The roads and highways sector in India is presently experiencing a crisis of sorts. Private participation in projects is at a critical low, with several new projects remaining unbid and existing projects being delayed, stalled or abandoned. The lack of private interest in public projects is not a sudden phenomenon but a trend which has developed over time and which requires analysis in order to be reversed. Initially, the National Highways Authority of India (the “NHAI”) favoured the ‘turnkey’ model of execution of highway projects. Under the turnkey model, project risks and responsibilities remain primarily with the project developer. However NHAI later began bidding projects out on a Build Operate & Transfer (BOT) basis (one form of a public-private partnership), in response to calls from private developers for the public authority to share in the project risks too.
Pursuant to the shift in tendering models, in the last few years, certain regulatory and other issues have emerged which have affected the private sector’s appetite for risk and led to a drastic reduction in its willingness to participate in new projects. These issues are discussed below in brief.
SYSTEMIC DELAYS – FINANCIAL VIABILITY IMPEDED
The private sector’s reluctance to participate in roads and highways projects may be partly attributed to the bottlenecks in the government’s project approval process, followed by delays in obtaining the requisite permits to commence construction. The delays in obtaining approvals often arise from a lack of coordination between various government departments, leading to the projects being rendered financially unviable for the private participants. Faced with such delays, private participants may choose to exit the projects rather than prolong the delays and increase their financial burden. In one such instance, GMR Infrastructure Private Limited (GMR) exited the high profile Kishangarh-Udaipur-Ahmedabad highway project in December 2012, for reasons related to delays in obtaining forest and environmental permits. Significantly, a few months later, newspapers reported that GMR had applied to the National Highways Authority of India to have its premium payment obligation rescheduled.
GMR was not alone in seeking relief; almost 90 percent of developers awarded projects on a premium basis in 2011-2012, had reportedly sought similar relief from the Government. A panel had been set up under the chairmanship of Dr. C. Rangarajan (Chairman, PMEAC) in November 2013, to formulate guidelines on the applicable interest rates for rescheduling, the identification of stressed projects, etc. The panel’s recommendations are presently pending the approval of the Ministry of Finance. The NHAI has reportedly expressed its disappointment with the recommendations of the panel and may take the same up with the Ministry of Roads and Highways (the “MORTH”). A final resolution to this issue appears distant at this point in time, with project developers walking away from projects even as the slow machinery of government takes its course.
The delay in the acquisition of contiguous land for road projects is another major concern. The NHAI is often obligated under concession agreements to provide 100 percent of the land (or right or way) required for road projects, to the developers. However the Central Government’s failure to adequately coordinate acquisition with the respective State governments, along with high land prices, often result in the failure to obtain the contiguous plots of land which are required for the construction of roads. By August 2013, the NHAI had already scrapped 6 projects (worth about Rs. 4000 crore) for failure to acquire the requisite land.
As indicated above, disputes in the roads and highways sector tend to fall in a broad pattern. Disputing parties could therefore benefit greatly from the input of a sector-specific authority, having the power to regulate tariffs, resolve contractual disputes and assist in any contract renegotiation which may be required. However, under the extant regulatory framework, no such single, independent authority exists. The NHAI although the apex government entity for the development, maintenance and management of national highways, cannot be considered to be a strictly ‘neutral’ authority since it is a party to concessions for the development of highway projects. In addition, the NHAI does not have adjudicatory powers. In view of the same, a serious need arises for the institution of an entity with wide-ranging supervisory and adjudicatory powers, which may draw the confidence of the private sector and revive this sector, while simultaneously protecting the interests of the public authority.
THE INSTITUTION OF A REGULATOR
The Union Cabinet is reportedly reviewing the draft Regulatory Authority for Highways in India Bill (the “Highways Bill”) submitted to it by the MORTH. The draft of the Highways Bill has not been made public as of date. However, newspaper reports have indicated that it provides for the institution of a highway regulator with the powers relating to the following:
- Adjudication of contractual disputes between the parties;
- Renegotiation of future contracts;
- Addressing the concerns of general public and lenders on road projects;
- Ensuring that contracts are registered with the authority;
- Fixing tariffs and monitoring the compliance of concession agreements; and,
- Deciding on the terms and conditions of an exit policy that allow companies to exit road projects;
The creation of an independent regulator under the Highways Bill therefore has the potential to address some of the concerns of the private sector.
