NHAI arbitrations galore: Companies should consider other cash flow options

The NHAI managed to settle some of its pending claims by paying just 20 per cent of what was originally claimed. The authority is yet to publish its report for the last year

In September, the IL&FS group saw arbitration proceeds from National Highway Authority of India (NHAI) as one of the many measures that could help it tide its liquidity crunch issues. IL&FS is not the only example: A large number of companies are awaiting proceeds from arbitration claims. However, NHAI’s past performance and industry analyst views suggest, road construction companies should consider other cash flow options. 

According to data sourced from company disclosures, sources and investor presentations, of the top six road construction companies with highest debt, claims or awards worth at least Rs 111.05 billion are pending with the NHAI. The six companies are Larsen & Toubro, IL&FS Transportation Networks (ITNL), GMR Infrastructure, IRB Infrastructure Developers, Sadbhav Engineering and Hindustan Construction Company (HCC). Of these, data for GMR Infrastructure was not available, the number for ITNL is based on estimates given by sources from the NHAI. 

Industry sources said the total number of claims pending with the NHAI will be higher. There is a big mismatch between what contractors have claimed and what the NHAI thinks is due. According to the NHAI’s FY17 annual report, about Rs 420 billion is pending as claims, whereas the actual payout may turn out to be less than 25 per cent of the same. Not all, but there may be companies that could treat claims from such arbitration cases as receivables even before it reaches the first level of arbitration award, said Shubham Jain, group head and vice-president with Icra Ratings. 

NHAI's own claim settlement in 2016-17 is not impressive. It was possible to settle claims (under its alternate dispute resolution mechanism) amounting to Rs 8.53 billion for an amount of Rs 1.65 billion during the year under review, the NHAI said in its 2016-17 annual report. 

In simpler terms, the NHAI managed to settle some of its pending claims by paying just 20 per cent of what was originally claimed. The NHAI is yet to publish its report for the last financial year. 

Industry analysts and officials added that most of these arbitration cases are related to escalation in project cost due to change in scope of work and occasionally due to delay related to land acquisition. The NHAI annual report pegs the number of arbitration cases at 125 and another 100 court cases. 

“While the claims look higher, there are other challenges. Most of the arbitration officers for NHAI have engineering expertise, there is no significant representation of finance officials who would understand nuances of concession agreements better,” said a former NHAI official, requesting anonymity. 

In cases, where companies have managed to win an arbitration award, the road ahead remains challenging. In 2016, under the new arbitration law, government authorities were required to pay 75 per cent of the arbitration award before legally contesting it further. 

“These proceeds received will help to pare debt. However, the company needs to provide a bank guarantee, which banks are unwilling to provide. The argument is that the payment received will be used to clear dues. However, if the award goes against the company in legal proceedings, the lender will be left with an unsecured loan with invocation of the bank guarantee given,” Jain added.