Infrastructure industry can drive Govt’s 5-trillon mission

Finance Minister Nirmala Sitharaman unveiled a Budget that aimed at boosting infrastructure and foreign investments, with a 10-year vision in mind. One of the major highlights of the Budget is the ambitious project of Bharatmala which will enhance road connectivity and Sagarmala which will help port and waterways connectivity. Infrastructure is a key determinant of the growth potential of an economy. The basic infrastructure and better transport system such as Highways, Expressways and connectivity to ports are required for the economic growth. From the growth perspective, the focus of the present Budget is in the right direction.

The fund source for this development will be road and infrastructure cess of one rupee on every litre of petrol and diesel sold in the country. In India, the average consumption of diesel and petrol is approximately 800 million litters per day –the same will be the expected credit on this account. Hence, this matches with PM Modi’s words that the Budget will act as a roadmap to transform New India

In the beginning of the first NDA government, the expected target of road construction was 14 km a day and later it has been revised to 40 km per day. But as per government sources, the achievement is only 75% per cent of the set target. Also now the government needs to spend on new projects, apart from upgrading the existing ones from four-lane to six-lane and their maintenance.

Given the government’s target of making India a 5-trillion economy, the government should increase spending on the infrastructure sector. Thus, there is a need to take a serious look into the reasons for the sector not PERFORMING up to the expectation.

The government is adopting the EPC (engineering, procurement and construction) and HAM (hybrid annuity projects) model for new infrastructure development. Here government is only a client and the execution of the projects are done by contractors or construction companies. HAM is the preferred model for the government because client needs to give only 40 per cent of the total project construction cost and the rest has to be shelled out by special project vehicle or the developing contractor. So the contractor’s performance is very important for the progress of the project and thereby economic growth and GDP. A dozen of major contractors who performed well in the last five years are in NCLT now. Not only contractors, the government is also equally responsible for this situation.

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When the economy is booming and the particular business segment is doing extremely well, then why the companies are collapsing? Is it due to the wrong financial management of a company? The answer is, may be some companies do wrong financial management, but here the problem lies with the government. The major reason for this is cash flow issues for the contractors. To come out of this situation, banks need to be friendlier for infrastructure funding. But, unfortunately the infrastructure industry is negatively listed in banks or in other words it is in high-risk business area. This is due to the huge uncertainty in the infrastructure projects and related business. Risk with the bank is increasing due to the delay of projects indefinitely and various reasons from the government authorities.  The financial closure the HAM project tendered in 2018 and LOA (letter of acceptance) issued by National Highway Authority of India are still in pending with contractors or developers, because the land acquisition has not been completed.  Another reason for the delay is preparing the DPR (detailed project reports) with wrong or without considering the public requirement which causes lot of change in scope at the time of project execution.

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Contractors sometimes divert funds to other businesses which increases the risk to bankers. This could be controlled by project funding. Further, risks on banks can be reduced by consortium banking.

Dispute resolution method should be better for India, because in complex contracts of Infra projects so many factors like land, public, technical and design issues, consultants, etc., the chances of disputes are huge with clients at all stages.

A dozen of major contractors who performed well in the last five years are in NCLT now. Not only contractors, the government is also equally responsible for this situation.

The disputes should be resolved through proper, effective and faster alternative dispute resolution methods. Most of the claims of the contractors are settled many years after the completion of the project. So the contractors and their vendors hardly exist till the claim settlement. Hence, enforceability and timeline factors amendment in the Arbitration and Reconciliation Act needed to be implemented at the earliest.

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Departmental engineers and government officers are unable to take decision in so many cases of “unfairness in the contract”.  The more important aspect is no division of unfairness into ‘procedural’ and ‘substantive’ unfairness is defined in our country, while a law to deal with unfairness in contracts is necessary. Most of the developed countries are having an act called ‘Unfair (Procedural and Substantive) Terms in Contracts’. The subject of ‘Unfair Terms in Contract’ has attained grave importance in recent times not only in relation to consumer contracts but also in Infrastructure contracts. This clause can give a huge impact in disputes resolution in infrastructure that could increase the effectiveness and efficiency in the execution.

The government needs to put in place a new and fast dispute resolution method, remove unfair clauses in the Contracts Act by bringing in a Bill and encourage banks to fund infrastructure projects. This is the right way ahead.


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