participate in the renegotiations, there will be a contractual mechanism under which those terms could be renegotiated without bringing projects to be standstill.

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.

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. Studies have shown that a key factor behind the difficulties facing the construction sector is the dependancy of claims from Government bodies.

An estimated Rs. 70,000 crore is tied up in arbitration. Over 85% of the claims raised against Government bodies are still pending of which 11% is pending with the Government agencies, 64% with arbitrators and 8.5% with courts. The average settlement time for claims is estimated at more than seven years.


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