The Centre plans to open an escrow account to help repay bank loans, speed up ongoing projects
NEW DELHI : In a major relief to the construction industry in distress from pending government payments to the tune of Rs 70,000 crore and large number of its projects were stalled due to stagnation since 2011 locking up 45% of over Rs 3 lakh crore loans, the Centre on Wednesday decided to open an escrow account to help them repay bank loans, speed up the ongoing projects and increase the ability to bid for new contracts.
The escrow account is basically a temporary pass to help the construction companies whose money is locked up in disputes with the government agencies like National Highway Authority of India (NHAI) to help them overcome the problem of the fund liquidity. The Cabinet Committee on Economic Affairs, chaired by Prime Minister Modi, approved a proposal of the NITI Aayog to pay 75% of the amount decided in arbitration in the escrow account for the margin-free bank guarantee in the cases in which the arbitration award is challenged.
The escrow account can be used to repay bank loans or to meet commitments in the ongoing projects and thus provide a stimulus to the construction industry and to employment in the industry that was hit due to almost stoppage of the construction works.
Officials said the 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.
They said other measures are also under consideration, including changes to bid documents and model contracts, and increased use of conciliation. NITI will also examine the idea of creating “claim take out funds” financed by private sector investors, while the Department of Financial Services will examine a suitable scheme for addressing stressed bank loans in the construction sector.
The move comes in the backdrop of the need to have a slew of short-term and long-term initiatives to address the issues of the ailing construction sector. In fact, the construction sector is a major contributor to economic activity accounting for about 8% of GDP and the largest creator of direct and indirect employment to about 40 million people. Officials said it is a highly employment intensive sector with a strong multiplier effect, creating an estimated 2.7 new jobs indirectly for every Rs 1 lakh invested. It has major forward linkages to sectors like real estate, infrastructure and manufacturing and backward linkages to steel, cement and other industries. Thus, this sector is critical for stimulating employment and economic activity. 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, impacting the banking sector which has a large exposure to construction, estimated at over Rs. 3 lakh crores.
Studies have shown that a key factor behind the difficulties facing the construction sector is the pendency of claims from Government bodies. An estimated Rs 70,000 crores is tied up in arbitration. Over 85% of the claims raised against the 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. Moreover, a majority of arbitration awards have gone against the Government agencies. In the case of the National Highways Authority, out of a total of 347 arbitral awards, 38 went in favour of the authority and 309 went in favour of the contractor/concessionaire.
