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Thursday , 18 July 2024

Sustainable Solutions to Highway Development

Sanjeev Ghai

This point has been raised earlier too – there is a conflict of interest with the NHAI which is one of the parties to the contract and if it is trying to interpret at the same time, it may not be right thing. But now that the government has made up its mind to have a highway regulator, that is probably the best possible solution. Also, from the point of view of the financer, I would like to highlight the issue of total project cost.

When the project is conceived and when it is bid, there is almost a difference of at least two years. In fact, we had funded some projects where the difference has been more than 2-3 years. Given the current environment and the way the inflation is going up, one is the official figure and another is the actual inflated figure. Then, while working out the project’s cost at the bidding stage, there is a certain design and at the time when the actual COD happens, the developers have been telling us that there has been some change of scope and changes in design as well. For approval of change of scope and design, you keep on approaching the Authority. The developer has one interpretation on change of scope on design and the authority has a different one. These issues can be sorted out. But for everything, there has to be a time limit.

There is a provision in the concessionaire agreement for obligations and penalties in case if A or B defaults. But there is no provision if both the parties default, that is contributory default.

A K Singh

I agree that the Total Project Cost (TPC), as it escalates with the passage of time, is an area of concern and this needs to be rectified to bring a sense of certainty to highway projects. The cost, as the government sees it, the way the concessionaire or developer sees and the way the banker sees it – all three are found very different. The cost, as the government sees it, is of course what will be eventually regarded as the actual cost, and the values of the concession, all the compensations and everything else are linked to this figure. So there has to be a discussion on this and a final consensus figure acceptable to all these stakeholders should be arrived at for a fair platform. The final TPC will be a tripartite decision and will be taken on a date mutually acceptable to the three stakeholders. Also, already there is a proposal to escalate the cost of delayed projects to current costs for consideration. The norms are expected to be exhaustive but there will be a solution. Regarding the default by both parties at the same time, it is indeed quite worrisome. But the MCA is quite favourable to the other party if the authority defaults. The interpretation of the MCA clauses is another problem, as we can see from the discussions. One common concern is the clauses or portions where it says certain things are under the exclusive authority of the government; similarly there are other clauses also. In fact we have flagged scores of odd clauses where requirement of clarity is felt by industry. These deliberations are at an advanced stage and there will shortly be some amendments to the satisfaction of all the concerned.

Next point raised was the DBFOT design flexibility available to concessionaires. The MCA simply provides that the concessionaire has to meet all the laid down specifications and design the infrastructure and beyond that the flexibility leverage has been given. However I can say that as long as the concessionaire meets the specifications, the client shall not question the design. The problem arises when, what the concessionaire or developer while being innovative in design, touches or cuts into some fine guidelines or specifications. In that case, the government, being the custodian of those rules, will certainly have an issue. An example is that designing of a structure in a particular zone may need to be done in a certain way, maybe an earthquake resistant structure. The concessionaire may feel it is not required or argue that instance of earthquake or flood of design parameters may not be faced during concession period and liberty may be given.But the Government will not agree to such flexibilities which are not in conformity. So this would be an example of a grey area but it can be sorted out on a case-to-case basis.

In PPP there is always a quarrel between schedule ‘B’ and schedule ‘D’. Schedule ‘D” is what is desirable in the infrastructure to be built, whereas schedule ‘B’ is how it will be actually built or executed, as opposed to the desirable standard. This is because what is desirable is often expensive and not financially viable. So the authority limits the features or options available to a scaled down version, which is what is schedule ‘B”. The design outlined in schedule ‘B’ is the minimum that has to be executed, and anything lesser than that would not be acceptable. A grey area that arises is when the concessionaire decides to develop according to schedule ‘D’ instead of going by the plan or specifications outlined in schedule ‘B’. We have given this interpretation or understanding in many cases. In some rare or specific cases, where there is nothing mentioned in schedule ‘B’, then schedule ‘D’ has to be followed. If these points are followed, there would not be any confusion.

