The Cabinet Committee on Economic Affairs (CCEA)’s announcement of a revival package for the ailing construction sector has come at an opportune time as it seeks to destress the liquidity woes of construction companies and the infrastructure sector, said the Confederation of Indian Industry (CII). “Indian industry welcomes this positive and timely initiative taken by the government as this would unclog stressed assets and revive projects that have been stuck over years in litigation and courts,” said Mr Chandrajit Banerjee, Director General, CII. 

Mr Banerjee added, “The revival package for the construction sector by the government will translate into a huge liquidity boost for the system and would save many construction companies from being declared NPAs.” The package will also allow recovery of loans by banks and facilitate construction companies to speed up execution of ongoing projects. Further, it will 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, he said. 

CII had engaged with key stakeholders across the government to make a case for this crucial sector, often described as the bottom end of the infrastructure chain, and is happy to see most of its recommendations reflected in the revival package

One of the major decisions by the CCEA includes a direction to PSUs to pay 75% of award amount to contractors against a margin fee in cases where the PSU has lost the Arbitration case and goes in for appeal in Courts. This amount will infuse liquidity and will be used by the contractors to repay bank loans or to meet commitments in ongoing projects. 

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 contractors. This will help disputes to be settled expeditiously, with minimum cost and time overruns and unlock stuck money to go back into circulation in the economy. It would be worth mentioning here that an estimated amount of around INR 70,000 crores is expected to be unlocked due to this measure. 

Commenting on the decision Mr Atul Punj, chairman of CII National Committee on Construction and chairman of PunjLoyd, said that the broad spectrum measures announced by the government will help the construction sector that has the potential to generate jobs and boost investments in infrastructure projects, an imperative to revive economic growth.  

In the long run, other measures are also under consideration, including changes to bid documents and model EPC contracts.  Cabinet has also directed PSUs/ Government departments issuing public contracts to set up Conciliation Committees comprising of independent subject experts to ensure speedy disposal of pending or new cases. The Department of Financial Services, in consultation with RBI, will examine and evolve a suitable one-time scheme for addressing stressed bank loans in the construction sector. 

Given the fact that the construction sector generates the highest level of direct and indirect jobs employing about 40 million people with a 2.7x multiplier effect on the economy and being the second largest contributing nearly 8% economic activities to the GDP, these initiatives are all set to trigger massive expansion of the infrastructure sector, industrialization, urbanization, rise in disposable incomes and success of various Government initiatives to improve India's residential and transport infrastructure. 

A few suggestions for possible additional amendments that will further streamline ease of doing business could include adoption of ICC’s Uniform Rules for Demand Guarantees (URDG) which are being followed in most major countries. Also, revision of clauses in Public Contracts so that the interest of both the Client and the Contractor are taken care of, is essential for the full recovery of this crucial sector.

While the effect of the amendment may be visible after a few months, in the long run these initiatives would enable Construction Sector to attract foreign investments and help in reviving sectors crucial for rebooting India’s growth story.

New Delhi

31 August 2016