Business Standard

Construction in the Time of Crisis

Construction in the Time of Crisis

Claims takeout funds and interest subvention can shore up construction companies challenged by massive unpaid claims.

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Construction in the Time of Crisis

This article was originally published in Business Standard.

The industry needs immediate intervention. Without it, the sector will spiral downward, dragging with it the economy and the central government’s showpiece, the Make In India campaign. If this decline happens, easing out of the spiral won’t be easy.

From a financing perspective, there is an urgent need to rationalise bank guarantee norms to meet international standards. For example, banks should provide 30 days’ notice before encashing guarantees. For long-term support, an interest subvention scheme similar to those implemented for other nationally critical sectors is required, with banks distinguishing between the construction and infrastructure sectors and offering separate banking exposure limits for each.

Another solution is to ask public sector undertakings (PSU) to clear all unsettled arbitrator-awarded claims before the claims are challenged in court. However, as the burden of such payments is massive, cash-strapped PSUs will find this solution challenging to implement. An alternative approach is a “claims takeout fund”, which buys, at a discount, certified claims that have gone into litigation and earns returns from eventual full-value payouts.

Market solution to claims funding

A claims takeout fund presents a market-driven approach to the claims problem. This approach takes advantage of the reality that although EPC companies face interim cash-flow issues as a result of the long settlement times for awarded claims that move to litigation, more than 95 percent of the claims challenged in court are awarded per the original decision of the arbitrator. The claims takeout fund can buy claims at a discount. The fund, run by specialists with relevant expertise, can also streamline and better structure the management of the legal process.

Gopal Sarma & Deepak Jain are partners at Bain & Company, India.


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