Sustainable Solutions to Highway Development

A.K. Singh

The Highway sector continues to be in distress. All key stakeholders are facing problems; the key infrastructure companies and the concessionaire SPVs are severely hit by liquidity crisis. Though in recent times, several relief measures have been attempted by the Authorities, the solutions are way short of the expectations of the sector. The effort to provide a workable model of exit of investments needs some more ironing and in the current economic scenario, this may not find attractive valuations for wide adoption but easing divestment procedures in operational projects will make the sector very attractive for innovative financing. With acceptable exit provisions, all the concessionaires will be able to exit, encash and capitalize the intrinsic value available in road projects and provide the much required liquidity and fund maneuverability. Another major step towards alleviating the stress has recently been taken by NHAI by putting all long pending disputes and claims through an innovative fast track settlement system for every concessionaire or contractor whose investment is tied up in long pending disputes. I personally foresee this method as a path braking event and a very powerful tool for all the clients in infrastructure, and something which was lacking on the national horizon. Globally, this settlement mechanism is picking up. Further, the government has agreed to securitize the concessionaires’ assets and the bankers can now comfortably provide loans.

The PPP model was the principal way of developing highway infrastructure but many infrastructure companies have been hit badly due to the multi dimensioned problems faced in PPP. Many companies that had the capacity, the infrastructure, the machinery and human resources for construction had no orders. The government has provided the opportunity to them through a separate vertical of government funded EPC projects. We are going to see a lot of movement in EPC which is not so intensively cash driven as the PPP. To make the sector less risky, we have to give the concessionaires a virtually green field like condition for them to be able to do everything as per plans. For that, we have streamlined all clearances and we are further into a very deep process of relaxing it so that the developer or the construction company knows that it is bound to happen. Then all these delays, performances issues, banks lending issues, users issues will not be there. Rather, it shall be a very predictable environment for everybody to plan, work and reap the benefits. The PPP mode is a very effective model provided all the risks are comprehensively accounted for with methods to deal with all eventualities.

Subbarao

As a Developer’s representative, firstly I would like to applaud the sensitivity demonstrated by the stakeholders in the highway sector to the changing environmental (business) conditions. The Authority/Ministry, while evolving with the Model Concession Agreement and amendments from time to time to accommodate the changing times, have also undertaken initiatives for speedy resolution and settlement of issues/conflicts such as the Grievance Redressal Committee, Interpretation Committee etc. Efforts being made to set-up a regulatory authority for Highways, is a step in right direction in response to the emerging industry trends.

Similarly, banks, financial institutes and financers also have been sensitive and responded to changing needs of the sector. When PPP was introduced in Highways Sector in a big way with an objective to give impetus to infrastructure development in the country, they came forward and assumed a participatory role in the entire process by adopting the appropriate project appraisal process, designing products and offering better terms as they got more exposed to PPP mode. They introduced innovative products into the market such as securitization of annuity assets, infrastructure bonds and lately Debt Funds etc., to accommodate the changing needs of the industry.

Similarly Concessionaires/Private players, from time to time, have adopted implementation strategies to ensure timely completion of projects and joined hands with Government in the nation building agenda. A most important and evolving phenomenon that we are experiencing today is road user activism. Over a period of time, with increase in number of toll roads, users started educating themselves on their rights associated with using highway infrastructure and have started demanding services such as additional PUP/VUP facilities, reduction of delay at toll plazas, good quality roads etc. Thus with time, user response to the tolling has been changing for good.

Having said so, there are a few challenges which pose threat to sustainability of PPP in Highways sector and need to be addressed together by all the stakeholders. The Model Concession Agreement (MCA) which encompasses the framework of performance has evolved like a Bible or Gita for the highway sector, with everyone left to decipher their own interpretations. It is being interpreted in different ways by different people at different stages and contexts. For e.g., a consultant’s interpretation of the provisions of MCA during DPR preparation stage would be completely contrary to the views provided during implementation stage when he/she assumes the role of an independent engineer (of course on different projects). Even the authorities at different stages actually have different views. The mindset of people involved has not been coherent with the method of procurement (Item Rate/EPC/BOT/DBFOT) adopted which is resulting in diverse interpretations of the clauses. This has resulted and would continue to result in large number of claims/conflicts pending to be resolved. This anomaly needs to be corrected which is critical for the sustainability of PPP frame work in the Highways sector. A guide for interpretation of the clauses may be developed for reference of the stakeholders which can act as a reference.

