Stimulus to reduce cost of bank guarantees for infrastructure contractors

NEW DELHI: Capping of performance security on infrastructure and construction contracts to 3% and bid security declaration in place of earnest money deposit as part of the third stimulus announced on Thursday will reduce locking up of capital and cost of bank guarantees for the sector, industry experts said.The announcements will help ease the liquidity issue for contractors, reducing their working capital requirements.The government also announced a Rs 1.10 lakh crore platform for infra debt financing with a Rs 6,000 crore equity infusion in the National Investment and Infrastructure Fund to provide a boost to infrastructure financing.“Newly announced measures such as replacing earnest money deposit with bid security declaration will provide relief to contractors since it shall lower locked-up capital and reduce cost of bank guarantee,” Tata Projects managing director Vinayak Deshpande said.Finance minister Nirmala Sitharaman announced capping of the performance security on contracts to 3% instead of 5-10% and the replacement of earnest money deposit with bid security declaration as part of the package to boost growth.“The construction sector has been struggling with working capital constraints...This relaxation will enable contractors to bid for more projects. Combined with timely release of payments, this can expand delivery capacity in the country,” said Manish Agarwal, leader - capital projects and infrastructure, at PwC India.The Rs 1.1 lakh crore platform for infra debt finance will provide the cash-starved infrastructure sector with much-needed access to funds, Grant Thornton Bharat associate partner Alok Saraf said. “While it may not provide immediate relief, it will certainly help companies to effectively plan upcoming projects,” Saraf added.The government, however, must focus on timelines for the National Infrastructure Pipeline to attract private investors, market watchers said.

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