analysis Real Estate

So far and yet so near

Photo: A. Muralitharan

Photo: A. Muralitharan

The Indian infrastructure sector is the backbone of the economy. It contributes prominently to the nation’s growth via a high share in GDP and provides employment to thousands.

The infrastructure sector also has a multiplier effect due to the number of industries that are linked to it. A sector that is so crucial for the overall development of the nation needs hand-holding by the government. Especially, in the aftermath of the pandemic.

The Union government has been proactive announcing a slew of reforms over the last couple of years. Recently, the government has also introduced a few key measures that can potentially disrupt the way the contracts for public work are awarded.

Public work award system

According to a recent report by the Ministry of Statistics and programme Implementation, as many as 438 infrastructure projects, each worth ₹150 crore or more, have been hit by cost overruns totaling more than ₹4.3 lakh crore. Of the 1,670 projects monitored by the MOSPI, 563 projects were delayed, while 438 projects reported cost overruns. While it may be argued that the contractors are responsible for the time and cost overruns, it also indicated an urgent need to overhaul the processes involved with the awarding of public projects and their monitoring. The current practice of awarding the contract was heavily skewed towards the lowest bidder and did not exactly prioritise quality, timely execution and a detailed scrutiny of the bidding contractor.

Among the other major impediments of the current system of awarding contracts were the delays in getting payments, litigation, disputes and the resulting arbitration. These were time-consuming processes and often resulted in cost and time overruns. The new guidelines help bring the Indian public procurement and contract awarding process on a par with international standards and help the decision-makers with a better gauge, while at the same time maintaining probity and fairness.

The fact that the Niti Aayog, country’s leading policy think-tank, and the CVC felt the need to enhance public procurement and project management procedures demonstrates the significance of the issue. The new process will ensure the most competent players are awarded the contract rather than the lowest bidder. A balanced structure, in which risks and rewards are appropriately shared among stakeholders and timely completion of high-quality projects is a common aim, can serve as the foundation for effective project management.

An incentive system that includes both monetary and non-monetary features (such as public recognition) and is linked to measurable outcome/ output characteristics can also be used to align the interests of stakeholders.

Liquidity/ working capital

Delays in receiving payments deplete the contractor’s cash flow and impede efficient execution of the project. The new norms mandate ad-hoc payments of at least 75% of the eligible running account bill due stage payment must be made within 10 working days after the bill’s submission. This 10-day period is for all processes to be completed, including prima facie inspection and certification by the engineer in charge (as declared by procuring entities). Within 28 working days of the contractor’s bill submission, the remaining payment must be made following the final checking of the bill.

The new rule will help cut through the current obstinacy and muddle, as it will provide a significant boost to all infrastructure projects and government procurement. How ministries have demanded bank guarantees from contractors in order to release funds in the event that arbitral decisions against the government were overturned on appeal. In infrastructure projects, the entire objective is defeated when contractors are asked to make deposits ranging from 20% to 100% amount of bank guarantees.

Payment of contract work

To reduce delays, the government has enacted an interest payment clause, which means that any delay in payment by government bodies will result in interest payments. Public authorities may set a mechanism for interest payment if bills are delayed for more than 30 working days after the contractor submits the bill.

The interest rate to be paid should be the same as the interest rate on the General Provident Fund. Responsibility shall be assigned to the appropriate officers in the event of unwarranted discretionary delays in payments, including failing to authorise/ make ad hoc payments. Project executing authority should have a system in place to track payment delays and identify unwarranted delays. The new guideline mandates that government entities pay the final bill within three months of the work being completed, ensuring that the contractor has the necessary liquidity to complete the underlying projects on time.

Digitising processes

All project executing authorities that are implementing works contracts worth more than ₹100 crore per year must have an online system in place to track the bills presented by contractors. Contractors will be able to track the status of their bills using this method. All contractor bills must be put into the system with the date of submission and the date of payment. Within one year of the date of the issuance of these instructions, such a system must be in place. By putting such a system in place, the government is hoping for transparency and redressal of issues on a real-time basis.

State government too

Currently, the new guidelines are only applicable to the Union government and its departments. Hopefully, the states will realise the benefits of rules and implement them at the regional level too. India’s states account for more than 60% of public tenders across the country. The incentive structure for all key stakeholders in public procurement should be designed in such a way that the system ensures that projects/ works are delivered on time, in a high-quality manner, and under budget. And these guidelines are the first step by the government to align the interest of all key stakeholders.

The writer is CEO, Eqaro Guarantees.

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Printable version | May 14, 2022 6:10:30 pm |