Road projects see limited gains from easier arbitration

More than 18 months after the Union Cabinet sought liquidity improvement in the infrastructure sector through the easing of arbitration awards, there has not been much progress because most of the arbitration awards are being challenged.

The Union Cabinet in August 2016 approved a mechanism in which government agencies would pay 75 per cent of the dues to clear cases that were stuck because of contractual issues, land acquisition-related matters, or other regulatory problems.

According to official data till January 31, 2018, 66 cases are in arbitration and ~14.82 billion has been sanctioned under the process, nine cases have been closed and the remaining are awaiting an outcome.

At the time of the Cabinet decision, an estimated ~700 billion was tied up in arbitration. Over 85 per cent of the claims raised against government bodies were pending. Of these, 11 per cent were pending with government agencies, 64 per cent with arbitrators and 8.5 per cent with courts.

"A section of arbitrators are highly corrupt and cases are prolonged to make money," an official told Business Standard, requesting anonymity. Matters that could be resolved in three or four meetings were being stretched unnecessarily, he said.

If the arbitration award is challenged by either party, the National Highways Authority of India or the concessionaire, it goes to the Supreme Court. Disputes in earlier contracts arose mainly due to escalation in the price of raw material.

"The concessionaires were making outlandish arbitration claims by indulging in gold-plating or cost escalation. These unreasonable claims led to delays in project execution and therefore the sector suffered," pointed out Vijay Chhibber, former road secretary.

Experts say disputes can arise at any time in a highway project, at the construction stage or the operation stage. The Indian Contract Act requires any company that files for arbitration to explain the stage at which the dispute arose.

The companies wanted to be compensated for increases in the cost of bitumen, cement and steel in accordance with rates at the time of execution or at the time of award of the contract. That would mean in every contract there would be a cost variation of ~300-500 million. The official even alleged that several unfair arbitration awards had been issued in the past, adding the arbitration award should be made strictly on merits. The arbitration award is subject to bank guarantees being submitted by the company to banks.

Projects affected by ongoing arbitration include those of Hindustan Construction Company, IL&FS Engineering and Construction, and Gammon India. According to official estimates, the banking sector had an exposure of more than ~3 trillion to the construction industry. Of that, 45 per cent is facing stress.

The idea behind the move was recovering loans by banks and allowing construction companies to speed up execution of ongoing projects.

It will also increase the ability of construction companies to bid for new contracts and the resulting competition will be beneficial in containing the costs of public works.

It was also anticipated that the measure would provide a stimulus to the construction industry and employment.

The new payment disbursement mechanism was among several other short- and long-term initiatives to increase investment in highways. The construction sector, which is a major contributor to the economy, was affected because a large number of projects were stalled in 2011 and 2014.