New Heights: Experience so far, unresolved issues and future potential

Experience so far, unresolved issues and future potential

Significant developments have taken place in the road sector over the past few years. The announcement of the ambitious Bharatmala programme marked an evolutionary journey in the sector from the development of arterial roads to economic corridors. The big-ticket programme envisages construction of around 65,000 km of roads over the next 10 years, of which 25,000 km will be developed under Phase I. The government is on its way to achieving these targets, with around 8,000 km already awarded under Phase I. About 15,000 km have been designated as high priority routes under Bharatmala, the detailed project reports (DPRs) for which are already in progress. Similarly, DPRs have also been initiated for 8,000 km classified as medium priority routes.

Drawing lessons from the past, the government has planned to adopt an optimal modal mix for implementing projects under the Bharatmala programme. Around 60 per cent of the projects will be implemented under the hybrid annuity model, 30 per cent under the engineering, procurement and construction (EPC) mode and 10 per cent through build-operate-transfer (BOT) mode.

Given the enormous targets set for road development in the country, there is a need to learn from past experiences and ensure that the sector grows in conjunction with the ambitious roadmap laid out for it.

A panel discussion was hosted at the India Infrastructure Forum 2019, to evaluate the sector’s progress, identify the issues plaguing it and the much needed steps to accelerate growth…

Tackling the pre-construction bottlenecks

In the case of highly competitive bidding, players quote low margins. In such a scenario, they face the risk of shrinking margins in case of project delay. No matter how well a project has been structured, the way it is bid out definitely matters. Therefore, for sound project implementation, determining the extent to which risk is to be handed over to the developer is of utmost importance. Only if the government is capable of completing the pre-construction approvals in time should a project be bid out through the BOT mode. Otherwise, it is better to go for a less risky model.

Contractors are of the opinion that pre-construction requirements such as land acquisition and shifting of utilities should be undertaken while the DPR is being prepared. As a result, by the time the project gets awarded to a developer/contractor, all the time-consuming activities stand completed.

Permissions for utility shifting are granted only once the contractor/concessionaire comes on board. The concessioning authorities can get the utilities shifted either through the contractor/concessionaire or the concerned state utility agencies. However, the experience with state utility agencies has been far from good and has resulted in inordinate delays. Therefore, the onus for utility shifting falls on the contractor. However, to help the contractors, utility estimates at the very least can be prepared in advance. Further, the strengthening of project implementation units will facilitate efficient project implementation as well.

Dispute resolution

Neither the contractor/developer nor the authorities are in favour of arbitration. It not only consumes resources in terms of litigation fees, but also results in uncertainty and takes up time, which could otherwise be utilised more productively. However, given the fact that the concessionaire works with a very small margin, issues with regard to project execution will definitely result in disputes.

As per the Indian Arbitration Act, arbitration proceedings should be completed within a year. However, the concerned parties can stretch the duration for another six months by mutual consent, after which the dispute is taken to court. However, legal experts believe that the time period of one year is not sufficient for arbitration as road contracts are quite big. Therefore, the arbitration period must be reconsidered after discussions so that the arbitrator has enough time in hand.

Though the arbitration process has improved over the years, some concerns still remain. A key aspect with regard to the dispute resolution mechanism is the need for the careful selection of an arbitrator. The arbitrator must not only have technical and legal knowledge, but must be a person of high integrity. There is also a need for better regulation of arbitration committees. In this area, India has to traverse a long way to evolve a code of conduct. The arbitration bodies must have in place an enforceable code of ethics.

The National Highways Authority of India (NHAI) and the government are working towards resolving disputes in a more amicable manner. As per the new guidelines for arbitration issued in September 2016, the government will release 75 per cent of the arbitral claim amounts against margin-free bank guarantees in situations where arbitral awards have been given but contested by the relevant authorities. However, this scheme has benefited only a few because most developers were unable to provide bank guarantees. Banks are wary of offering margin-free guarantees because many developers have weak financials. Although NHAI has announced a conciliation and settlement mechanism through independent experts to resolve disputes with concessionaires, it needs to be closely monitored to ensure that all claims are settled expeditiously in an unbiased, user-friendly and cost-effective manner.

The road ahead

The government has laid increasing emphasis on the development of greenfield corridors. A study is being undertaken on four different corridors to derive benchmarks for rating corridors and improving them. Going forward, the government’s primary focus is to improve corridor efficiency.

In order to meet the ambitious targets for the sector, the government is exploring new financing instruments. It is also considering tapping  long-term funding sources such as infrastructure investment trusts to finance road projects.

To enable rapid growth in the road sector, several steps need to be taken. There is a need to bring about an improvement in DPR preparation. This can be ensured by putting in place a mechanism by which guidelines are clearly laid out for consultants. Further, the government needs to make sure that at least 80 per cent of the land is acquired before the project is awarded to the contractor/concessionaire. Failure to acquire the requisite land has resulted in a reduction in the size of several projects. Taking the pre-bid meetings seriously and using them for making things clear and subsequently issuing clarifications is another step which needs to be taken. The authority must not evade the pertinent questions posed by potential bidders.

Another element which has been consistently ignored in brownfield road projects is the maintenance aspect, which definitely needs to be worked upon. Also, the quality of authority engineers and consultants needs to be looked into. Fast and timely decision-making on the part of the authority is required to execute projects without time and cost overruns. Firm documentation, not only at the time of signing the contract but also during project execution, is another area to be improved.

For successful implementation of any project, a harmonious and well-synchronised relationship between the three stakeholders – the authority, the concessionaire and the lenders  – is essential. So, confidence of all three stakeholders in the project is very important. If stakeholder confidence is established, then more banks will be willing to lend to the sector. And this view can only be strengthened through better and faster execution of projects.