The government's recent order on releasing a part of the construction contractors' money stuck in litigation would encourage the government departments , who otherwise withheld the money fearing corruption charges, Chairman and Managing Director of Hindustan Construction Company (HCC) Ajit Gulabchand told Business Today.
"Government order has enabled departments to make these payments. They were withholding payments because they were afraid that they would be called corrupt, " Gulabchand said.
The government last week asked its departments to make 75 per cent of payments to private contractor who have won in arbitration. The payments would be made against a margin-free bank guarantee. The government has also asked its departments to transfer any existing arbitration cases under the pre-amended Arbitration Act to the amended act, which has the provision of time-bound completion of arbitration.
According to an estimate by industry body CII, pending claims from government agencies and departments are key reasons behind mounting debt of construction companies. According to CII, over 85 per cent of claims raised are still pending, of which 11 per cent are at the level of employers, 64 per cent at arbitrators and 8.5 per cent in courts. As per CII estimates, around Rs 70,000 crore dues of construction companies are tied in arbitration.
Gulabchand said with this decision HCC's debt would also come down by half. "HCC has arbitration awards for over Rs 3,200 crore and with the government's decision, the company will get 75 per cent of this amount immediately. Similarly, claims worth around Rs 5,000 crore are in arbitration process, which we would win within a duration of 12 months," he says. The company has a total standalone debt of over Rs 4,900 crore.
Elaborating the problem faced by the construction companies, the HCC CMD said, "government was not paying their dues to the industry. There were cost overruns for which issues were constantly sent for arbitration and despite the contractors getting favourable award, government was not paying up and was instead challenging the award to Supreme Court." This, according to him, mounted the dues for the construction industry.
"Construction companies had borrowed in good faith from banks in order to spend the money. (But) this (mounting dues) created a liquidity crisis in the construction industry as well as for the banks. While the award in favour of the construction industry remains unpaid, the industry is paying the interest on loans to banks. And since the industry could not pay their loans, the bank has to show NPAs in their books, creating a vicious circle," he explains.
Though he feels that a complete settlement of disputes (over payments) would have been a much better option, but still he says, "the start of the payments itself is very positive for the industry."