27 Jun 2016 13:18 IST

Why IT firms are shying away from govt projects

Apart from payment and litigation issues, firms have to make investments upfront

Slowing exports have taken a toll on the IT services industry, yet it remains lukewarm to government projects. Payment issues and litigation are at the centre of this reluctance of companies to engage with the government.

By Nasscom estimates, the domestic market for technology is expected to grow by about 10 per cent a year on an average from 2014 to 2025 and hit $120-130 billion. The private sector spending is estimated to grow 9-11 per cent annually. Government spending is expected to keep pace, growing at 10.5 per cent, following the launch of the ambitious Digital India projects and the investments planned in Wi-Fi and national optic fibre network.

This is what excites Microsoft’s Satya Nadella about the Indian market, but, ironically, leaves CEOs/COOs of many Indian tech firms cold. If last year, bidding for the Centre’s crowd-sourcing platform mygov.in was lukewarm, in recent times, interest in several of the big tech projects in Defence and other areas has been downright poor, says Nasscom.

Problems, a plenty

Nasscom president R Chandrashekhar blames bitter experiences for the companies’ lack of enthusiasm. “Despite the large potential, the India business of our IT companies has been witnessing only flat growth. There is a reluctance on the part of companies to bid for government projects as most of these end up in non-payment or litigation. At one point, the outstanding hit almost ₹5,000 crore.”

An executive from a consulting agency, which works on government projects, said: “There is always a change in requirement in the course of implementation of a project, but the contract and the system don’t accommodate such things and it becomes a problem.”

NIIT Technologies until two years back had a large India business with a finger in many government projects. But it has been slowly exiting from them. Arvind Thakur, CEO of NIIT Technologies, says: “We found that it was very challenging to execute government projects, not from the point of view of delivering, but from the point of view of collecting the money. So, our receivables became a problem. In these projects you also have to give complete system integration solutions and margins are very low”.

According to Rostow Ravanan, CEO of Mindtree Technologies, which worked as a development partner on the government’s Aadhaar application in 2010, “It was a challenging project and we finished it successfully. But financially it was not a very positive experience... there were a lot of things that didn’t work in our favour.”

Infosys, too, has had hiccups with government projects. The company’s COO, Pravin Rao, in an interaction with the media last July, said: “When we bid for an India project we bid as a system integrator and there is a lot of dependency on other partners and other things which are not in our control. So, many a times even when it is not our fault, the payment gets delayed because it is linked to some milestone which is not completed.” The problem with government projects is also that they require upfront investments by IT companies, says Nasscom’s Chandrasekhar. “Some of these projects are implemented in a public-private partnership mode where the investment is made by the IT companies and they recover it over a period of time. This has also resulted in reluctance on the part of companies because they know, almost as inevitably as night follows day, that some complications and litigations will start and payment will be delayed.”

Way out

Nasscom says that it has prepared model RFPs (request for proposals) and shared them with the government and, if adopted, would help sort out the issues. “In the GST project, there was a very good participation from IT companies because there was a lot of consultation before and during the RFP process, which gave confidence to companies that the government is serious and they want the end result,” adds Chandrasekhar.

Given that the margins in government projects are not as high as that in the international market, there needs to be an incentive for companies to take them up, say industry experts.

Recommended for you