Developing India’s Infrastructure: Government-Industry Partnership

09 Nov 2019

The Indian infrastructure industry is one of the primary growth drivers of the economy and the country’s second largest employer. Along with the capital goods sector, it aids capital formation and boosts growth, adding around 2-3% to Indian gross domestic product (GDP) every year.

With higher Government interventions in building infrastructure through a target of Rs 100 trillion in the next five years, the sector is set for a transformation. Public funded projects are going up, both by the Central Government and state governments. Private sector infrastructure players have an expanding role in bidding and contracting for these projects and related activities, which has immense upstream and downstream benefits across sectors such as steel, cement, construction equipment, and project management and maintenance services.

A streamlined partnership between Government and industry can significantly enhance the infrastructure mission. The Confederation of Indian Industry (CII) is actively involved in building a robust, world class infrastructure sector and aims to create a facilitative climate to attract industry interest in the sector. Four priority areas can benefit from immediate attention and CII has put forth detailed recommendations for these.  

Payments due to suppliers of goods and services under arbitration awards

Estimates indicate over INR 1 lakh crores is due to vendors and suppliers from the Central Government departments and public sector units (PSUs) which have been awarded by arbitral processes already. The arbitration process takes about 1-3 years and further settlement takes even longer.

It is recommended that a separate line of credit be extended to banks by Government agencies, which can be used by them to pay money against arbitration awards to vendors. Repayments to banks can be made through budgetary allocations spread over a stipulated time period.  This will reduce the debt burden of vendor’s and ensure their growth and expansion while also increasing liquidity in the banking system and fast-tracking ongoing projects.

Amendments to the Arbitration Act

The 2015 amendments to the Arbitration Act sought to deter challenges to awards as arbitration is an alternative to commercial disputes, in addition to mediation and conciliation procedures. However, parties continue to mechanically challenge the awards, leading to substantial delays in settlement.

A study and review of the pending cases is recommended. Drawing on international practices, a committee of judicial experts/retired Supreme court judges may be appointed to limit the number of awards challenged. Timely settlements of awards as soon as the award is pronounced should be institutionalized.

In case of paucity of funds, departments can issue an agreement, which can then act as an account receivable in the books of the vendor.

The 2019 Amendment has introduced a change under a new Section 87, which, if brought into effect may undo the benefits of the 2015 amendment and this may be repealed.

Payment discipline and timely release of liquidity

A variety of reasons such as delays in certification bills, delays in payments after certification of bills, among others, have led to significant delays in payments to vendors/suppliers.

A payment portal may be set up by government agencies, which enables appropriate authorities to track timely payments in a transparent manner.

Further, it is recommended that laws pertaining to MSMEs for ensuring timely payments must also be extended to non-MSMEs as they too are burdened with obligations arising from delayed payments.

While it is recognized that the timely return of bank guarantees is crucial, the unconditional nature of the encashment and rising margins limits the participation of tenders, reducing competitiveness. Therefore, it is recommended that procurement rules and contract administration documents must be suitably modified, after a careful study of international best practices and standards.

Structural reforms in procurement process

There is an urgent need for structural reforms in the entire procurement process after a suitable review. Some of the indicative areas are contract monitoring, tendering process, quality and safety supervision, procedure for procurement, independence of project supervising agencies, etc.

A suitably resourced interdisciplinary group needs to be formed to come up with model documents. Associated steps need to be taken for improving contract administration, within a stipulated time frame of 6 months in 2 formats, one for MSMEs and one for large contracts.

Such changes will enable an effective and outcome-oriented partnership between Government and industry in the infrastructure mission and will also boost related sectors, such as construction machinery, for faster growth and employment generation across the economy.

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