Construction gets a liquidity boost

The Cabinet Committee on Economic Affairs (CCEA) initiatives to revive the construction sector might help the industry clear as much as Rs 70,000 crore worth of stalled projects under dispute. The total value of stalled projects, according to Centre for Monitoring Indian Economy (CMIE) data, is Rs 11.36 lakh crore.

“The CCEA initiative will not only lead to significant  de-stressing  of the construction industry but will also unclog the financial system which is bogged down with an estimated Rs 70,000 crore of outstanding debt from this sector,” said Jaijit Bhattacharya, partner, infrastructure and government services, KPMG in India.

Private sector contractors stuck in disputes with government agencies can hope for faster arbitration and 75 per cent of the disputed amount for such projects would be released immediately by the agencies to clear liabilities and to ensure construction projects are completed.

These and a number of other decisions were taken by the Cabinet on Wednesday to revive stuck construction and real estate projects. These decisions will help in quickly resolving disputes, pumping in liquidity and dealing with stressed assets. The Cabinet also cleared the setting up of conciliation councils by state-owned companies or government departments. These panels will have independent experts to ensure speedy disposal of pending or new cases. It was also decided that item-rate contracts between parties could be substituted with engineering, procurement, construction contracts. The Department of Financial Services and the Reserve Bank of India have been tasked with suggesting a new policy to deal with stressed assets in the construction sector.

“With the significant contribution of the construction sector and its forward linkages to various economic activities, it is very necessary to remove roadblocks that stall the sector’s growth,” said Anuj Puri, chairman & country head, JLL India. “The construction sector and its contribution are hugely driven by private sector participation, and hence such encouragement was definitely needed.”

Addressing reporters after the Cabinet meeting, Finance Minister Arun Jaitley said clearing up the construction sector was a priority for the government as it contributed 8 per cent of gross domestic product and provided employment to some 40 million. “There are various challenges before the construction sector and the government has been trying to improve upon the functioning of the construction sector. We have simplified arbitration law so that the process of dispute redressal could be made easier. We have also allowed establishment of commercial court." Jaitley said the Cabinet has decided to give an option to shift disputes to the new arbitration system, for faster resolution.

During an arbitration involving a project, the building activity gets hit and liquidity suffers. Hence in case of pendency of an arbitral award being challenged by a public body, 75 per cent of the amount will be released to the contractor against a bank guarantee.

The amount so released will have to be spent on discharging liabilities towards bank and financial institutions and any money left would have to be used for the projects.

Vinayak Chatterjee, chairman of Feedback Infra, tweeted that such a move could infuse Rs 30,000 crore into the “battered construction sector”.

Jaitley said the new contracts would have provisions for a conciliation board that would enter into contractual negotiations if there are changes in commercial circumstances around the project.

Parveen Jain, president, National Real Estate Development Council, said: “These steps will again get moving the stalled and delayed projects and bring them back on track. These initiatives will rekindle the real estate market with revival of cash flow and generating ample amount of employment opportunities.”

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