Moving on to renegotiation which may happen often over a long period of 20-30 years of concession, it is clear to visualise that no procedure can be written for all eventualities. Each time this happens, one has to keep on adjusting; now this can only be adjusted through a trust mechanism, renegotiation on a dynamic case to case basis. The principles for this have to be set and laid down in the MCA. There has to be a settled principle of deciding any new eventuality arising across the entire concession period. With the concern and sensitivity that is being felt, both in the government and across the industry on the issue, there will soon be a clause for renegotiation in the MCA. A concern that everybody has is the lack of transparency and the apprehension of abuse in renegotiation. Simultaneously, all things that we see now, once unforeseen till today, will be incorporated into the clauses in the MCA.

Another point is the aggressive behaviour of users. Sometimes the government cannot do what is desirable, due to budgetary constraints, so it cuts down on certain features. This kind of situation may cause some reactions from the users or the public. We have to give the user what is being demanded, if the request is reasonable. If not, and if there is aggression, the government has to take action and provide protection to the concessionaire as demand for large scale change of scope is causing large uncertainties, non-execution and delays in on-going projects

Mukesh Kumar

More than 65-70 % of the completed projects in infrastructure sector belong to road sector and this is due to very well drafted Model Concession Agreement (MCA). The MCA was drafted in 2005. It got a fillip with the recommendation of BKC committee report. As a result, some 7,000 km of road projects was awarded in 2012 -2013 but suddenly in last financial year, only 1100 km were awarded. We did a survey of about 42 projects. We found that nearly 90% of the projects were facing problems due to land acquisition, 48% due to right of way clearances and about 60% because of environmental clearance. The problems which we are facing are not due to the provisions of MCA but mainly due to non-compliance of the conditions in MCA. There have been instances where the project has been completed, Independent Engineer has also recommended for declaration of COD but the COD is declared very late due to procedural delay. Obviously, the debt servicing will be quite affected by this. So there is a need to redefine some of the clauses in MCA e.g. more clarity is required for interpretation of the clauses, especially those with respect to the conditions related to the environmental clearances, the applicable approvals which need to be done etc. Schedule ‘E’ of the MCA which lists the different approvals required says at the bottom, “All other approvals as per the requirement of the projects”. This also leads to disputes between the NHAI and the concessionaire. I have interacted with number of concessionaires who say there are certain approvals which are required in the name of the EPC contractor but NHAI insists on taking the same in the name of the concessionaire which is very difficult to get.

In case of problems pertaining to termination payment NHAI should consider giving it to the extent of work done and compensate the lenders during construction period. This will give a lot of comfort to the lenders to finance such projects because we are seeing that the concessionaire and the NHAI keep blaming each other for delay in projects but in the end the lenders suffer. So there should be a clause to pay termination payment during construction period to the lenders.


In case of renegotiation there has been over enthusiasm to renegotiate in the past. In order to cut such practices, a contract under any circumstances should not be reopened if the problem was due to factors other than commercial misjudgement. Reasons such as changing economic environment is also no reason for reopening the contract – for the simple reason because if anybody is assuming that for thirty years, the economic graph will continue to be the same, then that is not a good position to take as a lender. In renegotiation, we have to be very careful and the parameters must be defined in advance. If there is an act of god, Force majeure, such as an earthquake, it definitely calls for a renegotiation. This is not to say that only because of an earthquake a contract should be reopened, but this should be done in a very limited manner. Earlier, when the premiums had touched high values, we were the first one to say that we will not fund such projects because there was a substantial difference between the highest premium and the next highest value. This is the position taken by the developer, so we as lenders need not get involved. Secondly, it is not acceptable to lenders that even during the construction stage, the developer can exit.

Today, if for some project, if the land is not available, or if the railway over bridge approval has not come for long time, then how will it help by having a new developer substituted for the earlier one? So, in my opinion, till the construction has happened, the developer should not be allowed to exit. Most of these situations can be addressed without tinkering with the MCA. If we have two things in place – an independent regulator and also if we define contributory default – then things will be enforceable within a defined time frame.

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