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Construction sector needs urgent reforms

The construction sector plays a prime role in the economy of our country, not just because they build essential structures such as public and private infrastructure and housing but also provide employment opportunities for millions of people.

Due to the outbreak of global pandemic COVID-19, reverse migration of labourers and breakdown of construction materials supply chains, the construction activities, especially of real estate projects were affected adversely across the country. However, things seems to be getting back to normal as the industrial activities have started reaching the pre-Covid levels.

Construction sector will be at the forefront as India is moving towards its ambitious target to ramp-up infrastructure spending to Rs 111 lakh crore over FY20-25 from Rs 50 lakh crore over FY14-19. This would not only require a significant increase in financing and but also better project management skills to execute such a large pipeline of projects. Further, the sector needs reforms, some of which may call for complete overhauling of the system.

Give weightage to quality and technology in tenders

The biggest drawback of construction projects starts from the tendering stage itself. The system places sole emphasis on pricing which eventually affects the quality and also discourages deployment of latest technologies. In the traditional L1 system, decision is made solely on the price bids submitted by the bidders who have been pre-qualified. This procedure is followed in most government departments for decades. As a result, developer will look out for various cost saving measures, including neglecting pollution control measures and compromising workers safety at the site. Also, emphasising only on cost leaving other aspects aside may actually lead to higher cost in the long run in terms of higher maintenance and poor efficiency. Therefore, we should develop a system to pre-qualify vendors before offers are invited from them. The criteria for pre-qualification for an equipment supplier could be the type of equipment, how long it has been in service, requirement of spares and so on. It’s heartening to note that the government, last year, issued revised guidelines for public procurement and project management. According to the guideline, in appropriate cases, quality parameters can be given weightage during evaluation of the proposal in a transparent and fair manner.

Rejection of single bid should not be default practice

Tenders often get cancelled due to single bids as many players may not have the capabilities or technology to execute them which, in turn, results in delay in execution of the projects. It has been a practice for ages, among government procuring entities to routinely assume that open tenders which result in single bids are not acceptable and to go for re-tender as a ‘safe’ course of action. However, last year’s guidelines have changed this practice and allowed a single bid to be considered valid if due process and transparency was followed and discovered bid price is reasonable vis-à-vis market values. However, this is now applicable to tenders issued by the central government and its agencies while state governments still follow the age old practice of retendering in case of single bids.

Delayed payments

Delayed payments or withholding of payments (without valid reasons) has been the common complaints among developers of government projects. This has given rise to the emergence of ‘cut’ practice in the government projects leading to corruption. As a result, many developers have started adding the ‘cost of recovery’ or risk of delayed recovery in the cost of projects. Timely payment to the contractors is the most critical aspect of project execution and helps them manage their cash flows well. Though most of the tenders now specify the payment schedules, they won’t guarantee against any deviations from such schedules.  Of course, some of the CPSEs have installed online bill tracking system that red flags delay in bill payments. It’s good to know that some reforms are taking place in this direction too. Now, the  government is allowing ad hoc payments of at least 75 percent of eligible running bill/stage payments within 10 working days of bill submission and certification by the engineer in-charge. Balance payments are made after final checking within 28 working days of bill submission. Further, in case the payments are delayed there are provisions for payment of interest for payments delayed beyond 30 days. Also, officers concerned will be held responsible in case of unwarranted delays.

Time consuming arbitration process

Construction arbitration in India tends to defeat its very purpose of the swift, inexpensive, efficient, private and informal mode of dispute resolution. It has come to resemble the litigation process with greater expense, more procedures and longer duration. The legal fees, administrative costs, and arbitrators’ fees can be considerable.

Considering the immense complexity in construction cases, there has to be better mechanisms and institutional support in facilitating construction arbitration.

The construction industry is poised to become the largest employer soon and needs 45 million additional skilled workers over the next 10 years. Also, looking at our infrastructure and housing deficiency, construction sector will be one of the busiest sectors in the country in the coming years. Therefore, some progressive reform measures will be needed to attract foreign capital and also latest technology into the sector.

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