Vinayak Chatterjee: Construction needs a helping hand

Adverse circumstances have battered the sector; a spirited reset is in order

From the mid-1990s to as late as 2008, reports from multi-lateral agencies financing Indian infrastructure bemoaned the state of readiness of India's construction sector. They pointed out it lacked skilled manpower, technical competence, modern equipment, professional management and adequacy of capital. They dourly predicted the great Indian infrastructure push would stumble on the inadequacies of the Indian construction sector.

The infra sector in India had indeed stumbled but for reasons unconnected to the construction sector. Across the 10th and 11th Plan periods (2002- 2012), which saw the maximum upswing in infra investments, India put on the ground around Rs 35 lakh crore of infra projects, with the active engagement of the 'domestic' construction sector.

It is important to note 'domestic'. Because, there was much talk about global construction giants dropping anchor in India to mitigate the inadequacies. Indeed, it was fashionable for ministers to traipse all over the globe, inviting foreign construction companies. And a few did come, notably from the UK, France, Malaysia, Taiwan and South Korea. But the most famous of the brand names have shut shop and quietly retreated, whilst the ones remaining are carefully maintaining a studiedly low exposure.

So, we are back to our good old domestic construction sector - the favourite whipping boy of policy-makers, who would no doubt be quick to point out that many of these companies jumped onto the PPP (public-private partnership) bandwagon without due consideration of the implications, overleveraged their balance-sheets, quoted low and sought to live off claims and arbitration, cut corners in execution. Yet, it is the same set that built our national highways, metro rails, airports and power plants, which saw us through the first phase of rebuilding India in the 2000s. And, it is not only the top 10 construction companies whose names are familiar to all, but a large number of dedicated smaller firms which quietly toiled through the decade from their Tier-II headquartered towns.

Now, however, the sector is in serious trouble.

In an incisive analysis of the woes bedeviling the sector, Bain & Co says "the Indian construction sector is in a financial crisis today, with many companies facing an existential threat".

The reasons are not hard to decipher.

First, many large and medium-sized players willy-nilly confused their roles between being EPC (engineering, procurement and construction) contractors and BOT (build-operate-transfer) developers. With the same balance sheet capacity, they went headlong into equity and debt for PPP projects. When PPP tanked, they were left holding hugely stressed balance sheets.

Second, with the government as the main client, "stuck payments" have become the silent killer. Claims take years to settle (if at all) as many do not ever see the light of the day with sarkari systems as a matter of routine contesting the award of arbitrators in courts. Informal responses from players aggregate to informed guesstimates of liquidity stuck across unsettled claims and unpaid bills to the extent of Rs 1 lakh crore.

Third, there appears to be a "master-slave" relationship between contracting agencies and contractors, largely on account of unlevel playing fields. This manifests in a variety of ways, including unconditional Bank Guarantee encashments, interest on advance payments, provisions for retention and arm-twisting during 'bill-passing'.

Fourth, with the private developer community itself stressed, anecdotal evidence is they are taking out their liquidity tensions on the contractor community by delayed payments and unreasonable encashments of bank guarantees. So, there is bad blood within the corporate fraternity, too.

Are there solutions, to reset and re-energise these hardy gurkhas of our infrastructure battle?

Here are some suggestions:

• The government can consider immediately setting up a one-time, high-powered 'claims settlement tribunal', where pending claims across government departments can be clubbed together and settled on a mission mode. Private players and government agencies have to commit to honouring the dispensations handed out without resorting to further legal summersaults.
   
• Set up a 'special desk' under the auspices of the Department of Financial Services, Ministry of Finance, to speedily process the balance sheet restructuring of construction companies under the 5:25 or other windows of opportunity available.
   
• Hasten the implementation of the Public Contracts (Resolution of Disputes) Bill, currently under formulation, so future incidences of unfairly stuck payments are minimised.
   
• Push for a model standardised contract (like the Model Concession Agreements) to eliminate a bunch of unfair conditions that have historically crept into contract management.
   
• Clean-up the process whereby bank guarantees can be unilaterally encashed by any client.

The time has come to do all this, and more. The construction sector directly contributes to eight per cent of India's GDP, has one of the highest economic multipliers and is India's largest direct job creator.

Clearly, there is a need to provide succour.

Vinayak Chatterjee is the chairman of Feedback Infra vinayak.chatterjee@feedbackinfra.com;
Twitter: @Infra_VinayakCh