Another important challenge is the role envisaged for the road user, who is central to the infrastructure development, in the entire project life-cycle. In my opinion, the user who was kept at bay during the conception, design and development stages and suddenly is asked to pay for the facility, finds himself in a catch–22 situation. Hence users resort to agitations affecting the concessionaire’s timely completion of projects and revenue realization.

For e.g., during the implementation of projects, concessionaires have to face a lot of demands from the local users for construction of underpasses, additional service roads and other additional facilities not envisages during the DPR stage. The way these changes are handled by either by Independent Engineer or the Authority results in delays in completion of projects. Also, after the project starts commercial operations and the user is asked to pay for the services, his demands start rising. Increasing occurrence of such incidents, resulting in stoppage of works, damages to the project assets and non-realization of revenue only signifies the urgency that needs to be shown in correcting the anomaly, which if not attended to, could destroy the fabric of PPP in Highways. User involvement at appropriate stages of project formulation and educating them on their rights and duties in the use of highways would help in eliminating these kinds of problems. The Ministry could probably take a lead role in this matter.

Lastly, I would like to add to the point made earlier by Mr. Mukherjee on the adverse impact of judicial and legislative level interventions on projects such as the ban on iron-ore mining or sand mining. Mining bans in the recent past have severely affected the viability of highway projects in two ways. Firstly, non–availability of earth and aggregates for construction has resulted in delays and escalation of cost. Secondly, reduction of traffic has resulted in huge shortfall in realizable revenue from those projected during DPR/Bid. The Authority/Government shall come forward to rescue such concessionaires adversely affected by such policy/judicial interventions and provide relief as such unexpected consequences are beyond the anticipated risks that could have been accounted for by private players during bidding. This will no doubt strengthen the PPP framework and investor confidence in the sector and enhance its sustainability.

Dr. Esther Malini

I agree with Subbarao regarding interpretation of the MCA. The concession agreement has evolved over a period of time and now with so many projects already implemented, there is an issue in understanding the exact meaning or the intent of the agreement. We need a manual which gives guidelines for each and every clause so that it captures its intent. The manual can be made available to all bidders and other relevant people, so that they know what they are entering into. This will help in smoothening the process. There have been instances when the same clause has been interpreted differently even within NHAI, and this is a cause of is a cause of concern and a Concession Agreement Manual would help in providing a standard and uniform interpretation of the clause .

Another point is the Design aspect in the DBFOT concept. It is our view that the DBFOT concept is not fully understood. What is understood as Design Freedom is not completely appreciated by both the parties – the Authority and the Concessionaire – and these issues are kept unresolved till the COD. Thus, when the Concessionaire has already committed its funds and is waiting for the project to be opened these issues are unearthed regarding the interpretation of the design and considerable delays happen in declaration of COD. So this is something we need to think about – how to interpret the design issues and solve them right upfront so that so that this is not pushed till the last minute. We have some real-life examples of such cases, so the question is does the concessionaire under DBFOT really has design freedom?

A.K. Singh

One interesting point that has been raised is the interpretation of MCA clauses. The varied Interpretations have been a cause of concern in the industry. There have recently been a few initiatives at the NHAI to address this. Today we have an interpretation committee which addresses such issues across concessionaires, consultants and various NHAI implementing agencies. If there is any inconsistency, the committee deliberates, sees this from the contractual point of view and legal perspective and then comes out with a clear judgment as to what the clause means in all fairness.

It might look to be a good suggestion to create a detailed sample guidelines for interpreting the clauses of the Model Concession Agreement but as the concessions runs for a very long time, any local interpretation is likely to curtail the potential of the clauses. But more interpretations and deliberations will certainly show us a clearer path. There are instances when obligations of the Authority are not being met which causes material adverse effect. In this situation, the concessionaires have to find a better way to address the financial issues caused by them.