However, the Planning Commission of India has drafted a separate Bill setting out principles by which all regulatory authorities must abide. This Bill is titled the Regulatory Reform Bill, 2013 (the “Regulators Bill”), which was drafted pursuant to the issue of the report of the Damodaran Committee for Regulatory Reform (the “Damodaran Committee”). The provisions of the Highways Bill and the Regulators Bill would need to be analysed for issues of potential conflict or overlap.
TARIFF PROVISIONS – POTENTIAL CONFLICT
Under the provisions of the Regulators Bill, the Government would stand empowered to constitute “regulatory commission(s)”, “appellate tribunals” or “tariff regulatory commissions” from time to time. Section 2(25) of the Regulators Bill defines the term “regulatory commission” as the following:
““regulatory commission” means a statutory commission or board constituted under and in accordance with the applicable law for the purposes of regulating a public utility industry, licensees or services, that affect the consumers, directly or indirectly, but does not include a commission or board constituted for regulation of financial services;” (emphasis supplied)
It is clear that the provisions made applicable to “regulatory commissions” under the Act, would apply to any and all regulators constituted under their respective statutes, including the highway regulator constituted under the Highways Bill (should the Bill be enacted into law). Therefore the provisions of the Regulators Bill would be required to be read harmoniously with those of the Highways Bill for a holistic view of the nature of the regulator which may be set up. However, certain provisions may conflict with each other. For example, the provisions of the Highways Bill are expected to contain provisions relating to the regulator’s power to determine tariffs. However, Section 39(3) of the Regulators Bill provides that notwithstanding any other provision of law, where the government is satisfied that prevailing market conditions and competition are sufficient to determine the tariff for any particular public utility, it may direct the regulatory commission not to determine tariffs. Under the Regulators Bill, therefore, the government has the power to limit the tariff-making power of a regulatory authority, by notification. This may lead to a situation where the government and the regulator clash on the applicability of notified tariffs. Such conflicts could sap the confidence of the private sector in the predictability of the regulatory regime.
DISPUTE RESOLUTION – PROCEDURAL CHANGES
Section 45 of the Regulators Act mandatorily requires all “licensees” (which term has been defined to include concessionaires) to subject their disputes to conciliation prior to moving any court, tribunal, regulatory commission or other forum. Section 46(1) sets out that disputes which remain unresolved after attempts at conciliation have been made, shall be subjected to arbitration. Notably, Section 46(7) provides that notwithstanding the provisions under the Arbitration and Conciliation Act, 1996 (the “Arbitration Act”), the awards made under this section may be challenged only before an “appellate tribunal”. In contrast, the Arbitration Act provides that the applications to set aside arbitral awards are to be made to the principal Civil Courts of original jurisdiction in the respective districts. In this context it is relevant to note that the Damodaran Committee had recommended that a mechanism be put in place “to dis-incentivise use of civil courts for resolving contractual disputes, so as to encourage arbitration as a preferred manner of resolution”. It remains to be seen whether the inclusion of an appellate tribunal in the hierarchy of forums under the Regulators Act, will serve the purpose of reducing the burden on Civil Courts.
With the Planning Commission and the MORTH finding themselves unable to agree on a regulatory regime, more unresolved delays and disputes may lead to further losses to the private sector and deepen its distrust of the public sector. However the outlook is not all bleak. If introduced in Parliament, the Highways Bill could represent the first major step taken by the government towards the creation of an independent authority with the power to cut delays and streamline the project approvals processes, thereby addressing two of the biggest problems faced by the Indian roads and highways industry today and potentially opening up thousands of crores of private investment. The first major step for a structural correction has thus been taken, but a long, anxious road still lies ahead.
Disclaimer: This article was first published in the April 2014 issue of the Infrastructure Today magazine. It has been authored by Sujjain Talwar, who is a Partner; Aakanksha Joshi, who is a Senior Associate; and Divya Srikanth, who is an Associate at Economic Laws Practice (ELP), Advocates & Solicitors. They can be reached at firstname.lastname@example.org; email@example.com or firstname.lastname@example.org for any comment or query. The contents of this article/update are intended for informational purposes only and do not constitute legal opinion or advice. Readers are requested to seek formal legal advice prior to acting upon any of the information provided herein.