Unclogging the liquidity flow

While easing procedures against arbitration awards helps, more needs to be done to boost infra

It is often the under-reported news that has the potential for a favourable long term impact. On November 20, the Cabinet Committee on Economic Affairs (CCEA) approved a measure that would provide some relief to the infrastructure sector — a move that has gone little noticed outside the sector.

The CCEA eased the process for government entities such as the National Highways Authority of India (NHAI) to immediately clear up to 75 per cent of the amount locked up in arbitration disputes in favour of the private sector, even if the government entity had appealed against such awards. While NITI Aayog had issued directions to do this way back in 2016, the implementation left much to be desired. The effective constraint was the insistence by the concerned government institutions to ask for bank guarantees for this base 75 per cent and then even to cover potential interest (should the courts decide otherwise) before releasing the amount. The recent CCEA decision has asked institutions not to, (at least) insist on guarantees for the interest component of the amount under dispute. 

The deep liquidity crunch in the private sector made it anyway extremely difficult to secure such guarantees. More liquidity was needed to chase scarce liquidity. It is hoped that the process may further be eased in future to a system that does away with bank guarantees altogether, considering the challenges of securing any bank guarantees by infrastructure players nowadays.

To encourage banks to extend guarantees and give comfort to government entities to clear dues, the Confederation of Indian Industry’s (CII) Infrastructure Council had asked the government to consider extending a separate “Buyer’s Line of Credit” to banks which could be used by government agencies to clear payments under arbitral awards to vendors, which in turn, could be used by them to pay back loans to banks.

The CCEA decision now moves the needle from merely a directive from NITI Aayog to a decision of the Union cabinet that needs to be strictly complied with. It recognises that government, as the largest purchases of goods and services, is itself a prime contributor to the liquidity crunch; and delayed payments often lead through a series of domino effects to ultimate bankruptcy for private firms that depend largely on government orders. It is estimated that over Rs 1 trillion of funds is due from government departments and public sector units to vendors and suppliers in the form of “won” arbitration awards.

Equally importantly, the CCEA in its meeting also said that government entities should take the opinion of a law officer of the central government (for example, the Attorney General or Solicitor General) before appealing arbitral awards. This straightaway reduces the hitherto mechanical response of a statal entity to push any lost award to the court system. This one step would lead, hopefully, to a huge reduction in appeals to courts.

Incidentally, the Arbitration Act itself recognises the extent of the problem. Changes made to it in 2015, sought to deter challenges to arbitration awards and to speed up the process of clearing payments from such awards. However, amendments earlier this year effectively nullified such improvements only to disputes after 2015. It is these recent amendments which the Supreme Court struck down on November 27 — providing another big relief for the sector.

Release of arbitration awards is one part of the story. The larger canvas of cash-flow difficulties relates to securing timely payments from government generally, even for regular invoices. As all infrastructure analysts will testify, each passing month now sees the number of days of outstandings on private sector balance sheets increase at a worrying rate. A large reason for this is the complete lack of accountability for timely release of payments. So, from the time an invoice is sent (with GST paid in advance) it moves from table to table, geographically, vertically and horizontally within the bureaucratic maze till it finally appears as a credit in the bank account after months and months of chasing.

Such archaic B to G (business-to-government) processes need immediate change. 

CII has repeatedly suggested an outstandings payments portal of all government procuring entities. The raw data is already there as the GST architecture captures every invoice raised. A simple programming addition can array all invoices raised against the name of a specific entity and the sigma of all unpaid invoices will clearly and dynamically capture the totality of unpaid bills. If this is done immediately, political bosses may actually be jolted by the enormity of the problem. 

The government has subsequently announced that delayed payments from central government departments and public sector entities are to be monitored by the expenditure secretary and reviewed by the cabinet secretariat.

Arguments have also been extended as to why, with commercial banks and NBFCs abstaining, long-term liquidity needs to be channeled through a DFI (development financial institution) specific to the infrastructure sector.

It is granular measures such as these, which unclog the pipeline of funds-flows between the government and the private sector, which can effectively be part of the stimulus the economy desperately requires.

The author is chairman, Feedback Infra