IT firms complain of payment delays by the government

Though both the centre and state govts have stepped up spending on IT, delays in clearing invoices have offset the attractiveness of the contracts

Kshitiz Goliya
Updated19 Oct 2016
Delayed payments create serious cash flow challenges for the industry, especially smaller IT vendors, and can make projects financially unviable. Photo: Priyanka Parashar/Mint
Delayed payments create serious cash flow challenges for the industry, especially smaller IT vendors, and can make projects financially unviable. Photo: Priyanka Parashar/Mint

New Delhi: Information technology (IT) vendors are complaining about difficulties in executing government orders—from inflexible contactual terms to delays in payments—although both the centre and states are farming out more work to IT companies.

Take, for instance, NIIT Technologies Ltd. In the June quarter, the firm reported a 47.5% fall in net profit due to a provision of Rs36 crore for dues it was yet to receive on a government contract, which been put on hold. The company’s India business declined 7.2% sequentially in the quarter to September because it earned lower revenue from the government. India now accounts for just 7% of its total revenue.

“It (India business) impacts cash flow because it is very difficult to collect money from the Indian government... by defocusing on Indian government, we have been able to dramatically reduce the outstandings that we have to the cash flow,” said Arvind Thakur, chief executive officer of NIIT Technologies.

Both the central and state governments have stepped up spending on IT and e-governance projects. Rigidities built into requests for proposals (RFPs), which don’t take into account the complexities involved in project execution, and delays in clearing invoices have offset the attractiveness of contracts.

Payment terms and conditions tend to be skewed towards the end of the contract period. The problem worsens in case the project has a significant hardware component that has to be delivered and installed early on in the project life cycle, according to lobby National Association of Software and Service Companies (Nasscom).

Delayed payments create serious cash flow challenges for industry, especially smaller and medium IT vendors, and can make projects financially unviable.

“Day sales outstanding last year was typically between 85-90 days because of all the money stuck in domestic government projects. This quarter, it is 73 days because we reduced dependence on government. So, the entire cash position has changed dramatically,” Thakur said. Day sales outstanding refers to the average number of days that a company takes to collect revenue after a sale has been made.

India’s third largest IT firm Wipro Ltd in September threatened to initiate legal proceedings against the Employees’ State Insurance Corp. (ESIC), a government entity, due to non-payment of dues.

The company entered into a seven-year contract in 2009 with ESIC as a system integrator to set up a health administration programme for Rs1,200 crore.

“Wipro has completed its obligations under the contract. However, ESIC has withheld certain amounts due to Wipro in an ad-hoc and arbitrary manner, which has resulted in significant delay in collections for Wipro,” the company said in a filing to the BSE on 7 September

Wipro did not respond to emailed questions. HCL Technologies Ltd and Tech Mahindra Ltd did not respond to questions citing the so-called silent period ahead of quarterly earnings announcements. Emails sent to Infosys Ltd and Tata Consultancy Services Ltd remained unanswered.

The government awards contracts through L1, or the Least Cost Selection method. While L1 is the norm in procurement of IT hardware and software, there are other selection methods which should be encouraged taking into account the complexity and strategic importance of the project, IT vendors say.

The industry has been engaging with the government to implement new RFPs and implement new methods of selection such as quality and cost based selection (QCBS), quality based selection (QBS) and fixed price bids.

“We are suggesting we look at model RFPs so that this issue of different departments, different states, everybody having different payments condition and terms, don’t arrive,” said Sangeeta Gupta, senior vice-president, Nasscom.

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